Cash from clunkers

The WSJ explains the folly of the cash for clunkers program:
Cash From Clunkers
Let’s have a $4,500 subsidy for everything.

On the other hand, this is crackpot economics. The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

It isn’t clear this will even lead to more auto production over time, since the clunker cash may simply cause buyers to move their purchases forward. GDP will get a fillip in the third and perhaps fourth quarters, which will please the Obama Administration. But the test will be if auto sales hold up next year and into the future once the clunker checks go away. The debate over the subsidy may even have prolonged this year’s auto slump as buyers delayed their purchases waiting for the free lunch.

Betsy wants to know,

And if giving out free money for people to make their own choices is so great, how about vouchers for education? What about that District of Columbia program that the Obama administration and Democrats are eliminating?

James Pethokoukis: Cash for clunkers is Obamanomics in microcosm

An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car sales, not total sales: “In particular, we expect that roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway. Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.”

In other words, the program gets much of its juice via stealing car sales from the near future rather than generating additional demand. In practice, it works much like tax policies and subsidies to encourage women to have more children. Studies have found that women may have children earlier than they would otherwise, but they don’t necessarily have more kids.

The rebate program is also emblematic of the administration’s unwise approaches to economic policymaking. It borrows money to generate economic activity, which in effect borrows growth from the future, since eventually that loan will have to be paid back through higher taxes.

It picks and promotes a particular industry in a sort of small-scale industrial policy. It also places an emphasis on consumer spending as a route to renewed prosperity over greater investment — and isn’t that how the American economy got in trouble in the first place?

The ecological benefits may be minimal:

The fuel-economy requirements for the new car were, after all, fairly lax: You could in theory trade in a Hummer that got 14 mpg and get $3,500 toward a brand new 18 mpg SUV. That’s still an upgrade (and, in fact, that trade would actually save more gas than upgrading a 30 mpg sedan to a 35 mpg vehicle), but it’s a meager one. And if the upgrades are, in fact, all meager, they could end up being dwarfed by the energy required to manufacture new vehicles (particularly since dealers have to scrap the “clunkers” that get traded in—many of which are perfectly good, albeit inefficient, cars).

Borrowing money in order to create an incentive to destroy perfectly serviceable assets, to use the WSJ’s words, bothers me to no end: there is a historic precedent, which was nearly-ruinous. Econbrowser remembers,

One of the more embarrassing features of the New Deal was the Agricultural Adjustment Act of 1933, which paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier. And yet here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy.

Cash for clunkers? No, just more feel good crap that goes against capitalism.