Yesterday, George Will wrote a piece on why Americans are rightly skeptical of Obama’s economic plans. He included this postmortem on last year’s “Cash for Clunkers” initiative:
The used-car market is an important mechanism for redistributing wealth to low-income persons: The price of a car drops when it is driven out of the dealership, but much of its transportation value remains when it enters the used-car market. Unfortunately for low-income people, the average price of a three-year-old automobile has increased more than 10 percent since last summer. This is largely because the Car Allowance Rebate System, aka “Cash for Clunkers,” which ended in August 2009, cut the supply of used cars.
Cash for Clunkers provided up to $4,500 to persons who traded in a car in order to purchase a new car with better gas mileage, but it stipulated that the used car had to be scrapped. The Boston Globe’s Jeff Jacoby reports that a study by Edmunds.com shows that all but 125,000 of the 700,000 cars sold during the clunkers program would have been bought even if no subsidy had been available. If this is so, each incremental sale cost taxpayers $24,000.
I’d argue that in addition to the waste and distortion created by Cash-for-Clunkers, this program had another negative, unintended consequence. It showed the Administration was desperate to manufacture fake economic growth and was willing to resort to gimmickry to get it.
Surely no one really thought that a temporary tax credit to stimulate the purchase of new cars would meaningfully improve our economic situation. In addition to ridding our society of some useful equipment (some perfectly functional cars), it encouraged some consumers to spend more on one good (new cars) they had less to spend elsewhere (on things like furniture, clothes, vacations, etc.). This wasn’t creating or encouraging production. It was just encouraging one kind of consumption instead of another.
Not surprisingly the consumption government choose to encourage was of a product that could be packaged as politically desirable: new more “green” cars. It was a harbinger of things to come with the Administration continuing to meddle in the economy to prop up or bailout things they find politically attractive-weatherization projects, solar panels, and public sector union jobs-and to demonize whatever they don’t like, whether that’s for-profit education companies or health insurers.
This politicization of the economy and this sense that anything-and particulary anything stupid-could be coming next from the Administration has acted as another significant drag on growth. Cash-for-Clunkers didn’t just destroy useful cars, it put a dent in the belief that our economy would operate freely.