Tar Heel Business

Hello again everybody, and welcome to a new school year.  A lot of notable things have happened in the business world over summer break, and we will be sure to look back at the most important events in future articles while still being engaged in current events and the future outlook of the economy.

The issue I have been most drawn to recently has been the late Cash for Clunkers program.  There has been a lot of media coverage about it, and there have been no shortage of people looking to give their opinion.  In large measure, this national interest stems from the fact that Cash for Clunkers is such a strange and foreign concept to many people.  Certainly too, the goals of reducing carbon emissions, and helping out struggling automakers are issues of very heated debate in the country.  What is less certain is how dire the costs of the program are.

In 1850, Frederic Bastiat wrote a seminal essay entitled That Which Is Seen and That Which Is Unseen about the costs involved with destroying other people’s property.  Bastiat puts forth an argument that he has heard before and is popular with the politicians of his time: destroying property to spur on an economy.  In the book, he uses the example of a child running around breaking people’s windows.  Bastiat wonders: Is the child doing the community a service?  The politicians would believe that the kid is providing more work for the window repair people, and maybe some unemployed people will be able to get work because there is a big demand for window repairs.  But unfortunately, as Bastiat points out, it is not so easy to spur on an economy.  The people forced to buy new windows will not be able to spend their money on something they would prefer, thus the resources of the economy are being inefficiently allocated.

Even though Bastiat figured the broken window fallacy out over a century and a half ago, every now and again there comes along a group of people who have the brilliant new idea to destroy something to help stimulate the economy.  Those who argue that World War II helped us out of the Great Depression fall into the same fallacy;  and so it is today with the new fangled Cash for Clunkers program.  Bastiat would probably find the whole idea of providing subsidies for clunkers, and then forcing dealerships to destroy them very strange.

When clunkers are removed from the market, the market for these cars is going to have an increase in price across the board.  Since the people who buy clunkers are predominately poor, they are going to be the subset of the economy most negatively affected by the program.  The winners of the program are the auto dealers.  Even if people hid the fact that they were trading in clunkers, the dealers  engaged in price negotiations like they did, so cars were sold a good deal more than they would have been if not under the program.  It would seem then that Cash for Clunkers is simply a subsidy to auto dealers so that they can clear their inventories.

Of course, the benefits of the program may in fact be immeasurable.  It could be that there would be some boost in consumer confidence brought on by an increase in auto sales.  Also, a faster moving economy could attract a lot of the money which has been sitting on the sidelines since the collapse.  This Keynesian explanation is about eighty years newer than Bastiat’s, so it may be the case that the townspeople who all have broken windows will be more motivated to be productive.  This was almost certainly the case during World War II, because the prospect of losing the war would have been a huge motivator to be as productive as possible.  Nevertheless, I am skeptical that Cash for Clunkers will provide increases in productivity that will yield positive economic returns in the long run.  Though, it is very likely we will never know.

-Graham Lovin