23 August 2009

Cash for Clunkers

The three billion dollar Car Allowance Rebate System (CARS) program, known affectionately as “Cash for Clunkers,” is coming to an end on Monday because it is running out of money.  After the program burned through $1 billion dollars in its first week, Congress approved an additional $2 billion that has now apparently followed the first billion down the drain.


The fact that this money has been scooped up so eagerly seems to have taken some by surprise, though when it is given a moment’s sober thought, the prospect that a lot of consumers would snatch the “free” $4500 giveaway is about as shocking as a pound of raw meat disappearing when dropped into a school of piranhas.  President Obama spun this unexpected evaporation of taxpayer dollars as an indication of the program’s success - a success “beyond anybody’s imagination,” as he put it.  “We’re slightly victims of success because the thing happened so quick, there was so much more demand than anybody expected, that dealers were overwhelmed with applications.”[Note 1.]


In the media, Cash for Clunkers is portrayed as being wildly successful; the implication is that the program is a magnificent example of the ability of the government to stimulate the economy.  When the additional $2 billion funding was approved, the president lauded Congress for using the Recovery Act funds to extend the CARS program, so that “the American economy will continue to get a much needed boost.”[Note 2.]  “This program has been a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work,” said Transportation Secretary Ray LaHood.  He characterizes the program as “the best economic news story in America.”[Note 3.]  “According to some estimates,” a CNN report stated, “the total of $3 billion in the Cash for Clunkers program could result in an $18 billion boost to the overall economy.”[Note 4, emphasis mine in all quotes.]


Well, that’s a pretty good deal.  If the federal government can put $3 billion into a hat, wave a wand, and pull out $18 billion, then who can blame Americans for being tempted to hand over the reins of their lives to their trusty politicians? 


Despite the general euphoria, though, it may occur to a few people that something doesn’t seem quite right about this account.[Note 5.]  And a handful of Americans might even be suspicious of the notion that a government is able to “stimulate” anything at all.  (In this set of critically-thinking individuals, of course, I exclude nearly all economists, the “expert analysts” who are so immersed in a Keynesian fantasy world and in the results churned out by their computer models that they believe in their own magic.)  Skeptics of the government’s story may not be able to put a finger on the problem; they may not be able to identify which rapid move in the shell game, which sleight of hand, which gesture to the pocket or the sleeve, is the one that explains the trick.  But they know something doesn’t add up.


For these honest people, I submit the following questions that might help give them the confidence to expose the “experts” and the government policy-makers for what they are: emperors with no clothes.



(1)  How can Cash for Clunkers “run out of money,” as is reported?


If CARS really does provide a net benefit to the economy, as is claimed  (or at least implied) by its supporters, why is the program being stopped for want of funding?  How can something that is profitable be running out of money?  


The fact that the program cannot be sustained without a continuous influx of tax dollars indicates that there is a cost associated with it.  And where there is a cost for something, there are producers who pay for it.


Characterizing the program as being beneficial for America is dishonest at best.  Cash for Clunkers does not make money; it costs money.  It is necessary for the president and lawmakers to hide this fact because the cost is borne by Americans.  Inevitably, for every $4500 that Cash for Clunkers puts into someone’s pocket, it takes more than $4500 away from the Americans to whom that money belongs.  The program is not a “stimulation” of anything; like all government “stimulation,” it is a carefully disguised welfare package.



(2)  How would Cash for Clunkers work on a smaller scale?


When dealing with complex abstractions, it is often helpful and instructive to adjust the scale of a concept to isolate certain characteristics.  For instance, when considering the workings of a free market, one can identify some of the same principles operating in a child’s lemonade stand as in a multinational corporation.  The trader principle remains constant both for the man agreeing to mow his neighbor’s lawn in exchange for babysitting services and for the bank lending a hundred million dollars to a pharmaceutical company.  


So, as an exercise, let us consider how the economic stimulation of Cash for Clunkers would work in a household.


Suppose Johnny and Mary Smith are a married couple with three kids.  To make ends meet, both Johnny and Mary work, and for this purpose they each own a car.  Unfortunately, Johnny gets laid off, so they suddenly depend entirely on Mary’s income and a little bit of savings while Johnny looks for another job.


According to the principles of the Cash for Clunkers program, the ideal thing for the Smith household to do at this point is to have Mary give Johnny $4500 out of their children’s college savings account in exchange for his car.  Next, Mary should drain the oil and pour a water-silica-sand solution into the engine so that it will seize when the car is next turned on.  (This is what the “clunker” dealers are instructed to do.)  This will make it necessary for Johnny to buy another car so that he can drive to his job interviews.  To keep our example a closed system so that we can trace every step, let us say that he must now buy Mary's car.  He returns to Mary the $4500 in exchange for her car, which she will now have to share with her husband, making it difficult for her to get to work on time.  


The net result of this series of transactions is that nothing has changed for the Smith’s except that one of their two vitally important automobiles has been destroyed.


The important thing to notice in this scenario is that without an injection of money from an outside source - a source that gets nothing in return - the Cash for Clunkers program fails utterly.  It can only destroy wealth; it cannot create it.  


This is another demonstration of why it is necessary for the president and Congress to dissemble when advancing “economic stimulus” as providing a net gain for Americans, as opposed to being a simple welfare program.  In order to prop up the facade of “stimulus,” it is necessary to conceal the source of real wealth that pays for it.



(3)  Injustice aside, are participants in the program better off now?


There is no justification whatsoever for ignoring the monstrous injustice incurred by the millions of hard-working Americans who were compelled to pay for Cash for Clunkers in exchange for absolutely nothing.  However, as a mental exercise, let us momentarily set aside that injustice to consider a question.  Did the consumers who took advantage of the program benefit?  That is, did the federal government’s moral atrocity at least provide an economic benefit to the consumers that they claimed to be helping?


Since “clunkers” are cars that had to meet certain criteria for consideration - not the least of which is to be worth no more than $4500 in an open market - we can make a guess that many of the participants in the program were ordinary Americans, most of whom were not likely to replace their soon-to-be-demolished car by paying cash for a new Mercedes Benz or Maserati.  It is likely that the typical beneficiary of Cash for Clunkers used about half of the $4500 windfall to pay off some of their credit card debt and the other half to buy a new vehicle.  Significantly, it is also likely that any loans that had been used to buy the beneficiary’s “clunker” had been paid off for some time, while the purchase of the new vehicle required the beneficiary to take out a four- or five-year loan (since he had only a couple thousand dollars for a down-payment).  Considering all this, it should be clear that it is a stretch to call the typical participant a “beneficiary” of the program when he is probably worse off now than he was before.  Sure, he may feel a surge of excitement when he starts the engine of his brand new F150, but this fleeting benefit is more than offset by the troubles he faces burdened with the $300 or $400 per month car payment that he did not have before. 


Now, politicians will undoubtedly point to all these new vehicle purchases as being good for automobile manufacturers, which in turn is good for the American economy.  But we have already identified this as a diversionary tactic intended to draw attention away from the fact that other people are compelled to pay for it.


So, even if we set aside the injustice, the sheer economic ignorance of the plan is stunning and can be comprehended only by recognizing the persistence of politicians and “expert” economic analysts to misunderstand the nature of their meddling.  Consider: It is obvious, or at least it should be, that a significant cause of the current financial crisis was the direct and indirect force applied by the federal government upon banks to issue mortgages to Americans so they would buy homes they could not afford.  In the wake of this self-made disaster, for the government to try to fix the problem by enticing Americans to now buy cars they cannot afford is simply beyond the pale of reason.



(4)  If destroying a few hundred thousand cars can stimulate the economy, then why stop there?  


In “A Kerquillionty Dollars,” Doug Reich, referring to the topic of government “stimulus” programs in general, asked a similar question:


The logic behind the stimulus program is that the government needs to steal money from some taxpayers (or borrow from bond investors under the presumption that it will be stolen from future taxpayers) and give it to other people...  If their logic is correct, and expropriating the wealth and capital of some and redistributing it to others will somehow generate economic growth... it appears to be a huge mistake that they only spent $787 Billion.  Why did they stop there?  Under their reasoning, wouldn’t $788 Billion have been more stimulative?  Wouldn’t $1 trillion have been really, really stimulative?[Note 6.]


One might ask the same question about the Cash for Clunkers program.  The question exposes its nature - that it is a disguised welfare program that cannot create wealth but can only destroy or redistribute it.


Recall that enthusiasts claim that Cash for Clunkers gave the American economy a much needed boost, a desperately wanted stimulus, a shot in the arm.  If such a “lifeline” to the economy, constituting the “best economic news in America,” can be invoked by simply using tax dollars to pay people to destroy cars, why could this principle not be extended?  Why not introduce a government program to pay Americans to throw out their cell phones and computers, thus using the “power of the market” to generate new cell phones and computers?  Why not entice citizens to burn down their houses, thus generating new houses?  Why not provide an incentive to tear down every garage, gasoline station, pizza place, bagel shop, bodega, grocery store, department store, warehouse, and factory?


Why not create infinite prosperity by wrecking everything?  According to the principles of "economic stimulus," all this taxpayer-backed destruction should put Americans back to work, boosting the economy beyond our wildest dreams and creating an unprecedented era of good times.


Naturally, most Americans (with the possible exception of latent jihadists, eco-terrorists, and some university professors) would be aghast at the suggestion of such wholesale destruction.  Yet the principle holds at every scale.  The same irrationality at the heart of Cash for Clunkers fuels many of the absurdities of the economic thought of the last century (for example, the idea that war is beneficial to a free economy, or that paying farmers to destroy their crops enhances prosperity).


The error of this idea is described by Henry Hazlitt as the “broken window” fallacy.  In his scenario, a hoodlum throws a brick through a baker’s shop window.  A little crowd gathers in front of the shop, discussing the implications.  From a certain perspective, note some in the crowd (i.e. consistent with that of the Obama administration), “the misfortune has its bright side.”


It will make business for some glazier... The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum.  The smashed window will go on providing money and employment in ever-widening circles.  The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.[Note 7.]


If Hazlitt’s scenario seems artificially exaggerated or preposterous, I remind the reader of the report I quoted earlier, which CNN delivered without a trace of irony, as if it were an incontrovertible fact: “According to some estimates, the total of $3 billion in the Cash for Clunkers program could result in an $18 billion boost to the overall economy.”


Unlike today’s economists, Hazlitt goes on to trace the remainder of the effects introduced by the hoodlum.  The glazier would indeed have $250 worth of new business:


But the shopkeeper will be out the $250 that he was planning to spend for a new suit...  Instead of having a window and $250, he now has merely a window... The glazier’s gain of business, in short, is merely the tailor’s loss of business.  No new “employment” has been added.  The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier.  They had forgotten the potential third party involved, the tailor.  They forgot him precisely because he will not now enter the scene.  They will see the new window in the next day or two.  They will never see the extra suit, precisely because it will never be made.  They see only what is immediately visible to the eye. [Again, note 7, emphasis mine.] 


(5)  Why is force needed?


Even if a politician or economist produced a ready answer for all of the above questions, citing this or that statistic, interest rate, wise saw, or modern instance, with the exasperated air of one unaccustomed to having his authority questioned and with an irritation reserved for those stubborn few among us who do not surrender their lives and livelihoods to him without first asking a few questions - even if such a one could manufacture this many excuses, there is one question that he will find to be devastatingly unanswerable.  Or rather, it is answerable only by giving the game away.


The question is: If the program benefits everyone, why must the government compel some people to comply?


Of course, the answer is that protestations to the contrary, the program does not benefit everybody.  Force is required because that is the means to get someone to act against their interests.


The simple fact is that nothing that President Obama or Congress can do will stimulate the economy in any real sense - that is, no government can create real wealth.  It can only make itself appear to have done so, by focusing public attention on only part of the picture.  


The only power a government has in the economy - and it is a formidable power indeed - is to make some people pay for things that are consumed by others.


The power that philosophers have in the economy - equally formidable - is to convince people that they are morally justified in making some people pay for things that are consumed by others.



We have seen that politicians have an inestimable advantage in staging the legerdemain required to prop up farces like “economic stimulus plans” and the Cash for Clunkers program.  As in Hazlitt’s scenario, when the earnings of individuals are taken and redistributed to others, it is quite impossible to count how the money would have been used otherwise, precisely because those free actions never came about.  It is easy to add up the numbers for press releases - for instance, to boast that Cash for Clunkers put $1.9 billion in participants’ pockets through 457,000 transactions - but we will never know what the people who paid for the program would have done with the money if it hadn’t been seized from them.  


What we do know for sure is that the fact that it was seized is an unpardonable injustice. 



As a final comment, I’ll mention that I think a lot of ordinary Americans feel helpless to contradict the “experts” on CNN, Nobel Laureates such as may be found on the editorial page of The New York Times, and the brain trusts of the federal government.  I for one am not an economist; I fully concede that they know far more than I will ever know about academic economics.


But it is a mistake to surrender one’s mind and morals to “experts” in any field.  I cannot even begin to fathom the economic complexities, for instance, of Bernard Madoff’s fraudulent schemes, but I do not need to be an expert to identify those schemes as fraudulent, i.e. as violations of individual rights.  The same principle applies to the lawful violations of rights perpetrated daily by the Obama administration and Congress.  The complexity of federal programs - a complexity that makes it difficult or impossible for even the lawmakers themselves to understand (even when they bother to read the bills they sign) - does not change their nature.  Abrogations of rights are in essence the same whether they are delivered in one hundred pages of the Federal Register or with one squeeze of a trigger. 



NOTES

1.  “Government Will End Clunker Program Early,” The New York Times, 20 Aug 2009.

2.  “Statement by President Barack Obama on Senate Passage of Cash for Clunkers Extension,” Office of the Press Secretary, The White House, 6 Aug 2009.

3.  “Secretary LaHood Announces Wind Down to Hugely Popular CARS Program,” Department of Transportation Press Release, DOT 126-09, 20 Aug 2009.

4.  “Analysts predict billions in benefits from ‘Cash for Clunkers,” CNN, 7 Aug 2009.

5.  The general euphoria was not shared by some of the dealerships who are experiencing delays or hassles with application forms.  It is not surprising that such problems would be encountered when dealing with the federal government, but I am ignoring this detail in my post because it is a non-fundamental side issue.

6.  Doug Reich, “A Kerquillionty Dollars,” The Rational Capitalist, 2 Aug 2009.

7.  Henry Hazlitt, Economics in One Lesson, Arlington House, NY, 1979, (orig. Harper & Brothers, 1946), p. 23 - 24.


3 comments:

LB said...

This actually makes me sick to watch, but it's important to understand. Is there no better metaphor for the insanity of a government stimulus program than the purposeful destruction of a viable engine?

Stephen Bourque said...

Yes, good point. It's disgusting to see systematic destruction - and to realize that we were compelled to foot the bill.

Anonymous said...

Very well written. FYI, Henry Hazlitt was expanding on Frederic Bastiat's original example from his "Economic Sophisms" written in the 1840's. I mention that because other examples that Bastiat rolled out for other fallacies included a proposal that French Candlemakers petition the government to block out the sun so that French Candlemakers would have the same advantages that their English counterparts have due to a foggy climate. Or the proposal that goods crossing France should be required to move in French wagons, thereby increasing employment opportunities for French draymen and other labourers. Bastiat's proposal, in that case, was that the Assembly should pass a law mandating that French wagons be unloaded and reloaded at every mile post, thus insuring an even greater increase in French employment. If you have the time, it's worth a quick read.

C. Andrew