How Much is That Clunker In the Window?

How Much is That Clunker In the Window?
Jonah Goldberg
Wednesday, August 05, 2009

Ce qu'on voit et ce qu'on ne voit pas. That may exhaust my French phrase quota for the year, but it's worth it. The saying is the title of an essay by 19th century French economist Frederic Bastiat and means "that which is seen, and that which is not seen."

Bastiat's essay is most famous for the "parable of the broken window," in which a young boy shatters a shopkeeper's window and, after some initial outrage, the villagers conclude that the rascal helped the local economy. Why?

Because if no one broke windows, window makers would be out of business, and if window makers were out of business, they wouldn't buy any more bread or shoes, hurting the bakers and cobblers. So the six francs the shopkeeper must spend for a new window is really a boon to the community.

The problem with this argument can be gleaned from the title of Bastiat's essay. By counting the money the shopkeeper spends to replace a perfectly good window (that which is seen), we ignore the money he might have spent on something else (that which is unseen). The shopkeeper might have instead dropped six francs on new shoes, a book or a bonus for his assistant. Those who celebrate the broken window as a generator of growth take "no account of that which is not seen."

Sorry for the long digression, but the parable of the broken window is worth keeping in mind, or perhaps even worth updating to the parable of the crushed clunker.

This parable is more convoluted, but the upshot is that Uncle Sam pays people to destroy their own cars as long as they use the money to buy a new, more expensive car.

As you've no doubt heard, the "cash for clunkers" program gives buyers up to $4,500 of taxpayer dollars toward the purchase of a new car if they trade in their old cars for vehicles with better gas mileage. The old cars, still roadworthy, are then destroyed just like the shopkeeper's window.

The thinking behind the program is that the car companies need a boost, Michigan needs a boost, the environment needs a boost (through lower emissions), and Americans need help too.

Unsaid, but just as relevant, is that the authors of the government's mammoth stimulus plan need some proof that something is being stimulated.

The program's $1 billion funding evaporated in days rather than months as consumers, most of whom had been waiting to trade in their clunkers anyway, lined up for free cash. Washington is now agog with its successful effort to give out free money.

That Washington is shocked by the news that Americans like getting free money shows how thick the Beltway bubble really is.

Like the drunk who only looks for his car keys where the light is good, Washington can only see the economic activity it has created, not the activity it has destroyed.

For starters, who says the smartest thing for people with working cars is to buy new ones? Personal debt is supposed to be a problem, so why not look at this as bribing consumers into taking out car loans they don't need? Even with the $4,500 subsidy, not all of these customers are going to be paying cash for their new cars. So they'll be swapping serviceable-but-paid-for cars for nicer cars that are owned by banks.

Besides, maybe some people would be smarter to buy a savings bond or max out their kid's college fund or -- here's a crazy thought -- buy health insurance. But instead they've been seduced into spending the equivalent of their six francs on a car they don't really need.

But, you might say, some buyers surely do need a new car. True. But if they needed a new car, they'd get one anyway, eventually. Indeed, they might already have gotten it, but rationally opted to wait for the program to kick in.

Or maybe they'd have needed to delay the purchase until next year, or buy a cheaper car, possibly even a used car, which will now become more difficult for poor people to find because we are taking all these cheap cars off the market.

But at least under these scenarios, they'd be spending their own money.

Under the government's program, tax dollars are being diverted to people with cheap cars so they can buy expensive ones. That's just really inefficient wealth distribution, not wealth creation. But government can see it, and that's all that counts.