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AIP Column: Cash for Clunkers is Not Good for a Free Market Economy

My AIP article today addresses the Cash for Clunkers program that has the Democrats and Obama just giddy. On the surface it appears to be a successful program, but if you think about it, the program is not good for a free market economy that is powered by the decisions of individual consumers. When the government gets involved and meddles with those decisions by trying to manipulate the American people into spending money on products the government wants, especially those that have a political benefit for the government, we can get into trouble. Here's a portion:

The Administration has learned a dangerous economic lesson: government programs that subsidize a particular activity or product will influence people's behavior and cause them to buy things that the government wants them to buy. This may explain why Obama and his liberal allies are so giddy over Cash for Clunker's apparent popularity. What will Obama do with this new-found knowledge? We can only speculate, but one real possibility is that we can expect additional programs like this to sprout up, all in the name of saving the economy and the environment.

Take, for example, the federal tax credit on replacement hot-water heaters. Like "rebates" that many companies know will never be turned in, the benefit can be illusory: the consumer doesn't get his money back immediately, and by the time tax season rolls around, the required receipt may be long gone. If the government was instead giving away cold, hard cash for replacement hot-water heaters, people would likely rush to the nearest home improvement store with their "clunker" heaters in tow for a rebate on a new high efficiency hot water heater. Or how about Cash for Kilns? The government could give rebates for people who trade out their old, inefficient and in some cases monstrous furnaces for new high efficiency furnaces. But why stop there? With Cash for Glass Obama could offer cash rebates to people to replace all their old, drafty windows with new, draft free windows. Better yet, why not create Cash for Mother Gaia and offer a cash rebates for a entirely new, environmentally friendly house? The possibilities for such schemes are endless.

This all sounds rather innocuous doesn't it? Who could argue with encouraging people to save energy, especially when the program's purpose is to help the economy and the environment. But there is something a little worrisome about how easily American consumers can be manipulated when the government throws cash around. This worry is not about American consumers, who after all are just behaving in predictable ways in reaction to what is available in the marketplace. The concern is with the Administration's glib willingness to manipulate and control consumers' purchasing patterns.

Read all of my take on the Cash for Clunkers. What do you think? I'd love to hear your thoughts either here at Wizbang or at the AIP article itself.


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Comments (10)

Kim:I'm waiting for ... (Below threshold)
GarandFan:

Kim:
I'm waiting for the 'law of unintended consequences' to raise it's ugly head. You remember Barney Frank and his "I'm inclined to roll the dice one more time." Well we all know the outcome of the government inserting itself into home loans, encouraging people to buy who did not have the means to meet their mortgage payments. As the cost of homes rose higher due to increased demand, these people were 'encouraged' to lie about their incomes. After all, "the government" was backing the loan. "No one could lose". Well now we have the government encouraging people to buy new cars. "This will save energy". Yeah, right. Will the amount of energy 'saved' offset the increased mileage driven because of increased mpg? Will the REDUCED taxes collected on gasoline impact road maintenance? Or will government make up the difference by increasing the gas tax? So people sitting on the fence decide to go for a new car because of the 'free' $4.5K. So what happens when the money runs out (again)? And NO ONE shows up in the dealer showrooms? And car inventories start backing up (again)? Let's see, no need for salesman (unemployment up), no need to make more cars, so layoffs at manufacturing plants (unemployment up). Be interesting to see how many of those new cars are REPOSSESSED in 6 months. Poorer people have a tendency to drive older cars because that's what they can afford. They also tend to purchase used parts to keep those older cars going. Well, thanks to Barry, used car parts are going to go up in price. And older used cars are also going to see a price increase because, once again, thanks to Barry there will be fewer of them around for resale. Barry and company would have been wise to wait several months to see the outcome of their Cash for Clunkers. But 'wise' hasn't been a byword of this administration since day one. Or to quote Sheriff Joe Biden "We guessed wrong".

I'd just like to know why t... (Below threshold)
cirby:

I'd just like to know why the Cash for Clunkers program required the "clunkers" to be destroyed. The intent was to get people to trade in their old, inefficient vehicles and buy better ones (helping the environment in the process), right?

Then it seems that letting the dealers trade the mid-level clunkers for even worse cars (for example, a late-1990s "clunker" Volvo that gets only 18 MPG could be traded for a REAL clunkerish 1970s Chevy that gets 12 MPG, with worse emissions, to a person who doesn't have the money to buy a new car at all). That way, you get a 2-for-1 (or better) emissions and MPG improvement, while giving more-useful cars to people who can't afford anything like a new or recent used car.

Kim, One thing tha... (Below threshold)

Kim,

One thing that makes the Cash for Clunkers program particularly troublesome is that it heavily interferes with the used car market. Cash for hot water heaters, furnaces, air conditioners, etc. wouldn't have quite the same effect, since there really isn't a thriving used hot water heater market, for example. But used car dealers are now worried about the number of good used cars that CfC has taken out of the market. I'm expecting to see shortages of some used car models, and an overall increase in used car prices from car dealers. As usual, it will be lower income Americans, who can't afford a new car, who will suffer.

You make a great point about programs like CfC altering the spending habits of Americans by encouraging them to buy big ticket items and forgo smaller purchases, or put off buying certain items while they wait for a rebate. Whenever the government interferes with the market, the overall results are usually not good.

You've got great ideas Kim.... (Below threshold)
Victory is Ours:

You've got great ideas Kim. You should join up with Sarah Palin.

Washington D.C. is full of ... (Below threshold)
Flu-Bird:

Washington D.C. is full of too many old fossels anyway its time they were voted out of office starting with CHAPAQUEDIC TED

"...its time they were vote... (Below threshold)
GarandFan:

"...its time they were voted out of office starting with CHAPAQUEDIC TED"

Won't do much good. Evidently the Kennedy family and the Democrats of Mass. believe that Teddy's seat has become hereditary. Something like the Brit's House of Lords.

GrandFan - "I'm waiting... (Below threshold)
Marc:

GrandFan - "I'm waiting for the 'law of unintended consequences' to raise it's ugly head."

Umm, you mean like this?

Chrysler Group LLC and Ford Motor Co. are running low on their hottest-selling models under the cash for clunkers program, even as President Barack Obama signed authorization Friday of an additional $2 billion to extend the program.

Some Chrysler dealers are out of the Dodge Caliber, Dodge Avenger, Jeep Compass and Jeep Patriot.

"We sold out a week ago," said Steve Demers, general manager of Cueter Chrysler Jeep Dodge in Ypsilanti. "While I am happy that the additional money was approved, I, along with others, will not be able to take advantage of the demand."

Chrysler's Belvidere, Ill., assembly plant, which makes the Caliber, Compass and Patriot, is trying to catch up.

"It may take some dealers a couple of weeks to get more small cars," Chrysler spokeswoman Kathy Graham said.

Ford's stock of the Focus and Escape, its two hottest-selling clunker replacements, is low, according to WardsAuto.com, which tracks inventory.

The lack of popular Fords and Chryslers could drive buyers to foreign-brand cars that are selling well under the program. Even with more money available, the popular program is expected to end this month.

Ya gotta love that last para, the first billion spent on this sham of a program has seen the Japanese car makers lead in sales under the program.

Now if the US makers can't keep step up production Japan will benefit even more.

When I first read about the... (Below threshold)

When I first read about the cash for clunkers program I immediately thought.. why stop there, why not offer the program for homes too? We can knock down our inefficient homes and build new ones subsidized by government. I see I wasn't alone.

Here is the irony of the situation: Leftist decry what they call "trickle down economics", but supply side economics can be summarized as: people respond to incentives.

The Democrat's cash for clunkers program uses this exact method - trickle down or supply side, and when people respond to incentives they hail it ias a victory.

There are far too many old ... (Below threshold)
Flu-Bird:

There are far too many old fossels in washington right now

One consequence of cash for... (Below threshold)
Cars4Charities:

One consequence of cash for clunkers is that it is hurting charity car donation since many of the cars being turned in for a voucher would have been donated to charity for a tax deduction. This is not an unintended consequence since the politicians that pushed this bill were informed that this happen. They chose not to address it.




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