The Bizarre Economics of "Cash for Clunkers"

In this article, Jonah Goldberg describes how an economic program as nonsensical as "Cash for Clunkers" gets traction in the Obama administration.

Here's an abridged version:

[19th-century French economist Frédéric Bastiat's essay "That Which is Seen, and That Which is Not Seen”] 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."
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As you’ve no doubt heard, the “cash for clunkers” program gives buyers up to $4,500 of taxpayer money 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.
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The program’s $1 billion funding evaporated in days rather than months as consumers...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.
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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.