The United States looks to be following Germany, France, Italy and Spain in subsidizing destruction. On Tuesday, the House approved a “cash for clunkers” bill that would give car-owners vouchers worth up to $4,500 if they would trade in their old vehicles for newer, more fuel efficient ones. The bill directs dealers to crush or shred traded in vehicles to ensure they cannot be resold. Bill proponents hope the measure will boost the automobile sales and clean up the environment.
While new and fuel efficient cars are to be desired, destroying old vehicles is not the way to go about obtaining them. The fact is this bill will actually lower the American standard of living, not raise it. What is seen is the greater incidence of new vehicles on the road. What is not seen is the number of goods that have foregone production because the money that would have been used to buy them was put into a new car instead.
Take for example a person owning a $3,000 dollar old car and having $20,000 dollars to spend, having a net worth of $23,000. They take the government incentive, scrap their old car and buy a new fuel efficient one costing $20,000. Since the Government subsidy is $4,500, the citizen went to purchase the car expecting to pay only $15,500, and having $4,500 of their own $20,000 left in pocket. Thus with a $20,000 car and $4,500 in pocket, their net worth has gone from $23,000 to $24,500. Imagine their surprise when they go to pay and have only $15,500 in their pocket! What happened to the rest of the money?
Government subsides are supported by taxpayers, so last week this certain citizen had to pay $4,500 for the new “cash for clunker” tax, which they had forgotten about. So in the end, they have only just enough money to buy the $20,000 car. Being completely broke, their net worth has fallen from $23,000 to $20,000 dollars.
Look at Frederic Bastiat’s broken window fallacy for a better explanation of this phenomenon.
Adam Rule – MCPP Intern