Value and Choice
posted at 12:51 pm on August 4, 2009 by Doctor Zero
I’ve seen some people try to defend Obama’s ludicrous Cash for Clunkers program as something akin to a tax rebate or tax credit. This is rubbish, and betrays a dangerous misunderstanding of where government money comes from. A better understanding of basic economics would help Americans avoid the kind of snake oil salesmen currently running Washington. If the public school system won’t provide such an education, then it falls to conservatives to explain the basics, in order to build support among the voters for the policies necessary to repair the damage Obama’s madcap liberalism has wrought. We can use the Cash for Clunkers boondoggle to illustrate an important point about the relationship between freedom of choice and value. C4C doesn’t just waste money – like every instrument of central economic planning, it destroys value.
Cash for Clunkers is not a “tax credit” or “rebate” of any sort. In order to be either of those things, it would have to be restricted to those who paid the taxes in the first place. Furthermore, it would have to be awarded progressively, just as taxes are assessed progressively. The top 1% of wage earners pay about half of all federal income taxes, so half of a true “tax credit” would have to go to them. Something tells me we’ll never see a Cash for Jaguars program. Tax credits never work that way. When taxes are collected progressively, but credits and rebates are given in flat amounts – or weighted toward the lower tax brackets – the credits amount to more redistribution of wealth. If I pay twice as much in taxes as you do, but we both receive the same credit, the procedure amounts to a strikingly inefficient way to redistribute my money to you.
Cash for Clunkers doesn’t even have the pretense of being a tax credit. It’s a simple subsidy, in which taxpayers who aren’t selling clunkers subsidize people who are buying new cars. Like all government subsidies, including government aid to the poor, C4C is horrendously inefficient. Various observers have pointed out that a great deal of that first billion dollars in funding disappeared into thin air. On top of the taxpayer loot being stolen and squandered, we must add the value of the cars being destroyed. The final cost of this initiative will be far more than the billions of taxpayer dollars Congress has voted to pump into it. Of course, that funding is more of Obama’s reckless deficit spending, so the final total must be marked up to include the titanic interest paid to service the debt.
To properly appreciate the economic damage of such a subsidy, you must understand that even as Big Government spends these dollars, it is reducing their value. The name of the program is an insidious lie – it’s not “cash” for clunkers. If it was, you’d bring in your clunker, and somebody from the IRS would hand you a pile of greenbacks, or wire the money into your account. The $4500 must be used exclusively for the purchase of a new car, which must meet the conditions set forth by the government. The value of those forty-five hundred dollars is reduced, because you have no choice in how to spend it. Imagine how much further the value of that subsidy would be reduced, if it was only good for the purchase of a specific model, designed to meet the whims of the Church of Environmentalism and sold exclusively by government-owned General Motors.
Suppose you found yourself on a deserted island, with a suitcase full of money. That money would have no value, other than as kindling for a fire, because you have no place to spend it. Now suppose the island is not deserted, but you can only spend your money at a small general store that sells a limited selection of essential supplies. Your money has value in that circumstance, but not as great as the value it would have if you were at home, able to spend it on a wide variety of goods, or invest it to generate more income for yourself.
Subsidies like Cash for Clunkers degrade the value of money by restricting the ways it can be used. All money absorbed by the government loses value this way, because the government will never have the diversity of choices available to millions of free citizens. If the economy can be likened to a vast field of grain, then government spending is a high-pressure fire hose, riddled with thousands of leaks, pumping water purchased on credit from foreign suppliers, and held by a nearsighted madman. The free market is a vast raincloud that stretches for miles. The raincloud is vastly more effective for watering crops than the fire hose.
The destruction of value in this particular subsidy is even worse than usual, because it is a subsidy for the purchase of a product that depreciates with terrible speed – as the old saying goes, a car loses thousands of dollars in value the instant you drive it off the lot. Furthermore, since the C4C subsidy doesn’t completely cover the cost of the new vehicle, the consumer must take out a loan for thousands of dollars to make up the difference – and the interest on this loan, extended over four or five years, will add thousands more to the effective cost of the vehicle. Of course, the socio-economic group most likely to trade in a clunker and make a new car purchase, specifically because of this subsidy, is the group most likely to default on their loans. This particular example of Obamanomics will end up using three billion dollars of deficit spending to cause consumers to take on ten billion dollars in debt – and if the overall delinquency rate of 6% holds for these loans, one of the results will be $360 million in bad debt. The only way to make this money lose value faster would be to soak it in expensive champagne and set it on fire.
The media’s urge to celebrate Cash for Clunkers as some kind of soaring success, because lots of people showed up to buy cars and grab their free money, is evidence to be collected at the latest of socialism’s crime scenes. Socialism is always eager to shine a spotlight on its dubious “successes,” while its victims are buried quietly in the dark. In an economy as large and complex as ours, letting government reduce the value of dollars, by reducing freedom of choice, has catastrophic effects. The difference between even the most intelligently managed command economy, and the immense value produced by the free markets, is the difference between subsistence and prosperity. The current bunch in Washington can’t even manage to achieve subsistence.