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The “I Hate the Poor” Act of 2009
Who Really Benefits from Cash for Clunkers Program
So I am shaving the other day, and the man on the morning talk radio show is on a roll. Cash-for-Clunkers had just failed, or so declared the P.R. flack in the Department of Waste that administers the program, and Talk Show Guy thought this brought great lessons. “This was a good program! I really liked it!” the self-described conservative drawled over and over. “But if the guvmint can’t manage a good program worth $1 billion, why does anyone think it can manage a single-payer health care system they say will cost $1 trillion?”
Cash-for-Clunkers, of course, is the popular term for the Car Allowance Rebate System, which funds down payments of up to $4,500 for new cars if older model cars are also traded in and destroyed. The program was temporarily discontinued when it ran out of its initial allotment days following its implementation. Congress refunded the program.
Well, yes, he’s right, I thought, careful not to cut myself. When you offer $1 billion in free money to people, why was anyone shocked that they went for it? And if you offer free health care to a supposedly narrow segment of the population that cannot now access it, why do economic planners create budget projections that assume health care demand will remain static?
But that wasn’t what caused me to move the shaver from my face. That had to do with all of the talk about Cash-for-Clunkers being such a good program. It clearly isn’t, or at least it shouldn’t be to anyone who remembers the basics of their college economics classes. From this perspective, there is so much wrong that it’s hard to know where to start.
First, let’s dispense with the notion that this bill had anything to do with improving the environment. Getting people into cars that get better mileage often leads them to drive more, negating any benefit from the switch. What’s more, scrapping hundreds of thousands of clunkers en masse while encouraging production of new cars to replace them isn’t exactly an environmental blessing either.
The real purpose of the program is to help car dealers sell off the excess supply of 2009 vehicles that consumers weren’t buying at the prices dealers preferred to charge. Giving people free money to put toward a down payment was a way for Congress to pay back a powerful lobby that produced an unsustainable level of output during the Fed-fueled boom. It’s reminiscent of those New Deal programs that also tried to thwart falling prices by destroying perfectly good and usable products that otherwise would have lowered prices. In the 1930s, people rioted when the government forced farmers to pour perfectly good milk down sewer drains. No one’s rioting today because now the government is more richly compensating those who own the property being destroyed. (For a fascinating, contemporary account of the Agricultural Adjustment Act and other New Deal programs, see journalist John T. Flynn’s The Roosevelt Myth. For a more-recent account, see Amity Shlaes’s The Forgotten Man: A New History of the Great Depression.)
The result is a situation described by Clemson University economist Bruce Yandle’s “Bootleggers and Baptists” theory for the growth of government. According to Yandle, government often grows because two otherwise opposite groups are able to join forces to pass legislation that neither would have been able to get passed individually. His example applied to groups that supported alcohol prohibition: The bootleggers benefited from the outlawing of their “legitimate” competition, and religious groups opposed it as a matter of morals. When both groups joined forces, legislation became far more likely to pass. Yandle concludes that dry counties are likely to be Baptist-dominated but also contain active bootleggers comprising its “extra-legal” market.
Applying Yandle’s theory to the clunker program, the bootleggers are car dealers who face low consumer demand and sales revenues at current prices, while the Baptists are environmentalists who believe that older model cars insult Gaia, Mother Earth. The prospect of an old-car trade-in program unites both groups.
Cash-for-Clunkers, Agricultural Adjustment Act Comparison
|
|
Agricultural Adjustment Act |
Cash-for-Clunkers |
|
Year Passed |
1933 |
2009 |
|
President |
Franklin D. Roosevelt |
Barack H. Obama |
|
Purpose |
Relieve downward pressure on agricultural prices |
Relieve downward pressure on automobile prices |
|
Cost |
$1.64 billion in 2008 dollars to pay farmers to plough over crops |
At least $3 billion in 2008 dollars to destroy cars |
|
Winners |
Farmers, Bureaucrats administering the program |
Car Dealers, Bureaucrats administering the program |
|
Losers |
The poor and middle class who cannot access lower-priced food |
The poor and middle class who cannot access lower-priced transportation |
|
End-Result |
Increased government control of agriculture |
Increased government control of automobile industry |
That’s not to say Cash-for-Clunkers does not have its share of winners and losers. Car dealers who are experiencing summer profits are surely winning for now, as are those individuals who otherwise would have gone without a car but can now afford one. Let’s not forget the banks and finance companies that now have loan assets on their books. You can be sure the members of Congress who voted for this bill will remind dealers of their generosity in directing other people’s money their way in this old-fashioned shell game.
And it is a shell game, because the losers here are the poor and the lower middle class—the very groups in the most precarious economic shape 18-plus months into the Great Recession. They suffer in two ways. First, as primary consumers in the used-car market, they will see supply shrivel. Many cars that qualify for Cash-for-Clunkers still have long lives ahead of them. (My 2000 Chevy Astro qualifies for the program even though it easily has another 75,000 miles in it.) One car dealer in New York—like many dairy farmers in the 1930s—remarked about the immorality of a program that forces him to destroy goods that would otherwise provide benefit to members of his community.
The poor also pay in the form of higher prices resulting from the inflation that will be required to finance the program. The government is broke, with tax revenues falling while spending soars at levels even higher than those associated with the profligate Bush administration. In terms of cost, Cash-for-Clunkers is at least twice as expensive as its New Deal inspiration, the Agriculture Adjustment Act (see table). This program will be paid for, at some time, with monetary inflation furnished by our not-so-independent central bank, and we will pay for it in the form of higher prices. This is why inflation is a tax, and a regressive one at that.
Indeed, when I first read about Cash-for-Clunkers, I thought it should have been named the “I Hate the Poor Act of 2009” because—you can be sure—this program sticks it to those members of society least able to thwart it. In the end they will find maintaining economic autonomy all the harder, making it more likely they will become dependent on government in the future. The cynic in me wonders if this might be the actual intent.
Nonetheless, Talk Show Guy thought this was a good program. He liked it! I bet he got a good deal on a new car too. Hope he enjoys his ride.
Categories: 
Jevons paradox is the term used to describe the often observed effect of improved efficiencies in technology leading to an increase in consumption of the good or service that is the subject of the improvement. No doubt the intelligentsia are aware of this and one might reasonably assume that the central planners are anticipating a significant increase in the gas tax to help keep the brakes on an increased consumption level and thus can justify the plan as “environmentally friendly”. So watch for that gas tax increase and one more “hate the poor” policy. Here the central planners might shift gears and note that there are plans for significant improvements in public transportation, to be funded in part by the increased gas tax, that will alleviate the pain caused by the increased cost of operating a vehicle. Similarly, there is some talk that improving our overall gas mileage helps wean us off our addiction to foreign oil. Again, Jevons Paradox raises its head. So, without an increase in the gas taxes acting as a governor on consumption, history supports Mr. Westley’s concern about consumption increase. Mr. Westley does not mention the additional costs of insuring a newer more expensive car in the tally, but that seems worthy of note. So, the insurance industry gets a little bump.
There is some argument that the poor suffer disproportionately from pollution, which is caused in part by vehicular emissions, since more poor people live in urban areas that have higher concentrations of air pollution. There is some evidence of this, see for example statistics on the incidence of asthma. So, a program that lowers emissions might have some difficult to measure positive effect in this area. I’d like to see some data on this since it seems unlikely that it could be sufficient to justify such a program.
I fear that Mr. Westley underestimates the extent of the effects of the inflationary pressures this and other programs are creating. At some point in the future we will find these are not “hate the poor” policies but hate the middle class. So, let us all hope that we are all breathing more easily and sleeping more comfortably a few years from now with our cleaner air and reduced geopolitical vulnerabilities, because it is a very expensive and risky bet.
11 August 2009 at 10:33 pm