Automotive News recently editorialized that the program “worked,” and now it is time to “build on its success.”  The editorial declared:

The August U.S. light-vehicle sales tally reported last week proves that the government’s cash-for-clunkers program was a huge success. Now it’s up to automakers and their dealers to be clever marketers and salespeople to maintain and build on the clunkers momentum.

From the beginning, there were doubters who, for political or other reasons, said the clunkers program was little more than a federal handout to the Detroit 3. But the rising tide of enthusiasm among U.S. consumers for purchasing new cars lifted many automakers, not just those with a fleet full of fuel-sippers.

The writer added:

Better yet, dealers say cash for clunkers sparked a positive shift in consumer attitudes that will lift new-car sales in the months ahead, especially if economists are right about positive indicators.

This editorial was written two weeks ago, The industry has come back to earth with a thud since then.  The Boston Globe reports that things are rather quiet in the aftermath:

[O]nce the federal money dried up, so did the sales rally. Now, customers at dealerships like Silko Honda in Raynham are few and far between, and inventory is once again accumulating.

Manager Adam Silverleib said business was “pretty intense” as a result of the federal stimulus program, with the dealership hustling to accommodate customers and handle the piles of paperwork required for them to receive reimbursement on vouchers. “Now we’re kind of back to where we were in the spring,’’ he said.

And what was it like in the spring?  It was called a recession, with recession-like sales figures to boot.  In other words, one can liken the Cash for Clunkers program to throwing lighter fluid on damp wood.  Flames will rise up for a few minutes, but unless the wood catches fire, the lighter fluid was next-to-worthless.

Contrary to what Automotive News breathlessly declared, the Cash program pretty much was what anyone with common sense and decent economic training could have predicted.  It spurred sales for a while, but after the money dried up, so did the new car sales.

I contend, however, that where Automotive News saw “momentum” for the auto industry, in reality this program has brought long-term economic damage.  To understand why the program was, on net, economically harmful, one first must understand Frederic Bastiat’s “broken window fallacy.”

Since most, if not all, readers are familiar with this fallacy, I don’t need to repeat it.  However, the most important part is that while the townspeople believed the broken window brought prosperity, it actually reduced their wealth because they were forced to use resources to recreate a window which already had existed, thus depriving the community of the use f those resources elsewhere.

With Cash for Clunkers people turned in vehicles on which they were making small if any payments..  In normal situations, if they had wanted another vehicle, many would have traded in what they had for another used car or truck.  Instead, even though they were given a fairly large down payment, many purchased cars that substantially raised their personal debt.

To make matters worse, the government ordered the dealers to destroy the engines of the so-called clunkers, many of which were not clunkers at all.  Thus the government managed to destroy a huge amount of wealth, all in the name of creating wealth.  Furthermore, if any automakers or dealers used the Clunker  program as a reason to engage in new capital expansion, they quickly will find that those “investments” really are malinvestments, which means they will be worse off in the long run because they diverted resources to lines that won’t be profitable.

Like so many government programs, Cash for Clunkers, while creating some short-run benefits for a few people, will have negative effects in the long run.  I suspect that even the editors of Automotive News will realize sooner or later that it was a lemon.

The usual canards thrown at GM include (1) GM did not build cars consumers wanted, (2) the quality of GM cars was lower than the quality of competitive brands, (3) GM’s management was not responsive to consumers, and (4) GM concentrated on building “gas-guzzling” SUV’s instead of building smaller cars that did not use as much gasoline.  All are true, in one sense, but they did not originate with GM or its management as much as they came about because of government policies.

Mises understood that in a free market, no business would bureaucratize itself, as such a move would generate costs upon costs for which there would be no market for the end result.  Businesses exist only because of the decisions made by consumers to purchase their goods, and for no other reason.  They do not exist to provide employment for workers; employment opportunities exist only as long as consumers are willing to purchase those goods made by the employees.

As long as consumers have choices, they will use them, especially if a particular business is unresponsive to them.  In the case of GM, the real story is not with any deliberate intransigence on behalf of the GM management, but why it chose to be intransigent in the first place.  This certainly was not the case with GM during the Great Depression, when the company still managed to eke out a profit.

Government moved against GM on many fronts.  First, the government made it clear it stood behind the United Auto Workers union when it organized GM and whenever the union went out on strike.  Second, the unions were able to take what once had been a mark of efficiency – GM’s vertical integration – and turn it into a liability by holding the company hostage at various stages of production.

Second, government employment mandates created the requirement for GM to create a bureaucracy to deal with the huge amounts of forms and regulations that were levied by various departments of the state and federal governments.  Furthermore, because labor unions are primarily political creatures, the politics of organized labor forced GM and other firms to adopt bureaucratic methods to please their government “superiors.”

Third, the UAW made it extremely difficult for GM to be flexible and to adopt production methods that would have enabled it to be competitive.  (Indeed, we have seen the same problems at Ford and Chrysler, and Chrysler essentially is bankrupt like GM.  Ford barely hangs on.)

The government and union-created inflexibility that became institutionalized at GM magnified both successes and failures.  Furthermore, because GM’s comparative advantage was in trucks and sport utility vehicles, the company also became hostage to spikes in gasoline prices.

It is true that GM did not make many small, fuel-efficient cars, but it was due to the hard fact that GM’s labor contracts were so costly and so inflexible that the company could not step out and take any chances and make those cars.  Unfortunately, because the Obama administration is pretty much a wholly-owned subsidiary of the UAW, the new “Government Motors” will be just as inflexible, which means that even though GM will be building new “small” cars, nonetheless the company still will lose money (like Amtrak and the Postal Service) as the modern-day “Trabants” move along the assembly lines.  And when we stop buying these lousy products?  Well, the hard truth is that the government, in an attempt to prop up the UAW, will hamstring GM’s foreign competitors.  That means shoddy products and “service with a snarl.”

These are the times that try men’s souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly: it is dearness only that gives everything its value. Heaven knows how to put a proper price upon its goods; and it would be strange indeed if so celestial an article as freedom should not be highly rated.

So began the first of 16 pamphlets under the title “The American Crisis,” by patriot Thomas Paine. These very words were read aloud to General George Washington’s forlorn and bedraggled men on Christmas 1776, the night before the Battle of Trenton.

Consider the backdrop: For the six months since the Declaration of Independence, Americans had been in almost constant retreat. To a disinterested observer, the American cause must have seemed hopelessly quixotic.To many patriots as well, it appeared all but lost. But Paine’s stirring words helped give the troops the morale boost they needed. The next day they accomplished the impossible, capturing nearly the entire force arrayed against them. Desertions plummeted and reenlistments soared.

Lovers of liberty need a little Paine today in the face of all the pain around us. It seems at times that the world has gone mad. Companies that lose billions are being bailed out by a government that loses trillions.The same federal Leviathan that outlaws competition in first-class mail delivery but still can’t deliver letters at a profit now supposedly knows how to run auto companies, banks, and insurance firms. Debt, deficits, bureaucracy, regulation, government spending–the depressing stuff already in frightful superabundance pre-financial crisis–now threaten our diminishing liberties more than ever before. The cover of the March 15 issue of Newsweek proclaimed, “We Are All Socialists Now.”

No Sunshine Soldiers

Maybe we have good reason to feel like those dispirited troops on Christmas Day in 1776, but we should learn from what they did just a day later. We can either be summer soldiers and sunshine patriots, or we can let the very principles we profess be our rallying cry for the battles ahead.

Eternal optimist though I am, I admit that pessimism really tugs at me when I read the morning papers. At every speech I give these days, there’s a sizable portion of the crowd that seems ready to crawl under a rock and let the world go to a statist hell in a hand basket.  

But then I ask myself, what good purpose could a defeatist attitude possibly promote? Will it make me work harder for the causes I know are right? Is there anything about liberty that an election or events in Congress disproves? If I exude a pessimistic demeanor, will it help attract newcomers to the ideas I believe in? Is this the first time in history that believers in liberty have lost some battles? If we simply throw in the towel, will that enhance the prospects for future victories? Is our cause so menial as to justify deserting it because of some bad news or some new challenges? Do we turn back just because the hill we have to climb got a little steeper?

Readers of this magazine should know the answers to those questions.

This is not the time to abandon time-honored principles. I can’t speak for you but someday I want to go to my reward and be able to look back and say, “I never gave up. I never became part of the problem I tried to solve. I never gave the other side the luxury of winning anything without a rigorous, intellectual contest. I never missed an opportunity to do my best for what I believed in, and it never mattered what the odds or the obstacles were.”

A Tradition of Courage

Remember that we stand on the shoulders of many people who came before us and who persevered through far darker times. The American patriots who shed their blood and suffered through unspeakable hardships as they took on the world’s most powerful nation in 1776 are certainly among them. But I am also thinking of the brave men and women behind the Iron Curtain who resisted the greatest tyranny of the modern age, and won. I think of those like Hayek and Mises who kept the flame of liberty flickering in the 1930s and ’40s. I think of the heroes like Wilberforce and Clarkson who fought to end slavery and literally changed the conscience and character of a nation in the face of the most daunting of disadvantages. And I think of the Scots who, 456 years before the Declaration of Independence, put their lives on the line to repel English invaders with these thrilling words: “It is not for honor or glory or wealth that we fight, but for freedom alone, which no good man gives up except with his life.”

As I think about what some of those great men and women faced, the obstacles before us today seem rather puny.We just need to gird our loins.We have to get a lot smarter and better at reaching more fellow citizens with a compelling alternative to the dead hand of the corrupt and incompetent State. We need to put confident smiles on our faces and sally forth.

Time to Rally

We should not squander a second feeling bad for ourselves.This is a moment when our true character, the stuff we’re really made of, will show itself. If we retreat, that would tell me we were never really worthy of the battle in the first place. But if we resolve to let these tough times build character and rally our dispirited friends to new levels of dedication, we will look back on this occasion someday with pride at how we handled it. Have you called a friend yet today to explain to him or her why liberty should be a top priority?

Nobody ever promised that liberty would be easy to attain or easy to keep. The world has always been full of greedy thieves and thugs, narcissistic power seekers, snake-oil charlatans, unprincipled ne’er-do-wells, and arrogant busybodies. Sometimes they’re nattily dressed in custom-tailored, pin-stripe suits and give good speeches; sometimes they’re bedecked in jewel-studded robes and give lousy speeches; on yet other occasions they wear well-worn street clothes and don’t bother with a speech at all as they hold you up. It doesn’t matter how they’re dressed or what they say. No true friend of liberty should just roll over and play dead for any of them.

Wipe that frown off your face and get to work. Liberty’s future depends on you.

In a recent talk at the National Press Club, the U.S. Secretary of Transportation, Ray LaHood, declared that the government wants to “coerce people out of their cars.” He was not advocating direct force per se, but rather a series of incentives to make alternate transportation more appealing.

Nonetheless, he did utter the “C-word,” and we need to understand that it was not an accident. Government economic “incentives” are born of coercion, and while government agents often do not advertise that they are going to use real force to “encourage” us to make certain politically favored choices, that does not change the hard facts.

LaHood was describing how the government wishes to create more “opportunities” for people to use public transportation or to ride bicycles or walk to work or shop in order to avoid traffic gridlock:

I mean, look, people don’t like spending an hour and a half getting to work. And people don’t like spending an hour going to the grocery store. And all of you who live around here know exactly what I’m talking about. You know, the dreaded thing is to have to run an errand on a weekend around here or to try and get home at 3:00 in the afternoon or even 5:00 in the afternoon.

Now, look, every community is not going to be a livable community. But we have to create opportunities for people that do want to use a bicycle or want to walk or want to get on a streetcar or want to ride a light rail.

He was speaking of life in the Washington, D.C., area where traffic, indeed, is a nightmare. However, one must remember that one reason for the density of traffic in that location is the huge density of population, which is due to the fact that the federal government plays such a huge entity in our lives. Washington was not always such a major player, but the New Deal and World War II and its aftermath changed that.

Today the Washington, D.C., area has become a huge combination of government employees, lobbyists, and the rest of the government-industrial complex that has redirected huge swaths of our economy to making sure that city and its environments have a very high standard of living. In short, it drains the rest of us.

To combat what LaHood sees as a problem associated with such population densities and government roads, he wants to force a lifestyle on everyone that only a relatively small number of people want. For example, if one really wishes to have one’s life centered around public transportation and away from the automobile, then one should move to New York City. (Whenever I go to NYC, I stay outside the city and take the train and subway while there, as I refuse to drive in that kind of traffic.)

But LaHood is not talking about freedom of choice. Rather, he is speaking of diverting our incomes, via taxation, away from things we would want to do with them to things of which government approves. Government for years has been trying to force us to use public transportation, even as people resist.

It is not as though large-scale privately owned public transportation never existed. Numerous cities and towns had such systems until they either were regulated out of business or people freely changed their living habits. However, that aspect of history is not good enough for LaHood.

Keep in mind that he and other cabinet officials don’t have to worry about driving themselves anywhere: They are chauffeured by limousine, something not available to those us of who are forced to pay for his favored transportation.

In the years after World War II, the British government went on a binge of nationalization, and after the economy became even more tenuous and less competitive, the government nationalized failing firms, an action dubbed “lemon socialism.”  Now, one would think that with this sorry example being available, U.S. policymakers might try to refrain from allowing the British Disease to slip into our body politic, but apparently arrogance is overshadowing good sense and the understanding of history.

The latest government caper is the attempt to nationalize General Motors and Chrysler, with the government taking large ownership shares in each company, along with the United Autoworkers.  Taking up the rear are the people who actually lent money to those companies and who now are being given the back of the hand.  When some Chrysler bondholders recently balked at the government’s “permitting” them to gain about 30 cents on the dollar, President Obama denounced them as “speculators” and worse. Even though Chrysler right now is in bankruptcy court, I suspect we are looking at a fixed outcome based on what the government wants.

For all of the talk of calamity if GM and Chrysler shut down for good in a Chapter 7 bankruptcy (which the government will not permit to occur, unfortunately), we have to remember that the losses being sustained by these two companies mean one thing and one thing only: their continued existence in their present state is destroying wealth.  That makes the economy worse not better.

Supporters point to the millions of people employed in the GM and Chrysler production and sales chains and then claim that if the companies went under, the job losses would be “devastating.”  That is true, but only partly true.  The job losses would be devastating to those individuals and regions connected to those companies.

However, the net effects of a shutdown of these firms would be positive, and they would be realized at various margins throughout the economy.  Contrary to Paul Krugman’s “Depression Economics” view that an economy gains when government “stimulates” the use of “idle or underutilized resources,” in truth, the Law of Scarcity does not disappear.  There is a reason as to why these resources are “underutilized,” and it has nothing to do with an alleged fall in “aggregate demand.”

Instead, it has everything to do with the fact that American consumers prefer the vehicles made by GM’s and Chrysler’s competitors.  Furthermore, the extravagant labor packages that these companies had with the UAW highlights the further irony: the two entities that had the most to do with the demise of the domestic auto industry, government and labor unions, now are taking charge of GM and Chrysler.

Obviously, the only way that these companies can survive now is through massive taxpayer subsidies, which further will destroy wealth and make our economy worse off.  I cannot imagine the government permitting GM and Chrysler’s competitors to go unmolested, so look for all sorts of contrived action against the U.S. subsidiaries of foreign companies such as government probes and union-organizing attempts.  The last thing a government firm is going to tolerate is competition, and honest competition at that.

Thus one charitably can say that this new edition of Government Motors is going to be an economic disaster.  The venture will destroy wealth and make it even harder for people who are not politically connected to make a decent living.  It certainly is not a recipe for economic recovery, but somehow, I doubt that the powers that be in Washington really care.  They are going to have their very own “lemons” as socialist play toys.  O joy.

For all the tough talk about responsibility, the Barack Obama administration should not go into the automobile business (or the banking business, or the insurance business, or the mortgage business). We can be assured that the automobile industry in this country will be thoroughly politicized, the last thing the American economy needs now.

Beyond the consternation about the “loss of jobs,” we need to understand why GM and Chrysler are in their present fixes and why permitting them to experience bankruptcy – real bankruptcy – actually will save jobs. Second, we have to point out why saving these companies through government directives actually will damage the U.S. economy and make things worse, and potentially much worse.

While GM and Chrysler are at death’s door, we cannot say that for every automaker. Honda, Nissan, Toyota, and other companies with operations in the USA are doing fine, and while times are hard everywhere, they are not candidates for the undertaker.

Government critics of GM and Chrysler claim that they did not build the right kinds of cars: the small, fuel-efficient vehicles that people on the left want to force us to buy (when they are not trying to force us to take public transportation). The reason GM did not build those cars was that they could not make them profitably thanks to their labor contracts, which guarantee the highest industrial wages paid anywhere. (And that includes pay given to people who don’t work at all, per the United Autoworkers contracts.)

Unfortunately, GM and Chrysler (and Ford to a lesser extent) could not compete with other auto manufacturers when gasoline prices skyrocketed, which were brought about in large part because of concern about the strength of the rapidly inflating U.S. dollar. Furthermore, because of their bloated labor contracts, the Little Three (formerly the Big Three) had fewer profits squeezed out of automobile sales, which is a nice way of saying they were paying more for production than their foreign competitors. Start multiplying this times the numbers of cars sold and a definite pattern arises: Domestic companies were uncompetitive because they and their unions chose a higher cost structure.

One of the enduring myths in economics is that the higher the cost, the greater the wealth created. People still insist that Henry Ford “created the American middle class” when he doubled the pay of his autoworkers from $2.50 to $5 a day. That is nonsense. Higher costs do not create more wealth. Increased productivity does. On the other hand, higher costs imposed through government or coercive union contracts destroy wealth. The infamous UAW contracts required that the Little Three use more resources than were necessary to build cars and trucks, which meant those resources couldn’t be employed at their highest-valued uses, making everyone else poorer.

Even though the government is talking responsibility and even bankruptcy, nonetheless the market already has spoken on GM and Chrysler. At present the sum of the parts is greater than the value of the whole, which means these companies would be worth more by having their physical assets sold in a bankruptcy proceeding than kept together by government fiat.

By artificially keeping GM and Chrysler alive, the government not only is wasting scarce resources and forcing lower-income Americans to create “make-work” for higher-income people, it is also placing a hardship on those U.S. subsidiaries of foreign auto companies. Given the realities of American politics, I can imagine that sooner or later the government will take aim at those subsidiaries in hopes it can damage them in order to protect its “investment” in GM and Chrysler. Stay tuned.

“The Treasury said it would use $5 billion from the $700 billion financial rescue fund it oversees to buy preferred stock from the company. It said it would also lend $1 billion to General Motors, which owns 49 percent of GMAC, to allow it to invest further in the firm” (Washington Post, Tuesday)

Noe big deal, we can just print more.

FEE Timely Classic:
“The Value of Money,” by Hans Sennholtz