These were the recently traded clunkers whose owners were “nudged” by federal policy to accept a handsome payment from the rest of us for ridding the nation of older, more heavily carbon-emitting vehicles and replacing them with shiny new machines that required a lot of energy to produce but would, on average, yield lower carbon exhaust and greater fuel efficiency.  The clunker statute gave consumers $3,500 vouchers if they purchased vehicles that yielded a four-to-nine mpg improvement in fuel economy, and $4,500 if the yield was ten or more mpg.

In all, according to Bloomberg, some $2.88 billion in tax money was provided to those who together purchased some 700,000 vehicles made up of the popular Ford Focus, Toyota Corolla, Camry, and Prius, along with some Hummers and Ford F-150 and F-250 trucks.  These and a wide variety of other cars and trucks moved quickly from dealer lots to the homes of the blessed. In fact, the speed of the transactions was more than government could handle.  The program was wildly popular.

Taken together the average fuel economy of vehicles traded in was 15.8 miles per gallon, while the average for the clunker replacements was 24.9 miles per gallon.  And according to Ford Motor Company, this kind of fuel-economy improvement translates to a reduction of five to ten million barrels of oil consumed over the next five years. (The nation currently consumes nine million barrels a day.)  This will be oil that some other people can enjoy.

President Obama cheerfully termed the program “successful beyond anybody’s imagination.”  Secretary of Transportation Ray LaHood, who administered the program, said the effort was “a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work.”  LaHood quickly added that while all this happened, “[W]e’ve been able to take old, polluting cars off the road and help consumers purchase fuel-efficient vehicles.”  Economist John Lott surmised that “Only in Washington could a program that is spending money 13 times faster than was planned be labeled a ‘success.’”

In their sober assessment of the program, the Obama Council of Economic Advisers (CEA) found that the program will spur the economy for months as the auto industry gears up to replace inventories and meet growing demand.  Putting all this into numbers, the CEA estimates Cash for Clunkers will raise third-quarter GDP by 0.3 to 0.4 percentage points and lift total employment by 42,000 jobs by the end of 2009.

While the clunker program has been hugely successful in the eyes of Obama administration officials, the auto industry, and the consumers who received transfers from the rest of us, there is serious doubt that the program is all that successful when final costs are counted.  The doubt arises for at least three reasons.  First, the program was supported politically primarily for its much touted environmental benefits.  Carbon emissions would be reduced.  But the reduction costs are at least ten times higher than alternate ways of removing carbon.  Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth.  A crushed clunker with a frozen engine is lost capital.

Let’s consider each of these points briefly.

University of California-Berkley economist Christopher Knittel has developed a rigorous assessment of the implied cost of carbon emissions under the clunker program. (“The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program” [pdf], Center for the Study of Energy Markets, Berkeley, The University of California Energy Institute.) Knittel made plausible assumptions about the average life remaining in vehicles removed from the road, the average fuel economy associated with those vehicles, and the resulting levels of carbon emission that would have survived in the absence of clunkers.  Eventually, of course, the clunkers would have died a natural but less dramatic death.  Knittel then estimated the carbon reduction gained when the large fleet of clunkers was replaced by a new fuel-efficient fleet.  When he ran the numbers, Knittel found the cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables.  The cost estimate was $237 per ton under best case conditions.   And what does this tell us?  The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates the cost of reducing a ton of carbon to be $28 when done across U.S. industries.  Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it.

Frédéric Bastiat’s brilliant parable of the broken window reminds us that a street hoodlum throwing a brick through a window generates a series of job-generating transactions that might raise GDP by a trivial amount, if it could be measured.  Indeed, the idea seems so compelling that people today often speak of the silver lining found in the clouds that create hurricanes.  Think of the roofers that become employed.  But Bastiat’s key lesson is that a window has been destroyed—and it had value.  Before touting the total benefits of clunkers, we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation.  As Tony Liller, vice president for Goodwill, put it:  “They’re crushing these cars, and they’re perfectly good.  These are cars the poor need to buy.”

Finally, over the eons, human communities have contrived all kinds of devices to transmit critical survival skills and compatible behavioral norms.  One of these has to do with conservation of wealth.  “Waste not, want not,” we are told.  “A penny saved, is a penny earned,” we are reminded.  Using politics to pay people who destroy valuable vehicles, or to hold crops off the market, or to produce ethanol that may use more energy in production than it adds when burned, teaches a lesson of anti-matter and wealth destruction.  When all these considerations are made, Cash for Clunkers sounds like a sorry idea that should not be the model for future policy.

Let’s stop Cash for Refrigerators before the idea spreads further.

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.