Well, it turns out the the "Cash for Clunkers" program is a huge hit, and why shouldn't it be? People know a sucker when they see one, and you'll never have trouble drawing a crowd to line up for free money.
The problem, of course, is that, as the old saying goes, there is no such thing as a "free lunch." Somebody is always paying for it. That's also true of inflated payouts for junkmobiles: someone is paying for it. When Joe takes in his '89 Reliant station wagon (book value: $135) into the dealer and gets a check for $4500, that money is coming from somewhere; in this case, that "somewhere" is all the people who are not gulping out of the public trough.
They rifled through the first $1 billion allotted for the "Cash for Clunkers" in only a couple of days, but lo and behold, it turns out there are a lot more people in the country with cars worth less than $4500 who would like to get wildly-above-market prices for them. History has proved that the best way to get a wildly-above-market price on something is to have the government buy it, and this proves to be no exception.
But tough times call for tough measures, right? We need to stimulate the economy, so now is no time to be worrying about where the money is coming from. Can't we worry about all that later?
Well, not exactly. The major rationale for the "Cash for Clunkers" program is that it will supposedly stimulate the economy. Will it? Well, it will certainly stimulate one part of it: the moribund auto industry. But what benefit will that be to the economy overall?
Normally-sane, sensible people frequently seem to forget one fact: every dollar the government spends is a dollar it has taken from someone else, by force. (This is true even when the government turns on the magic printing press, thus devaluing the dollars everyone else is holding.) When the government gives a billion dollars to people who were still clinging to their Dodge Darts, it's a billion dollars that has been taken from other people, by force. And in addition to the simple moral wrong of stealing from one to satisfy the covetousness of another, we often overlook the fact that that's a billion dollars that won't be spent somewhere else.
All the government has done in such a scenario is take a bucket of water from one end of the pool and pour it into the other end of the pool, triumphantly declaring the water level to have been raised. What is unseen are all the things that money will not now be spent on. We see the benefit to the car owner and the car dealer, but what about people and companies to whom that money really belonged? They will now not be spending any of that billion dollars on opening a new branch, raising worker salaries, paying for medical insurance, building a house, or taking a vacation. They will not be investing it in mutual funds (which sends the money to companies which use the money to do things) or putting it in the bank (where it will be lent to people starting businesses or needing new capital). One sector of the economy benefits from the car deal, but it's at the cost of an untold number of other sectors that are hurt by it.
I see Congress is now scrambling to pump more money into the "Cash for Clunkers" program, since--surprise!--it's proving to be wildly popular. As I've heard the inimitable Walter Williams say, "Politicians love a visible beneficiary and an invisible victim."
Cash for Clunkers