Henry Hazlitt in Action – Cash for Clunkers

Aug 21, 2009 by

Henry Hazlitt, author of Economics in One Lesson, may be long gone, but his ideas are very much alive. Matthew Bandyk wrote an article on Cash for Clunkers which brings home a point that Hazlitt made many decades ago. Bandyk’s piece is pasted below:

“Did Cash for Clunkers Work?”

At Slate’s Big Money, Matthew DeBord declares that cash-for-clunkers (and the broader auto bailout) is victorious:

The U.S. industrial economy is moving again. Workers are going back to work. Consumers are able to buy large and expensive forms of personal transportation, into which they will put gasoline provided by giant international oil companies. Loans are being made. Money is changing hands. In the real economy, not the elite casino located in Bubbleville, aka Lower Manhattan.

…Maybe what’s good for General Motors, and the rest of the U.S. auto industry, is still good for the United States.

But wait a minute–the fact that money is exchanging hands does not immediately lead to the conclusion that these programs are good for the economy.

The government has not necessarily created value by giving money to car companies and dealers. Rather, it might have just shifted that money from other uses. If the government hadn’t spent that money on a bailout and cash-for-clunkers, that money would still be “changing hands” elsewhere.

There are good reasons to think that this specific application of the money has not created value. Not all Bubblevilles happen in elite casinos–they can happen in middle America too. It was just 30 years ago that Chrysler was begging for its first bailout. Advocates of the current bailout often cite the fact that Chrysler paid its loans back early as evidence that bailouts “work.” But the 1979 bailout may have only compounded the problems of the Big Three and made their inevitable near-collapse worse–keeping Chrysler on life support drained Ford and GM of market share. It also gives all the companies less incentive to clean up their acts when they know government will be always be there for rescue. Are we once again covering up these companies’ fundamental problems by stepping in to save them?

Cash-for-clunkers is a perfect example of value being shifted, not created. DeBord cites Edmunds’ Jeremy Anwyl on how the program has stimulated car sales. That’s true–there’s been a spike in car sales this summer. But Anwyl has also written that this spike might come at the expense of sales later in the year. In other words, cash-for-clunkers has made consumers interested in buying cars earlier than they otherwise would–but it remains to be seen how much of a net increase in car purchases there will be.

Of course, I could be wrong, and these investments might pay off. But just because economic activity is happening does not mean that the government was right to create that activity. To argue otherwise is like arguing that we should all pick up rocks and break windows in order to create jobs for glaziers.

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