Growing the Economy by Destroying It

Anyone watching the news lately has most likely perked their ears at any mention of the recession because it’s something that effects us all.  The government has been pushing a number of different policies through in an effort to combat the growing recession alongside the three stimulus packages.  The one program that filled the news the most before the health-care debacle was nicknamed Cash for Clunkers.  It was touted as a success by the establishment due to the large amount of participation by the public.  Cash for Clunkers was a program whereby the government would give a person money towards a new car if they would trade in their old car.  The Problem, however, was that Cash for Clunkers did not actually help the economy instead it hurt it by increasing economic disparity and destroying goods needlessly.

Economic disparity hurts the economy by enlarging the class of people, the poor, who use the same or more goods and services than they create.  On the surface it may seem that programs like Cash for Clunkers do not affect the social structure but they do.  My first car was given to me by my sister when she and her husband decided to buy a new minivan.  She wouldn’t have gotten very much money for it had she sold it, so it was an easy decision in her mind to give her car to me who could not afford one at the time instead of selling it.  However, had the Cash for Clunkers program been in place at the time, getting 3′500 dollars off on her new minivan probably would have been the route she would have taken and I wouldn’t have blamed her.  This process of giving away or selling at a low rate cars that no longer have a high value and yet are still in working condition allows people to buy or receive cars who would not otherwise be able to.  This increases their range and mobility in finding work which in turn increases a companies potential employees. We will begin to see the price of used cars rapidly rise as the market adjusts to having 690′000 used cars out of the economy.

Worse so than creating economic disparity is how Cash for Clunkers claims to help the economy by destroying goods.  Edmunds.com has come out with the claim that only 125′000 of the cars bought in the program were from people who had not already planned to buy a car so that is essentially what is happening.  The government pays people to destroy something that has remaining potential so that they will buy new goods and increase the gross domestic product.  The idea is not all that new, in fact it dates back to the 19th century.  A french politician by the name of M.F. Chamans theorized that if the government were to burn Paris to the ground it would grow the economy by creating new jobs and new demand for goods.  It sounds radical but in fact shortly after hurricane Katrina there were news analysts saying the same thing, that our economy would benefit from New Orleans having been destroyed.  Thankfully, better minds prevailed and no actions towards destroying Paris ever came about.  Although Chamans theories were quite popular, his theories were refuted by an economic theorist named Frederic Bastiat in an essay entitled “That Which is Seen and That Which is Not Seen.”  In it Bastiat tells the story of a shopkeeper whose son accidentally breaks a pan of glass from the shop window.  Chamans would say that the breaking of the glass was good for the economy because it keeps the glass maker employed, however Bastiat says that idea only takes into account the seen.  The unseen is that if his window pane had not been broken the shopkeeper could have bought something he actually needed, that might have increased his business and yet he would also have the benefit of the pane of glass.  By destroying the pane of glass the shopkeeper loses his pane of glass and also loses the benefit of whatever he would have bought instead.

The same is true of Cash for Clunkers, by destroying working cars the economy loses both the benefits of the car along with whatever would have been bought in its place.  Since the three billion dollars used to pay for Cash for Clunkers came from the taxpayers we lost money that would have been spent buying goods.  Also companies lost money that would have been spent increasing the output of goods, and employing more people.  Which would have grown the economy.  Our political leaders would be wise to listen to the advice that things that seem to good to be true, normally are.  And we as voters would be wise to not elect politicians who don’t even have a rudimentary understanding of economics.