Crackpot car economics

Opinion Journal:

Americans are streaming back into auto showrooms, and one reason is the “cash for clunkers” subsidy. Democrats are naturally claiming this is a great success, while Republicans are claiming that because the program has run out of clunker cash so quickly, this proves government can’t run the health-care system. How do we elect these people? What the clunker policy really proves is that Americans aren’t stupid and will let some other taxpayer buy them a free lunch if given the chance.

The buying spree is good for the car companies, if only for the short term and for certain car models. It’s good, too, for folks who’ve been sitting on an older car or truck but weren’t sure they had the cash to trade it in for something new. Now they get a taxpayer subsidy of up to $4,500, which on some models can be 25% of the purchase price. It’s hardly surprising that Peter is willing to use a donation from his neighbor Paul, midwifed by Uncle Sugar, to class up his driveway.

On the other hand, this is crackpot economics. The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

It isn’t clear this will even lead to more auto production over time, since the clunker cash may simply cause buyers to move their purchases forward. GDP will get a fillip in the third and perhaps fourth quarters, which will please the Obama Administration. But the test will be if auto sales hold up next year and into the future once the clunker checks go away. The debate over the subsidy may even have prolonged this year’s auto slump as buyers delayed their purchases waiting for the free lunch.

...

Actually the auto makers and dealers have been offering discounts of greater than $4,500 on many models for almost a year. Those discounts were on vehicles that probably would not qualify for the clunker cash, which means they are better vehicles that probably do not get as good a gas mileage as the cars being sold now. But in terms of safety and comfort those vehicles are miles ahead. But if people want small vehicles that get high mileage that is OK with me, but they should not need incentives to buy them.