Supplement to the Economic theory of regulation by Yandle: Bootleggers and Baptists. Baptists lobby legislatures to shut down liquor stores on Sunday, but demand for alcohol doesn't go away and is satisfied by bootleggers. Bootleggers earn a living satisfying this demand! Upshot is that government regulation works out in complicated ways.In Cash for Clunkers, the Bootleggers (the ones making the money) are the car manufacturers, where the Baptists are the "Greenies." The deal was that people would scrap their "older" cars for newer ones that were more fuel efficient ones. It's supposed to be a win-win for everyone, if everyone includes only the Green Lobby and the Car makers. Everyone else, the taxpayers, gets the shaft. It was hugely popular, for obvious reasons, it made a car that might have been worth $500 dollars, now worth up to $4500. The program was supposed to last until November 1st, but unfortunately it already ran out of money.
It was unclear how many cars had been sold under the program on Friday, but the number was far higher than anyone had expected. About 40,000 vehicle sales were done through the program but dealers estimated they were trying to complete transactions on an additional 200,000 vehicles, said Sen. Debbie Stabenow, D-Mich.This is a clear case of the Government not knowing the consequences of their actions. They should have known that they were going to cause a artificial mini boom. Then of course these are the same politicians and officials that didn't have a clue they were creating an artificial boom in housing. So really this is par for the course. It begs the question, why do people think government run health care is a good thing? That is for a different post though.
Going back to the Bootlegger model, lets look at the car companies. It's not hard to see why they wouldn't love this idea. They would be selling more cars without having to cut their own sales prices. The $4500 is being paid for by the taxpayer, so anyone reading this is helping pay for someone else's brand new car! I bet you didn't know you were so generous or that you had all that extra money to help your fellow man out! Well I really can't say everyone is paying since 43.4% of Americans pay zero or negative taxes.
Now to be fair there are a lot of dealerships that are offering other incentives to help move cars but the problem here is that you have to ask why no one was buying the cars in the first place? Could it be that people don't want to shell out money of big ticket items in a time of still rising unemployment? Now of course that can't be it.
Now looking at the Baptists here, the Greenies. There argument is that these older cars wer putting more GHG in the air that will lead to catastrophic global warming that will destroy everything! I don't believe it. This is an excellent book which should spark the death knell for the AGW alarmists; Heaven and Earth, Global Warming, the Missing Science.
One of the things not really considered here are the poor. It will be interesting when all this is said and done, to see the statistics and what income levels were able to buy these newer cars. I don't think it takes a Ph.D to see that only the well off will be able to afford the new cars, while at the same time, destroying older model and usually cheaper cars will not be available for lower income folks. One of the unintended consequences of this will be, a shortage of "affordable" cars for the poor. Which is probably what some want to happen all along. That will give them a reason to "help" the poor afford cars, much in the same way as they did for housing.
Can ayone say Boom/Bust?
UPDATE: Added a comment made over at CafeHayek.
C4C is a broken window fallacy.
It's a perfect example of law of unintended consequences and the ineptness of Government all rolled into one bill.
Partial list of unintended consequences:
1. The poor will be worse off since there will be fewer lower prices, perfectly usable cars on the market.
2. Short term boost in auto sales for dealerships, all this does is reduce inventory, by offering incentives to buy but does nothing about the long run outlook for the auto manufacturing companies. The underlining problem is why there was so much pent up inventory? That's something government fiat cannot fix.
3. From number 1, we will see a "crisis" in "affordable" cars for the poor, looks for another government program to help elevate that, which will cost even more tax dollars.
4. From number 2, the auto companies will see this short term boost as a sign of consumer confidence and long term expectations. They will boost production, but quantity demanded hasn't changed. If anything quantity demanded will go down in the long run because of this program. The Auto companies will loose money in the long run because of C4C and will require government intervention, which thanks to all those campaign donations, they'll receive able tax money to pay for their foolish investments.
This is a layperson view with an Austrian twist. I am no economist and haven't even finish Intro to Macro yet...which probably is the reason why I see this so clearly. My head isn't filled with Keynesian mumbo jumbo yet so my ability to reason hasn't been dulled.
This is just another piece of evidence as to why Keynesianism is a worthless theory and needs to be scrapped. I'm convinced if and when we get out of this mess, in 2 hundred years when they look back at the 20th century, the top 5 most "evil" people from the 20th will be; Hilter, Stalin, Pol Pot, Mao, and Lord Keynes.