The Law of Unintended Clunkequences

The mark of the economically-literate person is an ability to see a few levels below the immediate surface of an event or policy -- to understand, for instance, that every government intervention in the market sets off a series of ripples and reverberations, like a pebble breaking the surface of a placid pond. Some of these effects are more obvious than others, but all have consequences. They might benefit certain parties, but harm others. They might enrich one group, at the expense of another. The beneficiaries may be obvious, while the victims are hidden from view.

The key is trying to see things whole – or as whole as one can with something as complex as an economy. Perhaps the best writing on the subject was done by Frederic Bastiat, in his essay on "what is seen and what is not seen": link. Every American who aspires to economic literacy should read it.

It’s impossible to anticipate with precision what all those ripple effects will be (thus the folly and danger of central planning). But a prudent person at least counsels caution when it comes to government meddling, since it could result in more negative than positive consequences. A wise person has the humility to hold back.

A local story about the after effects of the federal Cash for Clunkers program offers a good case in point.

The immediate, surface impact of the program seemed positive. Americans flocked to take advantage of the giveaway, happy to have the government (meaning other people) subsidize their new car purchases. Dealers were delighted to get the showroom traffic. And all the transactions that took place, as $3 billion in federal money was blown in just a few weeks, did give a measurable (but modest and temporary) boost to one sector of the economy. That’s about as far as some people could (or cared to) see. And what they saw made them happy.

But one consequence of taking so many used cars off the market so abruptly is that a shortage was created, which is driving up the costs for used car seekers. Reports the Gazette:

“Several car dealers in Colorado Springs are reporting sharp price hikes and a drop in availability of affordable used cars on the wholesale market in the wake of the federal government’s Cash for Clunkers program and the financial turmoil in the new-car industry.

The dealers said the effects are — or will soon — be visible on a car lot near you, in the form of slimmer selections and higher prices.

One dealer said every late-model used vehicle he’s seen lately on the wholesale market is $2,000 to $3,000 higher than it would have been a month ago.

The Cash for Clunkers program paid $2.87 billion to scrap 690,114 gas-guzzling cars and trucks, according to the latest statistics. The number of cars turned in on new car trades in Colorado was not disclosed, but the feds spent $37.6 million in the state. Each trade-in was worth either $3,500 or $4,500, so if those rebates are averaged out, that suggests about 9,400 used cars were taken off Colorado roads last month. Some of those presumably would have gone to the used car market if the program hadn’t existed.

In addition, the program came at a time when many new-car dealers were beefing up their used-car stock because of slow new-vehicle sales. At the same time, some dealers who lost their factory franchises have been converting to used-car shops, and they’ve been scouring the country for good used vehicles for their lots.”

C4C may have been a one-time boon for Americans wanting to trade in a “clunker” for something new and marginally more efficient. But it’s becoming a bust for Americans who want to get a better “clunker” than what they're driving now. Federal splurging reduced car costs for some Americans, but increased them for others. New car dealers got a temporary booster shot, but used-car dealers have now come down with a terrible cold. One sector of the economy felt a bump; another experienced a slump. And whether the economy as a whole is better off is doubtful.

What economic-illiterates hailed as a "success," prudent people recognize as a case of shell game economics, in which money was taken from one set of pockets and transferred to another. The flurry of activity did nothing to nourish and actually grow the economy; it gave us a short-term sugar buzz from which we're now coming down.

But not to worry. We'll soon be hearing this described by politicians as "the used car cost crisis," prompting calls for another government intervention, to fix a problem created by the earlier intervention. And so it goes, ad infinitum, one government blunder inviting another -- as we ride the fast lane toward a centrally-planned economy.