Is Cash for Clunkers the Dumbest Government Program Ever?

Chris Edwards of Cato suggests "Cash for Clunkers" is the dumbest government program of all time:

• A few billion dollars worth of wealth was destroyed. About 750,000 cars, many of which could have provided consumer value for many years, were thrown in the trash. Suppose each clunker was worth $3,000 at a guess, that would mean that the government destroyed $2.25 billion of value.
• Low-income families, who tend to buy used cars, were harmed because the clunkers program will push up used car prices.
• Taxpayers were ripped off $3 billion. The government took my money to give to people who will buy new cars that are much nicer than mine! ...
• The auto industry received a short-term “sugar high” at the expense of lower future sales when the program is over. The program apparently boosted sales by about 750,000 cars this year, but that probably means that sales over the next few years will be about 750,000 lower.

We aren't too fond of Cash for Clunkers either.

Cash for Clunkers Crash and Burns

The New York Times reports that car dealers in New York have pulled out of the government's cost-shifting program to aid automakers in Detroit under the banner of environmental awareness. But dealerships are simply unable to pay employees or normal maintenance costs with the majority of their reimbursement requests still unapproved.

One dealership owner explains, “The bottom line is the bad outweighs the good,” Mr. Wondergem said. “I had to make a decision to stop participating because of the stress and the risk. This program has really consumed my life. "

The waits are so widespread that GM is now offering to deposit a temporary infusion of cash in order to shore up dealership's accounts and keep them participating in a program that has allowed the auto maker to raise production.

Meanwhile charities are hurting as vehicle donations suddenly drop, used care dealers are complaining about low inventories, and repair shops worry about the difficulties they will face when looking for spare parts.

Cash for Clunkers Falls Prey to Laws of Economics

Congress's  ill-named "cash for clunkers" program has, like so many programs before it, failed to defy the laws of economics.

As typically happens when government subsidizes something - the price for cars has gone up. The blog "Legal Insurrection" looks at car sales data and notes that consumers are getting far less "discount" off the sticker price - which makes sense, given that dealers have less incentive to lower prices, as consumers need to buy now to take advantage of the "cash for clunkers" voucher.

They also note that the price for used cars is increase, which also makes sense, when you consider that the cash for clunkers program requires trade-ins - which would otherwise be resold (likely to lower-income households than those trading them in) - to be destroyed.

And Matthew Gagnon notes on the Next Right that all Congress has done is create another "bubble" - this time in the automobile market.  Lots of folks are buying cars now to take advantage of government subsidies, which will only result in a steep drop in sales later.

If Only Congress Passed an "Economics for Dummies" Program

It always amuses me to see "cash for clunkers" ads on TV these days. This government subsidized program, like hundreds of others, has been a tremendous failure.

The transportation Secretary, Ray LaHood said on Sunday that unless the Senate approves $2 billion in additional funding, the Obama administration could be forced as early as Tuesday to halt the "cash for clunkers" program that has become one of the most visible and fast-acting of the government's economic-stimulus programs. This legislation is a prime example of economics going completely senile in the hands of the state. This program would be the same as everyone burning a sofa and dining room set and refurnishing their homestead every couple of years.

In effect, the government has opened up a Pandora's box of problems. Firstly, taxpayer money is being used inefficiently. Second, this stimulus money is nothing short of a bailout for large companies with a lot of leverage. Ford Motor Co. expects to post its first year-over-year monthly increase since 2007, in part because of the bounce from the program. Third, this program has shot up demand in such a way that dealers have not been able to meet supply, forcing companies to cut rebates that were promised. Fourth, only individuals with cars that have low gas mileage (read: SUV, Hummer drivers) are the ones getting this rebate.

No wonder Nathan Benefield is still upset that his car wasn’t eligible, especially now that many of the SUVs that are traded in as “clunkers” and are destroyed are better than his new car.

Where Were These Guys a Few Months Ago?

At a recent town-hall meeting, Federal Reserve chairman Ben Bernanke said he had to 'hold my nose' over bailouts. I wish he had expressed some of those misgivings when lobbying for the bailouts last year, instead of the "do it now!" testimony he actually gave.  (On a side note, here is a video of Bernanke in 2005 saying there is no housing bubble, housing prices would not decline, and in 2006 that housing would not have a drag on the economy, while car sales would climb; and in 2007 that the subprime market was not a problem.  Just point this out because a lot of intelligent folks seem to trust Bernanke's judgment more than their own).

In a similar story, Treasury Secretary Tim Geithner insist that the path to economic recovery is through lower deficits. It is too bad that earlier in the year, he was advocating that the path to economic recover was through a $787 billion in a deficit-funded stimulus bill.

Thanks guys.

Keystone Opportunity Zones Fail to Deliver Economic Prosperity

On Thursday, the Legislative Budget and Finance committee heard testimony evaluating the effectiveness of the Keystone Opportunity Zone (KOZ) program. The KOZ is an “economic revitalization” program that provides businesses in distressed communities with state and local tax exemptions. That testimony ultimately concluded that the program is seriously flawed and in dire need of improvement. 

For starters, the committee appointed to evaluate the program found many inaccuracies and inconsistencies within the KOZ’s own data that prevented much “comprehensive and quantifiable assessment of the program.” For example, data on the number of jobs created and the amount of capital invested is self-reported by program participants. It came as no surprise then that these numbers were substantially overstated and appeared to represent a mix of both actual and estimated figures.

Also of note is that many KOZ participants are providing little, if any, job creation or capital investment in return for the tax exemptions and investments they receive. In fact, some 75% of reported participants didn’t create any jobs.

If that wasn’t bad enough, the Department of Community and Economic Development does not even have a method to calculate total program costs. Therefore, it is impossible to run a cost-benefit analysis to determine if KOZ-related “job creations and capital investment” (see above) justify the amount of state and local tax revenues being forfeited.

The study did find some measurables, however. Statewide, only 30% of KOZ acreage is being developed, whereas some 70% of designated land is largely undeveloped. Additionally, no business has ever been deemed “not qualified” by the Keystone Opportunity Zone program.

The full joint committee report on Keystone Opportunity Zones can be found here, with a summary of findings here.

Pennsylvanians are Voting with Their Feet

I wonder how many believe that forgoing new taxes and cutting back spending would lead the state of Pennsylvania to the “post apocalyptic landscape of Cormac McCarthy’s novel soon-to-be-movie, The Road.” Such is the assertion of Ed Rendell and many Pennsylvania Democrats supporting his runaway spending and tax hikes. They assert, cuts in spending will mean the end of education and agriculture, the loss of law enforcement and health care.

But even though Rendell's policies won him reelection, he is losing with another type of voter, the folks who are voting with their feet.

Pennsylvania is in the bottom half of the country in the Tax Foundation’s 2008 State Business Tax Climate Index, and has the 11th highest tax burden in the country. As a result, the Commonwealth lost 12,000 residents to other states last year, and 58,000 since 2000, according to the US Census. Pennsylvania is also the fourth highest state in outbound moves according to United Van Lines’ 2007 Migration study.

The metropolitan areas of Pennsylvania, namely Pittsburgh and Philadelphia, has seen a steady outflow of people. According to a report by the Tax Foundation, “Philadelphia is one of just six of America’s twenty largest cities by population that impose a city-or county-level tax measured by compensation, be it a tax on wages, earned income, or occupational privilege.” With the most mobile population living in large cities, movement to the suburbs or to neighboring states is not uncommon.

Liberals Who OpposeTax Hikes During Recession

Pennsylvania Gov. Rendell renewed his call for higher taxes today, claiming it was ludicrous to think higher taxes would cost jobs. Who would argue with that?

Well certainly the Commonwealth Foundation, but how about John F. Kennedy, Barack Obama, or a younger version of Gov. Rendell - all who argued for lower taxes to spur economic growth, or against higher taxes (which would hinder the economy) during a recession

John F. Kennedy: "Lower rates of taxation will stimulate economic activity"

Barack Obama:  Democrat Barack Obama says he would delay rescinding President Bush's tax cuts on wealthy Americans if he becomes the next president and the economy is in a recession, suggesting such an increase would further hurt the economy.


Ed Rendell: Business tax cuts are a key component of our job-creation strategy... they provide a powerful incentive for businesses to locate or expand in Pennsylvania. 

Ed Rendell: But the Capital Stock and Franchise Tax still hits Pennsylvania businesses— particularly manufacturers—hard.  I am convinced that accelerating the phase out of this tax will do more to help Pennsylvania workers than any other business tax change we can afford to make at this time.

Rendell Adminstration:  Without tax credit, thousands of lost jobs in film industry

Gov. Rendell Proposes Firing 24,000 Pennsylvania Workers

Governor Rendell announced today that to satisfy his appetite for more spending, he would like to increase Pennsylvania's Personal Income Tax (PIT) by 0.5 percentage points - to 3.57%.

As we announced yesterday, a PIT increase would cost thousands of Pennsylvania jobs.

Our updated analysis reveals that Rendell's latest proposed increase would cost 24,000 Pennsylvanians their jobs. This is on top of those jobs already lost during the current recession.



Not only is that bad economic policy, it's just plain old "mean" and "heartless".

One more note: Governor Rendell again blames "Wall Street Greed" for his troubles and forcing him to raise income taxes (for the 2nd time as Governor). Sure, Wall Street bankers are "greedy", but Rendell should also mention that the financial crisis was a failure of government, which fueled and encouraged unwise behavior by financial institutions; he should acknowledge the failure of his tax, borrow and spend policies to grow the economy; he should mention that at both the federal and state levels we had increasing government control of the economy, not free markets; and he should note failure of the so-called stimulus (which he lobbied for) to stimulate.

So what is his solution? More of the same failed economic policies of the past.

What Will Higher Business Taxes Get You?

Bloomberg, via the Club for Growth, has a troubling lesson for those who want to hike business taxes.  Microsoft CEO Steve Ballmer says that if Obama's new corporate tax scheme is passed, Microsoft will move more jobs overseas.

In related news, Pennsylvania Senate Democrats want to impose "mandatory combined reporting" on business taxes - which is similar to Obama's plan, only it would tax Pennsylvania companies on their business in other states, rather than on an national/international scale.  The idea is to crack down on the "Delaware Loophole" - the loophole being Delaware and other states have lower taxes on businesses, and so corporations set up shop there.  The PA Chamber has more on combined reporting.

And the answer to the question posed in the title?  Higher business taxes get you fewer businesses and fewer jobs in those remaining businesses. 

Will Tourism Collapse Without Taxpayer Subsidies?

Letter sent from the Commonwealth Foundation to Pennsylvania Deputy Secretary of Tourism Mickey Rowley

Dear Mr. Rowley:

I am writing to respond to the Pennsylvania Tourism Office’s recent press release on Senate Bill 850. We contest the claim that reduced state tourism spending will “severely impact Pennsylvania’s economy by costing thousands of jobs and closing small businesses.” This backward, reactionary thinking confuses the cause of Pennsylvania’s budget deficit for its solution.

You note that in 2008, Pennsylvania’s tourism industry provided $18 billion in wages. Clearly, the industry has enough revenue coming in to fund its own advertising and promotion; it doesn’t need a few million dollars in taxpayer handouts.

Furthermore, you provide misleading statistics in your press release by only accounting for Marketing to Attract Tourists while excluding funding for Tourism Promotion Assistance. Senate Bill 850 appropriates $13.5 million to promote tourism. This is far too much taxpayer funding for something which is not a core function of government, and which has not improved Pennsylvania’s economic climate. Indeed, the $25.7 billion contributed by visitors to Pennsylvania is an increase of only 15 percent from 2003, yet state taxpayers’ subsidies to the tourism industry increased 41 percent over the same period.

Your citation of the Colorado experience undermines your claim that reducing tourism spending would damage the economy. Colorado’s overall economic growth went from the bottom of the 50 states to near the top during the 1990s. Furthermore, you cite Ohio, Michigan, and California as exemplary examples of states which subsidize tourism. Yet these three states are the worse for it—all rank near the bottom of the nation in economic growth business climate. All are losing residents to other states, and rank among the leaders in out-migration (even leading Pennsylvania in this dubious category). And all are facing dire fiscal crisis due to the combination of overspending and economic stagnation. These are not states Pennsylvania should be emulating.

Most importantly, you fail to consider how higher taxes to pay for state spending will affect the tourism industry, and Pennsylvania’s entire economy. Senate Bill 850 moves Pennsylvania in the right direction, adopting fiscally responsible policies that decrease tax burdens and put spending decisions back in the hands of citizens. This will draw tourists and businesses to the state better than any government agency.

In Liberty,

Matthew J. Brouillette
President and CEO

Why Government Can't Run a Business

John Steele Gordon has a good op-ed in the Wall Street Journal on why government attempts to run a business always fall short - whether that be health care, car companies, or liquor stores.

In a related piece, the Journal ridicules the plan to make bankrupt automakers build more fuel-efficient - and thereby more expensive - cars.  The Tribune Review also jumps on that ill-advised proposed mandate, als noting how Ford has rebounded - because their business model wasn't developed by politicians.

On Cato-at-Liberty, Randal O'Toole explains how badly concieved the new CAFE standards are:

The bad news is that nothing in Obama’s standard guarantees that they will actually save energy. The rule only requires that the mean fuel economy of all models, not all cars, made by a manufacturer meet the 35.5 mpg standard. Not much energy will be saved if gas guzzlers sell well and hybrids don’t. ...

The Obama administration estimates that the added cost of the new standard will be $1,300 per car, but that (if gasoline remains $3 per gallon) it will save drivers $500 per year. That means it could pay for itself in the long run — but only if people actually do buy more fuel-efficient cars.

Will Pennsylvanians Starve Without Farm Subsidies?

Some early criticism coming from the Rendell administration about the Senate budget is that cuts to the Department of Agriculture will result in less farming and possibly event mass starvation. There are two myths behind this rhetoric.

The first being that agriculture is the “number one industry”; there is no data behind this cliché, it is simply something politicians say to pander to farmers and rural voters. Second is the nanny-state idea that unless taxpayers subsidizing farming, it won't happen.

Most economists agree that agriculture subsidies are not good for the economy, or even for farmers, and Cato gives the top ten reasons to cut farm subsidies.  Our Spending Tips 2009 identifies plenty more state agriculture programs that should be cut from the budget, not increased.  

The fact is that the average farmer receives little support from agricultural subsidies, most of these go to large corporate farmers and land-holders. Furthermore, the items cut in the Pennsylvania budget were largely programs like "Pennsylvania Fairs" and "Agriculture Marketing" - feel-good programs which do nothing to put food on the table.

In contrast, take the case of New Zealand, which ended all agricultural subsidies in 1984.  Not only did their farm industry not collapse, it thrived like never before

If Rendell is truly concerned about helping farmers, he should work to  repeal the state's inheritance tax, which affects family-owned farms, rather than the corporate farms taking much of the subsidies.

Right-to-Work Works

Mark J. Perry queries, using the ALEC report Rich States, Poor States:

• "What feature do 15 out of the top 16 states for economic outlook have in common?" (A: They are right-to-work states). 
• "What feature do the bottom 15 states for economic outlook have in common?" (A: They are compulsory-union states). 
• "What feature do the top 8 states for domestic migration have in common? What feature do the bottom 10 states have in common?" (A: Right-to-work, compulsory-union, respectively)

The National Right to Work Foundation's blog also takes on the economic impact of compulsory unionism, noting that right-to-work states have not been hit as hard as compulsory union states in the current recession.

Indeed, it is quite clear that right-to-work states have had far faster job, income, and population growth, compared to compulsory-union states like Pennsyvlvania.

Rendell's Pants are on Fire

Governor Rendell, in comments made today about Sen. Specter, claimed that Specter is "being criticized by his party for voting for the stimulus ... which is something every conservative economist said was necessary, including President Reagan's former economic advisor." Immediately afterwards, his pants burst into flame.

As I have pointed out before, Rendell is either lying, or completely misinformed. The Cato Institute has compiled hundreds of economists who opposed the stimulus.

And the Reagan adviser Rendell points to is Marty Feldstein, who initially supported the idea of a stimulus (mainly one featuring cuts in tax rates), but opposed the stimulus that passed, even writing an, editorial in the Washington Post calling the stimulus, "an $800 billion mistake."

As David Boaz pointed out "the count of Republican or conservative or libertarian economists who support Obama’s biggest-spending-bill-in-world-history stands at . . . zero"

Even more on taxes, spending, and the stimulus

Americans for Tax Reform has a new fact page on "Tax Bites" - showing how much taxes take up for the cost of goods and services we buy, from cigarettes to meals, and airfare to wireless telephone services.

Heritage has a blog post responding to Obama's speech on his tax policies - noting specifically that his "tax cuts" are in fact income redistribution, that his tax cuts do not affect "the most workers" of any tax cut in history, that his plans won't "stimulate anything", and that his numbers of jobs he will create is a fabricated estimate.

On the economic stimulus, Reason Magazine talks to a number of economists on their perspective of the stimulus.  Specifically they answer the questions about what are the problems with the stimulus, what in the stimulus will work, and even whether "doing nothing" is a better option for the economy.  My favorite comment is from Robert Higgs, who says that all of the stimulus will work - work to reward every special interest allied with the Democratic Party.

Finally, Chris Edwards writes of the ballooning number of federal subsidy programs - which has been going on for decades - and that we have now reached 1,804 such programs.  He also offers a small sample of the subsidy programs added since 2000, a myriad of large, small, and bizarre programs.  He does not offer a list of government programs that have been discontinued.  I wonder why.

Which Tax Cuts Have Stimulated the Economy?

"'We tried that, and it didn't work,' Obama and his partisans sneer in response to arguments that tax cuts are the key to restoring economic growth." 

But as Peter Ferrara writes in the American Spectator cuts to marginal tax rates and capital gains rates - such as the tax cuts of John F. Kennedy, Ronald Reagan, George W. Bush in 2001 and 2003 - all resulted in accelerating (or "stimulating") economic growth.  Other tax cuts - namely credits, rebates, and redistribution through the tax code, such as those pushed by Bush in 2008 and Obama in 2009 - don't do anything to stimulate the economy. 

Such tax rebates or tax credits do not work to stimulate economic growth because they do not change the fundamental incentives that govern the economy. A $500 tax credit or tax rebate involves the government either explicitly or effectively sending you a check for $500. But after that you and everyone else still face the same tax rates and same economic incentives. 


Tax cuts do not expand the economy by "putting more money in people's pockets," thereby leading to increased spending. Increased welfare benefits would put more money in people's pockets as well. But this is an outdated Keynesian rationale from the 1930s that increasing spending will increase growth to meet the demand. That does not work for two reasons. First, the government has to borrow or tax the money from someone else in the economy to give you the tax credit or increased welfare check. So, if it takes $500 out of the economy to give you $500 through the tax credit or increased welfare, it has not added anything to the economy on net. Secondly, again, there is no change in fundamental incentives. ...

As of this month, we are in the longest recession since World War II. The National Bureau of Economic Research scores this recession as having started in December, 2007. Yet, from the beginning we have followed old-fashioned, Keynesian tax cut stimulus policies, first under Bush, but then continued under Obama, rather than the amazingly successful tax rate cut policies of Kennedy and Reagan. That is why this is the longest recession since World War II, with still no end in sight, and unemployment persistent and relentlessly climbing. 

The Sunspot Recession Crisis

According to NASA, we are in the midst of the greatest sunspot recession since 1913. Analysts believed the sunspot recession had hit bottom in 2008, but activity has continued to decline, leading the government agency to proclaim, “This is the quietest sun we've seen in almost a century.”

How has the government responded to this sunspot crisis? Surely, they must be working on a plan to somehow stimulate sunspots and lift us out of this recession. Actually, the country’s leading scientists have chosen to do – nothing (gasp).

In the mid-1800’s, scientists discovered the existence of a sunspot cycle, a natural series of recessions and booms in sunspot activity that repeat over time. These recessions even have financial benefits, such as increasing the lifespan of satellites, saving millions of dollars.

Despite the fact that Adam Smith noted the existence of similar natural forces in the economy nearly 100 years before the discovery of the sunspot cycle, the government continues to interfere with the natural ebb and flow of the market cycle. Economic recessions, like sunspot recessions, serve a purpose. They naturally correct market behavior, allowing weak companies to go bankrupt and allowing new, stronger (or simply more efficient) companies to take their place.

FASB Eases "Mark to Market"

The Federal Accounting Standards Board voted to ease "mark to market" accounting rules, which forced financial firms to markdown the value of their assets.  This is pretty wonkish, but its kind of a big deal.  If some firms were selling off "toxic" mortgages at bargain prices, other firms would have to lower the reported value of the mortgages they held, even if they had no intention of selling them in the near future.

This represents the first "deregulation" of an over-regulated financial sector in a long time.  More from Competitive Enterprise Institute, Heritage, and Free Market Politics on the reform. 

You will note that ending "mark to market" was one of the Free Market Alternatives to the Bailout outlined here in Sept.  It takes a long longer for good policy ideas to percolate than bad ones (e.g. bailouts, stimulus, bonus taxes, etc).

Rich State, Poor State

ALEC has released the 2nd edition of their Economic Competitiveness Index - Rich States, Poor States - which looks at which policies drive economic growth among states, and which states are winners and losers:

The governments in the Northeast are already about one-fifth more expensive than in the rest of America – $6,400 versus $5,200 of state spending per resident. Only in recent years has the gap between the New England states and the rest of the nation been narrowing (see Table 2). However, an average-income family of four still saves $4,000 a year by moving to just an average tax state and more like $6,000 a year by moving to Florida. Because the Northeastern states tend to have highly progressive tax systems, the incentive for wealthy families to relocate is greater.

Meanwhile, the Northeast is becoming increasingly inhospitable for employers. Labor costs are about 30 percent above the national average in this region. Of the 22 right-to-work states, a grand total of zero are in the Northeast. Other than taxes, this is arguably the greatest factor impeding economic competitiveness
in the region.

As usual, Pennsylvania ranks among the worst states in the union - 46th in terms of economic performance, and 42nd for economic outlook; here is the Pennsylvania profile.  This may be a stunning report for Gov. Rendell, who continues to demand praise for "creating jobs", despite evidence that spending more taxpayer money on "economic development" undermines economic growth.

The Heritage Foundation further points out that the federal stimulus rewards states that have adopted failing economic policies:

As the report notes, states that want to pursue statist policies do not have their own version of a Berlin Wall to prevent people from leaving. They do, however, have something almost as powerful. They’ve got a Congress that’s willing to undermine this important feedback (i.e., accountability) mechanism by handing out $200 billion plus in bailout money to the states. States that get bailed out by the feds have less of a need to face the failures of their own policies. Could the declining fortunes of states governed by liberal policies also explain the desire of the White House to exercise greater control over the conduct of the next Census?