Even government economists, including the ones who promoted the ‘Cash for Clunkers’ scheme a year ago, cannot possibly be so ignorant of the history and fundamentals of their own profession as to be unaware of the “Broken Window Fallacy,” first enunciated by Frederic Bastiat in his seminal Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen) more than a century and a half ago.
Also known as the “Law of Unintended Consequences,” Bastiat used this brief parable to illustrate the concept:
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.
As Bastiat shows, the economy as a whole — glaziers, cobblers, publishers, etc. – gains nothing from Mr. Goodfellow’s spending. The shopkeeper’s broken window was (as logic suggests) a 100% loss since the money spent to replace it merely restored the status quo ante. No wealth at all was added — as would have been the case had Mr. Goodfellow kept the window he already had and been able to buy new shoes or a new book with that money.
Precisely the same point applies to automobiles.
Just as windows are merely a means to an end (letting in light while keeping out the elements), automobiles have no intrinsic value apart from their utility as a means to move from one place to another. While some may offer greater reliability or amenities that make them more comfortable and convenient — especially newer models — exchanging one for another provides no net gain to transportation.
Further (and this seems so perverse that even I, cynic that I am, find it hard to believe) our federal government in fact actually took steps to make certain that the entire $3 billion spent on this clunker of a program was a 100% loss.
A specific condition of receiving the cash was destruction of the clunker — which had to be a functioning vehicle!
Dealers who accepted the trade-in for the government voucher were required to first determine that it was a working vehicle and then pour sand into the engine block and run it until the motor seized. One wonders why the feds didn’t offer a bonus to any dealers willing to go the extra mile by throwing a rock though the dealership’s plate glass window!
A year later the $3 billion “Cash for Clunkers” program has not only proven to be the apotheosis of the Bastiat’s fallacy. A newly released report by the online auto consumer guide Edmunds.com shows that it actually adds an extra level of depth to the Law of Unintended Consequences.
Used cars values have now reached a seven year high. As of last month, the average price of a three-year-old vehicle had jumped 10.3% compared with just a year ago. In fact, used car prices are climbing so fast that the remaining new car buyers (i.e., those prospects not poached from the current year by having been lured into moving up their purchase by last year’s subsidy) are having difficulties arranging financing because the official “Blue Book” trade-in values used by lenders to calculate loans are lagging behind the market.
The consequences of “Cash for Clunkers” might have been unintended, but they clearly could not have been unanticipated. All of this is so manifestly self-evident that it is incredible (in the literal sense of the word) that the Obama administration could have actually believed its own rhetoric in justifying the program. A far more plausible explanation is that the purpose was to prop up the financial viability of their Government Motors venture — the total loss of $3 billion to our economy nothing more than a collateral cost.
