Cash for Clunkers: Immoral, Wasteful, Failure

The government program that gave people up to $4,500 for trading in an old car for a new energy efficient model has been widely proclaimed a huge success, as measured by the popularity of the program. That certainly made it successful for the politicians who, in effect, were buying futures votes for themselves. Of course, they didn't say so; instead they claimed they were pursuing the noble benefits of stimulating the economy, promoting energy efficiency and reducing carbon dioxide emissions. Absent from the discussion was whether there was any moral or constitutional basis for taking money from some people (taxpayers) and redistributing it to others for purchasing automobiles.

Government is supposed to protect people's rights, but its violation of people's rights to their own money has become so widespread for so long it has become generally accepted. According to economist Walter Williams, “Two-thirds of the federal budget consists of taking property from one American and giving it to another. Were a private person to do the same thing, we'd call it theft. When government does it, we euphemistically call it income redistribution, but that's exactly what thieves do—redistribute income.” The “cash for clunkers” program (CARS, Car Allowance Rebate System) is simply another scheme for doing the same, disguised by claims of collective economic, environmental, and energy benefits. These claims are not only false but distract attention from the moral and constitutional issue of property rights and government theft.

The Founding Fathers were very familiar with the English philosopher John Locke's ideas about the rights to life, liberty and property. Jefferson was actually accused by some, most notably his fellow Virginian Richard Henry Lee, of simply copying Locke's work in writing the Declaration of Independence. Jefferson replied that he did not consult other literature while he was writing but “did not consider it as any part of my charge to invent new ideas altogether.” Rather, he said he intended simply to make “an expression of the American mind.”

In 1772, four years before Jefferson wrote the Declaration of Independence, Sam Adams created a “committee of correspondence,” the first organized opposition to British policies. It composed a document that provided a framework for the Declaration of Independence. It enumerated the rights of the colonists: “First. A right to Life; secondly to Liberty; thirdly to Property.”

Jefferson, however, substituted the words “pursuit of happiness” for the word “property” in Locke's triad of rights. The change was in no way intended to downgrade property rights. Jefferson and his contemporaries envisioned property rights as the principal means for the pursuit and attainment of happiness. The new phrase was inclusive not only of property rights but of the purpose they were to serve, and that of human actions in general.

The Declaration of Independence referred to the rights to “life, liberty and the pursuit of happiness” as “unalienable” because they were derived from the nature of man and inseparable from it. Man's rights are not given to him by government but by his own existence. Government can only recognize them or violate them. “Unalienable” means “not transferable to another or capable of being repudiated.” One's right to property is not to be transferred to another by government. Nor is it to be repudiated by laws that deprive him of using that right for the pursuit of his own happiness rather than for what the politicians may claim is better for society. The Declaration states that it was “to secure”—Locke's phrase—the rights to life, liberty and the pursuit of happiness that governments are instituted. When government engages in redistributing property rather than securing it for its rightful owners, it is an instrument for violating rights and plundering wealth instead of securing it.

Madison wrote: “Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government, which impartially secures to every man whatever is his own."

So the cash for clunkers program was off to a bad start in the most fundamental sense. The alleged collective benefits from the program fare no better. Burton Abrams and George Parsons of the University of Delaware added up the total benefits to buyers and auto companies, the environment, and from reduced gas consumption, minus the overall cost of the program. They found that instead of stimulating the economy, the $3 billion program that sold 700,000 vehicles made the nation $1.4 billion poorer.

What about the increased auto sales from the program? An analysis published by Edmunds.com showed that in any given month 60,000 to 70,000 “clunker-like” deals happen with no government program. Jeremy Anwyl, CEO of Edmunds.com, says the 200,000-plus deals the government originally anticipated from the program were about the “natural” clunker trade-in rate. He notes, too, that 100,000 buyers put their purchases on hold waiting for the program to launch, thus exaggerating the effect of the program once it began. Furthermore, when it became apparent the program was underfunded, consumers rushed to take advantage before the funding ran out. Anwyl also says “car prices are usually slashed in August and September to make room for the next year's models arriving in September. In anticipation, buyers have been putting off purchases all year.”

All those factors contributed to peak sales during the CARS program. But to the extent they caused buyers to move their purchases forward, they reduced demand for vehicles after the program expired. It should not be surprising that in September 2009, the first month following the clunkers program, U.S. sales of cars and light trucks fell 41 percent from August. GM's sales fell 45 percent; Chrysler's, 41 percent; and Ford's, 5 percent. Similarly, Volkswagen said Germany's cash-for-clunkers program might boost sales to 3.7 million units, up from 2.8 million, but that sales would likely revert to 2.8 million in 2010.

In the same way that the CARS program demonstrates an ignorance of human rights that is more than two centuries behind the times—predating the wisdom of our Founding Fathers and our nation's history of progress— it demonstrates a similarly primitive ignorance of economics. The wizards of Washington who devised CARS, and those who defend it, are apparently ignorant of an elementary principle explained more than a century and a half ago by the French economist Frederic Bastiat. In his famous “broken window” essay, a man's son breaks a window pane, which costs six francs to replace. Against the argument that such accidents stimulate the economy by supporting glaziers and the manufacturers of glass, Bastiat explained economic effects that are not seen. If the man didn't need to replace the window pane, he could have, for example, replaced his worn-out shoes or added another book to his library. If the accident did not happen, the man would have both the window and the shoes (or book). Instead he has only the new window. The shoes or book are never seen because they aren't purchased, but they represent a loss not only for the man but to society from the destruction of the window. In Bastiat's words: “Society loses the value of objects unnecessarily destroyed,” and “to break, to destroy, to dissipate does not encourage national employment.” Or as the great economist Henry Hazlitt wrote a century later, referring to the same essay: “You can't raise living standards by breaking windows so some people can get jobs repairing them.” But that is the principle behind the CARS requirement that perfectly serviceable vehicles traded in under the program be destroyed. Auto dealers were required to destroy the engines by injecting sodium silicate, then crush the cars for scrap, eliminating the possibility that even parts that might be usable could be salvaged.

Even with the CARS rebates, many people still either couldn't afford a new car or couldn't meet the requirements of the program. These include the working poor, teenagers, and charities that depend on donated junkers to carry out their work. A used car would meet such needs just fine, but the program eliminated 700,000 used cars from the market. So, many people who really needed a car ended up buying a new one and paying more than they felt they could really afford. As a result, they then couldn't afford new shoes or books—or such things as health insurance, dental care, better housing, more nutritious food, or an evening educational class. Furthermore, since they paid more for a car than they intended, they went further in debt with larger monthly car payments that cause a long-term reduction in their ability buy shoes, books, etc.. And depleting the supply of used cars reduces business for repair shops, employment for automobile mechanics, and auto dealer business for used cars.

When we turn to the issue of newer cars reducing gasoline consumption because of greater fuel efficiency, we see that ignorance once again prevails. As the English economist Stanley Jevons explained way back in 1865, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth ...It is the very economy of use which leads to extensive consumption. It has been so in the past and will be so in the future.”

There is plenty of evidence that Jevons was right. When James Watt's steam engine was more efficient than its predecessor, the Newcomen engine, demand soared. People found all sorts of new uses for steam power. The same thing happened with electricity. And when automobiles became smaller and more energy efficient because of the Arab oil embargo in 1973, people drove more—not less—because they could go further on the same amount of gasoline. Gasoline consumption rose for two decades as energy-efficient cars flooded the roads.

In April 2009, Boston Globe columnist Jeff Jacoby wrote: “Improvements in fuel economy effectively make fuel less expensive, and when costs fall, demand tends to rise. As driving has grown cheaper in recent decades, people have done more of it—choosing to drive to work instead of taking a bus, for example, or buying a second car, or moving to a house with a longer commute, or sending the kids to college with cars of their own. Between 1983 and 2001, data from the Energy Information Administration show, the number of annual vehicle-miles driven by the average American household rose from 16,800 vehicle-miles to more than 23,000.”

During the period of which Jacoby speaks, fuel efficiency increased by 20.4 percent, from 14.2 mpg to 17.1 mpg, and vehicle-miles traveled per household increased 37 percent.

The proponents of the CARS program talk only about the energy efficiency of new cars compared to clunkers. They don't compare it to the energy required to manufacture them. Paul Driessen, a senior fellow with the Atlas Economic Research Foundation and a former Sierra Club member, calls attention to the energy required “to extract metallic ores, hydrocarbons and other raw materials from the earth, process and refine them, create alloys and plastics, and turn them into engines, chassis, windows, tires and interiors.” He says there is “no way” these energy costs “will ever be recouped by any savings the replacement cars might conceivable generate.” Daniel J. Stern writes: “It quickly becomes clear to all but the most strident Prius-preacher that driving an old car a half a million miles is really less taxing to the greater environment than making even just a single new one.”

Finally, we come to the issue of global warming and the carbon dioxide emissions of older cars. Again, the pro-CARS argument is based on ignorance—plus plenty of misinformation and even outright fraud. Climate change is not caused by changes in atmospheric carbon dioxide or by human activity. See my 3-part article “Global Warming, Global Myth” at http://www.amlibpub.com/liberty_blog_archive/2008_10_01_archive.html [for Parts 1 and 2] and http://www.amlibpub.com/liberty_blog_archive/2008_11_01_archive.html [for Part 3]. For a more detailed explanation, see the massive report issued in 2009 by the Nongovernmental International Panel on Climate Change (NIPCC). It is an 880-page book by many scientists that comprehensively refutes the global warming claims of the United Nations' Intergovernmental Panel on Climate Change (IPCC). This is a work of enormous scholarship backed by over 4,000 peer-reviewed scientific studies that were not considered by the IPCC.

But, for the sake of argument, let's assume it is desirable to reduce carbon dioxide emissions and look at the effect of CARS. “As a carbon dioxide policy, this [program] is a terribly wasteful thing to do,” says Henry Jacoby, a professor of management and co-director of the Joint Program on the Science and Policy of Global Climate Change at MIT. “The amount of carbon you are saving per federal expenditure is very, very small.” Bruce Yandle, Distinguished Professor of Economics Emeritus, Clemson University, says “the reduction costs are at least ten times higher than alternate ways of removing carbon.”

Based on Department of Transportation numbers, the total carbon savings from cash for clunkers amounts to only about 57 minutes of America's annual carbon dioxide emissions. But that is based on a static analysis, i.e., that there will be no change in driving behavior when fuel efficiency improves. Since we have already shown that greater fuel efficiency leads to more miles being driven, the actual reduction in carbon dioxide emissions will be even less than 57 minutes per year—and it could even be more than from the traded-in vehicles if the new vehicles are driven enough additional miles per year. Now consider that 6.7 tons of carbon are emitted in building a new car, and it becomes obvious that CARS results in a many-fold increase in carbon dioxide. Paul Driessen says there is absolutely no way that the emissions of carbon dioxide, other greenhouse gases and “real pollutants” from manufacturing replacement vehicles will ever be recouped by any savings from driving them.

President Obama said cash for clunkers was an “overwhelming success...provided the American auto industry an important boost, and is achieving environmental benefits well beyond what was originally anticipated...while reducing greenhouse gas emissions...and has proven to be a successful part of our economic recovery.” Is he as ignorant of what has been happening during his own administration as he is of the past? Has his collectivist ideology left him totally disconnected from the realities of history, property rights, economics and science?

Transportation Secretary Ray LaHood said “this is one stimulus program that seems to be working better than just about any other program.” That must mean those other programs are even bigger failures.

The CARS program is just one more demonstration that collectivism cannot triumph over reality. Collective good cannot be achieved by benefiting some people at the expense of other people's rights—including their property rights. The situation is not unlike that in our “broken window” example: the property rights that are destroyed are like the pair of shoes or book that is never purchased. They remain unseen and unconsidered while the benefits to others (or the environment) are extolled. Yet, not only are property rights themselves a value to people; if some people are deprived of them, the economy and society lose as well. For if people were not deprived of their property rights, they would exercise them in buying goods and services that would benefit employment and industries. And these would be of greater value than what is obtained under CARS or similar programs, as demonstrated by market prices and preferences. Government intervention in the market simply diverts resources in society to things of lesser value at greater cost. Thus society is better off when people are free to exercise their property rights than when the government violates those rights to stimulate other purchases. And the more a government substitutes its preferences for the choices of the people in the marketplace, the more the economy goes downhill, as history abundantly demonstrates.

Collectivism has failed wherever it has been tried. In contrast, America showed the greatest advancement of society in history because the Founding Fathers based their government on individual rights, not collectivism. Individual rights are essential to human progress. That is an inescapable reality. It will not be overcome by ignorance, lies and smooth talk in the cause of collectivism.

Government Destroyed U.S. Auto Companies

"One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary." —Ayn Rand

The Detroit automakers were “perfectly viable businesses that have been slowly murdered over 30 years,“ according to Wall Street Journal columnist Holman W. Jenkins, Jr., who follows the industry closely. He was referring to the CAFE (Corporate Average Fuel Economy) standards, which he calls “the most perverse exercise in product regulation in industrial history.” In his view, the recently updated mileage standards will cost the manufacturers $100 billion and “make a mockery of the idea that government money will render the companies profitable, even as the same bailout bill demands that the Big Three drop their legal challenge to a California mileage mandate even more unsustainable than the federal government's.” The California standards would render most auto designs, profit centers and tooling unsalvageable.

CAFE requirements have effectively required the Big Three to lose tens of billions of dollars making small cars in unionized factories. GM and Ford can make small, efficient cars profitably all over the world except in North America. Buick is one of the best sellers in China, and GM president Rick Wagoner testified at a congressional hearing that GM's China operations were profitable. In April 2009, GM sales in China hit a monthly record, up 50 percent from a year earlier. Meanwhile, GM's sales in the U.S. slumped 33 percent from a year earlier, to only 172,150 vehicles. And in July, 2009, GM reported first half sales in China rose 38 percent, to 814,442 vehicles, a record for the company. GM has also been strong in Latin America and, until quite recently, in Europe. Small cars are popular in Europe, where gas is commonly $6 per gallon and has ranged as high as $9. Foreign profits of the Detroit automakers helped to offset their huge losses in the U.S., said Wagoner.

Detroit couldn't make small cars profitably in the U.S. because of ruinous wage contracts with the United Auto Workers resulting from government favoritism. The average hourly cost of Detroit's Big Three prior to the Chrysler and GM bankruptcies was $73 per hour compared to $44.20 for American workers in foreign auto company factories (“transplants”) in the U.S. GM had legacy costs, for health care and pension benefits, of $2,000 for every vehicle it sold. Meanwhile, 12 foreign auto companies were making cars across America's South and Midwest and employing 113,000 workers, who make 54 percent of the cars Americans buy.

The quality of the Big Three's cars in the U.S. fell behind that of the transplant companies because they skimped on them in order to invest in quality and features of the big vehicles (SUVs and trucks) on which they could reap large profits. In return for the companies shoveling money to the unions while incurring losses on the cars being producing, “Washington compensated them with the hothouse, politically protected opportunity to profit from pickups and SUVs....Washington's latest fuel-economy rules actually reward manufacturers for increasing the size and weight of some vehicles,” says Jenkins. In addition, a 25 percent federal tariff on imported trucks, plus other quirks of the fuel-economy regulations, further encouraged the companies to push trucks and SUVs.

The EPA's “two-fleet” rule requires that a company's corporate average fuel efficiency in the U.S. can't include the cars it produces abroad and imports into the U.S. If it did, GM's problems would have been much smaller. That didn't happened because of the Democrats' concern over the votes of the environmentalists and organized labor, which are important for maintaining their political power.

Of course, the fuel-economy rules also apply to foreign brands, some of which make big, powerful vehicles, too. But they have an out. They simply pay fines. From 1983 to 2007, BMW paid $230 million in CAFE fines; Volvo, $56 million; and Daimler, $55 million. In 2008, Daimler paid one of the largest single-year CAFE fines ever, $30 million. But that amounted to only $118 per car, peanuts compared to GM's legacy costs and the tens of billions it has lost by producing small cars that American buyers didn't want. The Government Accountability Office says the Big Three didn't choose to pay the fines because they feared political repercussions and being accused of “unlawful conduct.” And they would also have big problems with the UAW, which makes their big, profitable vehicles. So they just kept making the small cars at a loss in order to be able to average their fuel economy in with that of the big vehicles on which they made a profit.

Until 2008, Detroit's reliance on SUVs and trucks made sense. Fuel costs were low, and Americans liked the larger, more powerful—and safer—vehicles. The Big Three all made money on trucks—as much as $8,000 per vehicle. Mike Jackson, chief executive of AutoNation Inc., the nation's largest dealership chain, says federal rules caused Detroit “to cede the car market and make all their money in trucks. If they had been forced to compete up front, they would not have become overdependent on trucks.”

The UAW collective bargaining agreement with Detroit's Big Three doesn't exist at all in the non-unionized foreign transplants. It's the size of a small telephone book and covers not only work rules but fundamental business decisions, such as selling, closing or spinning-off businesses. Logan Robinson, a law professor with much experience in the auto industry, says both the UAW and the Big Three maintained large staffs of lawyers, contract administrators and financial and human resource representatives at all levels, from factory floor to corporate headquarter. “Typically, each plant or warehouse is a 'bargaining unit' and has a union president and a staff. If the company consolidates its facilities, there will be no need for two presidents and two staffs....As a result, unnecessary facilities are not sold, but kept open, lit and heated, just to preserve a redundant bargaining president and his team.”

Some jobs under union work rules could be performed in 5 or 6 hours. After that workers could sit idle or simply go home and still be paid for 8 hours. If they did any further work, they got paid overtime even though they never worked more than 8 hours. That doesn't happen at the transplant factories.

Another union rule allowed six unexcused absences before a worker could be fired—a rule that still exists in the post-bankruptcy GM. That's another rule the transplant factories don't have.

The Obama administration also favored the UAW by requiring GM to agree to build its compact green car stateside as a condition of exiting bankruptcy. No company, not even the Japanese or Korean ones, makes a compact inside the U.S. Ford plans to make its new Fiesta in Mexico.

According to Robert Crandall and Clifford Winston, senior fellows at the Brookings Institution, Daimler dumped Chrysler and the possible joint venture between GM and Renault-Nissan went nowhere “because the Detroit-based operations could not improve their labor relations measurably and otherwise restructure sufficiently to be competitive.”

Similarly, an article by Paulo Prada and Dan Fitzpatrick notes “Labor flexibility has emerged as a key advantage during the industry downturn, allowing foreign-owned plants to rapidly downshift in ways their unionized U.S. competitors cannot.” For example, BMW laid off workers at its Greer, S.C., plant, and Toyota laid of workers at its Georgetown, Kentucky, factory and shuttered another factory it was planning to open.

The management of the auto companies, GM in particular, has been criticized for having too many brands of automobiles and too many dealerships, far more than Toyota compared to the number of vehicles each sold. But because of government regulations, it was cheaper to keep extra brands and redundant dealerships than to get rid of them. This is where state regulations got into the act. Almost every state has franchise regulations which make it very expensive to close dealerships or eliminate a brand of automobile. When GM eliminated the Oldsmobile brand from its line-up, it cost $1 to $2 billion, and the lawsuits dragged on for four years.

The UAW contract long provided for the infamous “jobs bank,” a euphemism for paying vast numbers of employees when the companies had no work for them. It also extracted health care and pension benefits from the companies that are far more generous than in any other American industry. For every UAW member working at a U.S. car factory, three retirees were collecting benefits. At GM, the ratio was 4.6 to one. Professor Robinson says the auto industry was not capable of dealing effectively with the UAW.

How did the UAW acquire such power? Not through the free market. It's the transplants that operate under free market principles. The UAW acquired its power from FDR's New Deal, specifically, the 1935 National Labor Relations Act, better known as the Wagner Act.

According to Hans Sennholz, Ph.D.:
"This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board further perverted this law, which already afforded legal immunities and privileges to labor unions. The U. S. thereby abandoned a great achievement of Western civilization, equality under the law.
"The Wagner Act, or National Labor Relations Act, was passed in reaction to the Supreme Court’s voidance of NRA and its labor codes. It aimed at crushing all employer resistance to labor unions. Anything an employer might do in self-defense became an 'unfair labor practice' punishable by the Board. The law not only obliged employers to deal and bargain with the unions designated as the employees’ representative; later Board decisions also made it unlawful to resist the demands of labor union leaders."

Dr. Lawrence W. Reed, president of the Foundation for Economic Education, has written:
"Armed with these sweeping new powers, labor unions went on a militant organizing frenzy. Threats, boycotts, strikes, seizures of plants, and widespread violence pushed productivity down sharply and unemployment up dramatically. Membership in the nation’s labor unions soared: By 1941, there were two and a half times as many Americans in unions as had been the case in 1935. Historian William E. Leuchtenburg, himself no friend of free enterprise, observed, 'Property-minded citizens were scared by the seizure of factories, incensed when strikers interfered with the mails, vexed by the intimidation of non-unionists, and alarmed by flying squadrons of workers who marched, or threatened to march, from city to city.'"

Obama has adopted FDR's economic policies and said he intends to strengthen the union movement, just as FDR did. He said he will sign a “card check” bill if Congress passes it, which will eliminate the secret ballot for workers in voting whether or not to join a union—thus exposing workers to potential intimidation to join.

The president—in just his first six months in office—made unprecedented power-grabbing moves. These included firing the CEO of a private corporation, dictating the makeup of boards of directors, forcing private corporations and their stockholders to surrender shares to the government and other shares to the union, compelling the merger of private companies, and using money appropriated by Congress for the banking industry to instead bail out the automakers. He has also overturned a century of federal bankruptcy law. Where is the legal or Constitutional authority for all these actions? He has also called for imposing new regulations not only on the auto industry but throughout the entire economy.

During his presidential campaign, he spoke often of “fundamentally restructuring” this country. Millions of people who voted enthusiastically for him didn't really know what he meant by that, but it sounded good. Obama was careful not to be too specific, and the media's love affair with the candidate precluded their raising any potentially embarrassing questions on this issue. Now, however, it should obvious that this Marxist president's “fundamental restructuring” means the destruction of capitalism and replacing it with what Jefferson feared when he wrote: “The greatest calamity which could befall us would be submission to a government of unlimited powers.” That will prove economically destructive, but more importantly, it is destructive of something even more precious—that which makes capitalism, economic progress, and our fulfillment as human beings possible—freedom.