Cash for Crest

August 6, 2009

As Congress scrambles to add a couple billion more to the “cash for clunkers” program, the DC punditocracy sees the program as a sign that government programs are turning the economy around.  Seizing the positive moment, President Obama flew to Indiana to decalre that the economic tide is turning thanks to his efforts and to promise more government programs to spur economic activity.

Who knows if the economy is really turning or how robust a recovery will be?  But whatever progress does occur has nothing to do with cash for clunkers or other stimulus spending. 

Yes, giant government subsidies for new car purchases have led to many more new car sales.  But that doesn’t mean that the program has made a net contribution to economic activity.  All that the program did was divert economic activity from one area to another or from one time to another.  The increase in new car sales comes at the expense of used car sales, new car sales in the future, and the purchase of other goods and services.  There is no free lunch.

If we offered giant government subsidies for anything, we would see more purchases of that thing, but that doesn’t mean that the subsidies made a net contribution to economic activity.

Just yesterday I noticed that Procter and Gamble reported an 18% drop in profits from an 11% drop in sales.  Maybe we need a government program to spark more sales for P&G.  The government could offer “cash for Crest,” P&G’s toothpaste brand.  If the government threw a couple billion dollars of subsidies at toothpaste sales, I’m sure we’d see an explosion in toothpaste purchases.  But if the government did so, all we would be doing is shifting consumption to toothpaste away from other current or future consumption.

The Wall Street Journal has proposed the proper solution to this problem.  How about if we have a $4,500 subsidy for everything?  Of course, the WSJ correctly notes that this is “crackpot economics.”  But that somehow doesn’t stop Obama or the punditocracy from declaring economic victory for government planning.