Depression parallels

John Hood explains how “cash for clunkers” is the automotive equivalent of the 1930s-era crop destruction programs.

Back in the first term of the Roosevelt administration, its agricultural policies created the absurdity of the federal government paying farmers to destroy their crops even as many Americans were finding it difficult to feed their families. The program was intended to prop up prices and thus benefit farm interests at the expense of consumers — the former being well-represented in Washington, the latter not so much. If you think about the economy in Keynesian terms, such a policy might appear rational. If you think about the economy in practical terms, of course, the policy was idiotic.

There’s something similar going on with Cash for Clunkers. Automobiles represent a significant share of the nation’s capital stock. Even used cars often have years of life left in them, years during which owners can use them to get to work, perform work, or transport themselves and their families for education, recreation, or consumption.

The program is remarkably stupid. It’s just another form of credit inflation pushing the demand curve out. Once it hits the limits of demand, the shifting back of the curve to its place on the supply curve will be nasty because none of those new cars will need replacement as soon as the clunkers would have. There are some differences of course. Roosevelt was trying to reduce supply, whereas this program is just a means of consuming tomorrow’s demand today.