Thursday, August 6, 2009

Why not break all the windows?

Part of an ongoing cost reduction via outsourced economic criticism, tied to today’s scheduled Senate vote on $2b more in “cash for clunkers” funding.

Richard Rahn of Cato extends the broken window fallacy of cash for clunkers to justify a broader range of state intervention

If Congress suddenly required every car and truck in America (all 250 million of them) to be immediately destroyed and replaced with new cars and trucks that got better gas mileage, would the country be worse off or better off? Those members of Congress who voted for the "cash for clunkers" program would probably say "better off," even though a perfectly good auto and truck stock would be destroyed.

The congressional clunker caucus would say millions of workers would be employed to replace all of the existing cars and trucks. Yes, that would be true, but everyone else would be poorer. Those who had to buy a new car would have less money to spend on everything else, which would mean fewer jobs in the rest of the economy -- more autoworkers but fewer farmers, teachers and medical researchers -- not a good trade-off.

Members of Congress would then say that we are saving gasoline by having a more efficient auto fleet -- which ignores the fact that building a new car takes far more resources, including petroleum, than could possibly be saved by the gain of additional miles per gallon.
Of course, the up front cost vs. lifetime fuel savings is why I’m driving my 2000 pickup for another 5+ years, and why my next econobox is more likely to be a Honda Fit (MSRP $15k, 35 mpg hwy) than a Toyota Prius (MSRP $22k, 45 mpg hwy). In a free-market economy, price signals tell us how to most efficiently allocate resources.

Rahn continues
Congressional "logic" could also be applied to housing.

Why not knock down all houses built in America before 2000 and replace them with new and more energy-efficient houses? Wait -- we already evidenced the results of that experiment -- it happened in New Orleans. Rather than the government directly knocking down the houses, Hurricane Katrina did it for us. Are the people of New Orleans better off or worse off because of Katrina? Are all of the American taxpayers who footed much of the rebuilding cost -- hundreds of billions of dollars -- better off or worse off because of Katrina?
He goes on from there to criticize other spending programs (without ever mentioning Frédéric Bastiat and his 1850 essay).

Finally, even if all this spending is a good idea, how is the government going to pay for it all? The numbers just don’t work:
The Congressional Budget Office projects a total additional deficit of approximately $4.9 trillion dollars during President Obama's first term (2009-2012). …

It is also not mathematically possible to take care of all the new spending by increasing taxes on the top 5 percent of taxpayers (those making $160,000 or more annually) who already pay 61 percent of the federal tax (or $676 billion per year). Most of these people are now paying close to the revenue maximizing rate, which means that any increase in their tax rate is unlikely over the long run to bring in much more tax revenue.

Quite simply, upper-income people have options. History shows that when tax rates are raised, many will choose to work less (leisure is nontaxable), retire earlier than they had planned and save and invest less in taxable, productive activities. Those making more than $160,000 per year would need to have their taxes roughly tripled to take care of just this year's deficit. (One merely has to look at the tax evasion practiced by the chairman of the congressional tax writing committee, the secretary of the Treasury and the former majority leader, et al. at today's tax rates to know that they and their colleagues, as well as most everyone else, will find either legal or illegal ways to avoid paying the tax.)
And thus the administration will inevitably have to raise middle class taxes. Unless of course it wants to inflate its way out of paying debts.

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