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What the Government Bailouts Are Hiding

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Unemployment and a stagnant stock market will be the price we pay in future.

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Inquiring minds are reading Cash for Clunkers Is Just a Broken Windshield by Caroline Baum. It's the best trashing to date of "cash for clunkers" program.

"Transferring money from taxpayers to car buyers is a transfer. The money taken from taxpayers can't be used for something else.

"This is the lesson of Frederic Bastiat's essay, 'That Which is Seen, and That Which is Unseen.' Bastiat, a nineteenth century French political economist, tells the story of a shopkeeper who has to hire a glazier to repair a broken window, providing work and income for him in the process. That's what is seen.

"What is unseen is what the shopkeeper would have done if he didn't have to pay the glazier. He might have bought shoes for his children, providing income for the shoemaker, who in turn could buy leather to produce more shoes. The glazier's gain is the shoemaker's loss. There is no net gain, no job or income creation, from this transaction.

Broken Window Fallacy

"The 'broken window fallacy,' as it is known, can be applied to all government spending. The $787 billion fiscal stimulus enacted in February transfers money from taxpayers to the government to allocate as it sees fit. The effect of the government's expenditures shows up as growth in gross domestic product. Auto manufacturers produce more cars to meet the juiced demand, adding to GDP. This is what's seen.

"What is unseen is what would have been produced by the private sector had the government not confiscated future revenue via taxation.

"Cash for clunkers requires that trade-ins be scrapped, whether they are fully depreciated or not. How is destroying something good for the nation?

"James Hamilton, professor of economics at University of California, San Diego, says cash for clunkers adopts the worst of the New Deal policies and adapts it to today's circumstances.

"The Agricultural Adjustment Act of 1933 'paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier,' Hamilton writes on his blog. 'And yet, here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy.' "
Caroline touched on several key issues. The first is is money taken from taxpayers can't be used for something else. The second is with regards to the destruction of productive assets. I'll add a couple more.

Government seldom, if ever, allocates resources efficiently. That's another problem with all these stimulus efforts. Without market feedback, it's difficult -- if not impossible -- to spend money wisely. At best, government pushes demand forward. At worst, government pays money to destroy productive assets while going deeper in debt to do so.

Moreover, interest on debt from all these stimulus programs is adding up. Eventually, taxes have to rise to cover those interest payments. Rising taxes will reduce both future demand and future business hiring.

For more on the Seen and Unseen, including an analysis of misguided Keynesian stimulus efforts, please consider On the Brink of Recovery.

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