Tried and Failed Policies Resurfacing as Stimulus

(Cross-posted in part at Heritage)

The “cash for clunkers” plan recently proposed in Congress would provide subsidy for a new car purchase to anyone willing to have their current car destroyed. But the economic rationale is eerily similar to the New Deal program most widely agreed to be a catastrophic failure: his agriculture plan that slaughtered pigs. The reasoning goes like this:

Crushing the old car has two benefits. First, it ensures that the consumer's purchase of a more efficient vehicle actually has a net environmental benefit. Second, it prevents a glut of used cars on the market, which would reduce trade-in values for new car buyers, which would cut into the sales incentive effect.

This was the same misguided reasoning that led to the slaughter of six million pigs and plowing under of about half the crop area under cultivation. The head of the Agricultural Adjustment Administration argued that:

People who believe that we ordered the destruction of food are merely the victims of their prejudices and the misinformation that has been fed to them by interested persons. What we actually did was to stop the destruction of foodstuffs by making it worth while for farmers to sell them rather than to destroy them.

In other words, the destruction of crops and livestock would ultimately lead to less waste because prices would be lifted, and so farmers would have more incentive to produce. However, despite vigorous defense by the administration, it is now known that most of the meat went to waste and it was an abysmal failure. Government cannot do a better job than the market in setting prices, and government’s destruction of output will never lead to increased output. It was a failure of economic reasoning – which is now coming back in vogue.

Another failed policy being considered is the mandate to buy American:

The stimulus bill passed by the House last night contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package.

This policy is almost precisely the one put into force during the period of railroad subsidies. According to The Myth of The Robber Barons, transcontinental railroads receiving subsidies had charters that required they only buy American-made steel. But American rails, made with American steel, were of lesser quality than some foreign brands, and this drove their maintenance costs up. This was one of many reasons why subsidized railroads performed extremely poorly compared to private ones.

Yet, here we are again using subsidies that distort incentives, and adding to the problem by passing mandates that will drive up costs and produce inferior products. This new “hope and change” we’re seeing is simply a return to the failed economic reasoning of the New Deal.