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Why 'Cash for Clunkers' is like the Iowa Film Credit

August 07, 2009

While buying and trashing old cars and subsidizing filmmakers may seem very different, they actually are similar in important ways.

They illustrate that politicians take the shocking phenomenon that people will line up for free money as proof that a program is a success. They also illustrate that politicians are always ready to embrace the "broken window fallacy." Here is a nice summary:

Bastiat’s essay is most famous for the “parable of the broken window,” in which a young boy shatters a shopkeeper’s window and, after some initial outrage, the villagers conclude that the rascal helped the local economy. Why?

Because if no one broke windows, window makers would be out of business, and if window makers were out of business, they wouldn’t buy any more bread or shoes, hurting the bakers and cobblers. So the six francs the shopkeeper must spend for a new window is really a boon to the community.

The problem with this argument can be gleaned from the title of Bastiat’s essay. By counting the money the shopkeeper spends to replace a perfectly good window (that which is seen), we ignore the money he might have spent on something else (that which is unseen). The shopkeeper might have instead dropped six francs on new shoes, a book, or a bonus for his assistant. Those who celebrate the broken window as a generator of growth take “no account of that which is not seen.”

Just as the "success" of Cash for Clunkers program ("Tremendous! It's already out of money!) ignores the other uses for the money, so does the "successful" Iowa Film Credit. But the other uses are "unseen" because Mike Tramontina can't issue a press release for somebody who pays off his credit card faster because he has lower taxes.

Finally, both Cash for Clunkers and the Film Credit imply that legislators are smart enough to determine the best direction for the economy. If you believe that, I offer Exhibit A.