Government programs can have a permanent impact on the economy. Cash for Clunkers demonstrates that the long-term impact of short-term incentives can hurt the vast majority of Americans.
In 2009, as Congress rushed to do something for the economy, Cash for Clunkers was enacted. Owners of old gas guzzlers could trade in their cars for new fuel-efficient models. Environmentalists were happy to get polluters off the roads and Detroit was happy that car sales would increase.
In the short run, the program shifted some car purchases forward, as families that could afford to buy a new car took advantage of the incentive. In the long run, millions of used cars were removed from the economy.
The permanent change in supply raised used car prices and pushed them to what appears to be a permanently higher level.
Cash for Clunkers drove the Manheim Used Vehicle Value Index to new all-time highs in 2009, and that index remains near all-time highs five years later.
While the intended purpose of this and other government programs might be admirable, lawmakers in Washington need to remember the laws of supply and demand will always apply. When Washington spends our money on clunkers or college tuition or healthcare or anything else, they increase costs in the long run.
Any policy that spends in an area beyond government's realm of defense or infrastructure will do the greatest long-term financial harm to those who can least afford the costs.
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