One way governments can seriously damage an economy is with misdirected policies that seek to “spur GDP growth” or “fix” an economic problem.

Of the latter we have seen a lot during the last two years through massive bailouts of failed companies or stimulus packages. Government policies usually mean spending money in unproductive ways or giving credit to businesses on which no private entrepreneur would risk hard-earned cash.

Recently the big news was the success of the “cash for clunkers” car-purchase program. This bill, designed to “help” the economy, gives federal subsidies of up to $4,500 dollars for exchanging your old car for a new one with better gas mileage.

Originally, this program had only $1 billion dollars assigned to it, but thanks to high demand, it ran out of cash in a week. The House has approved an extra $2 billion to keep the program running. The will use some of the funds assigned to the Obama stimulus package for this purpose.

A Senate vote is less sure, pending action soon.

What the government is doing is distorting the free market, forcing people to stop saving, which builds capital or pays down debt, and instead to purchase unproductive assets.

The money they are giving away is money that government owes and has to be paid with interest. The consumer will probably also have taken on more credit to pay for the new car.

Here is a clear example of a misdirected policy that will spur growth, in the short term, through more debt and consumption. However, it will drag the economy in the future as it’s burdened with more interest payments, and the private sector will have less capital to be used in a productive manner that creates real growth.

Also note that more than half of U.S car sales are imports. This program simply makes foreign companies richer at a cost to U.S. taxpayers, and increases the U.S trade deficit.

If a short U.S. government ETF existed, I would go all in on it.