In only a week's time, the government's much ballyhooed "Cash for Clunkers" program (officially the "Car Allowance Rebate System"), has blown through a billion dollars and become the darling of the mainstream media, automobile corporations, and politicians.  It is credited with Ford's first sales increase in over two years (on a year-over-year basis), and in slowing the decline of government-owned GM and Chrysler.  Its supposed "success" has fueled Congress's desire to allow it to blow through another $2 billion of taxpayers' money.  The bill has the support of the groups across the spectrum of special interests — AFL-CIO, the United Autoworkers, the U.S. Chambers of Commerce, and the National Association of Manufacturing — and of politicians on both sides of the aisle.

So what's not to like about getting old, gas guzzling cars off the road, replaced by (ostensibly) safer, more environmentally-friendly vehicles?  Especially when doing so is "stimulating" the economy, providing demand for new automobiles?

The answer is multi-fold.  First of all, it is important to remember something about the very definition of economics — the study of the allocation of scarce resources that have alternative uses is how economist Thomas Sowell puts it in his book Basic Economics.  If you have $10 in your pocket or $10 thousand, every dollar you spend on candy is not available to spend on gasoline for your car, or clothes, or your electric bill.    Likewise, every dollar a family spends on a new car is a dollar not being spent on food, health care, or clothing, or invested for retirement or a college fund, or put away in a savings account for a rainy day.

The automobile industry is very large and very visible, and has very vocal supporters — unions, manufacturers, dealers, etc.  Plus, don't forget:  the government now owns majority stakes in two of our three largest auto makers (GM and Chrysler).  So now add the entire government to the mix as a stakeholder.  So offer a tax credit for the purchase of a new car (trading in a "clunker", defined in this case based on gas mileage, not actual physical condition), and watch the sale of new cars get "stimulated".  The purchase of new cars increases, satisfying the those vocal stakeholders — but at what price?  It's easy to measure the increase in new car sales, but much harder to measure the decrease in the purchase of other goods and services, the money that individuals and families would have spent elsewhere if not buying a new car — the "alternate uses" of the family's income.

Of course, for the government to spend money, it has to get it from somewhere — either taxation, borrowing (which basically means future taxation), or by printing money.  In each case, nothing of value is created by the government, resources are just shifted from one part of the economy (present or future) to another, or the value of money already held by individuals and institutions is decreased.  Taking a slice of pizza from my plate and putting it on yours doesn't increase the total amount of pizza, it just merely changes who consumes it.  Tax credits like the "cash for clunkers" program distorts price signals and reallocates resources throughout the economy.  This, by definition, means a less efficient economy.

Lost in much analysis of the new car buying spree is the lesson learned in the recent subprime mortgage crisis:  when the government distorts the market by artificially creating demand for something, people tend to borrow money that might not be able to pay it back.  We have seen a rash of mortgage foreclosures, as people took advantage of government incentives to purchase homes; thanks to "cash for clunkers", are we setting ourselves up for a rash of auto loan foreclosures as well?  Only time will tell.  One can be sure that if so, we can look for a government proposal to help people who "get behind" on their car payments — another government bailout.

Finally, there's the usual nature of waste, fraud, and abuse endemic to any government program, particularly one initiated in a hurry.  The "CARS" program sets very specific criteria for what constitutes a "clunker" that is eligible for the tax credit; however, auto dealers have every incentive to qualify as many people as possible for the program and thus sell more new cars.  What will be the audit and enforcement process involved to ensure taxpayer money isn't spent on "credits" for unqualified "clunkers", or even on fictitious car sales?

A more comprehensive analysis shows that the "cash for clunkers" is no benefit to the overall economy, just another transfer of property to special interests, facilitated by the government and subject to fraud and inefficiency.  Congress should not reauthorize another round of billions in tax dollars for this program.