Wealth Destruction and Government Policy

I had not planned to post again so soon after publishing two articles in quick succession, but a recent article has been nagging away at me for the last couple of days. The article comes from The Times, and deals with a proposal to pay for the scrapping of cars:

It has been on and off for months, but a key announcement in Alistair Darling’s budget in 10 days’ time looks like being a car “scrappage” scheme. The motor industry is in trouble and thinks the best way to reverse an alarming slide in sales is to give people who trade in old cars for new or nearly-new ones a £2,000 allowance.

At the moment, this is still not UK policy. However, as the same article points out, this is not a completely new policy, as it has already been enacted in other countries:

Eight European Union countries – Austria, France, Germany, Greece, Italy, Spain, Portugal and Romania – have introduced scrappage schemes. The biggest impact has been in Germany, where sales last month were up 40% on a year ago, leading the government to treble its funding for the scheme. In France, with a smaller incentive, sales were up by 8%.

As can be seen here, the way in which the scheme is presented is to suggest that this is good and much needed policy. The article does include some critiques of the policy; that it is not 'green' and that the resultant sales of new cars will not necessarily stimulate the domestic manufacturers. To these obvious problems, it might be added (subject to the detailed final plan) that it will simply create a market in second hand cars to be sold for scrap in the scheme. i.e. cars that would be scrapped anyway will be sold to purchasers of new cars in order for them to qualify for the subsidy.

However, this is not the fundamental flaw with this plan, and no commentary that I have seen does deal with the underlying problem with this idea. This is the problem of what the the plan is doing in principle.

In particular, the principle is the wilful destruction of wealth in order to generate economic activity. Each car that is build represents the utilisation of labour, materials and capital to build the product, and the end product represents a store of that wealth. Whilst the value of a car declines, for every year of its life it still represents a store of the wealth that was created. When a person scraps a car before its 'natural' end of life, they are actively engaging in the destruction of wealth.

At the extreme, this is the equivalent of bombing a city to create activity, but without the drama and the inherent sense of absurdity that this represents. On the same principle, we might see a proposal to purchase toasters to scrap them, or the purchase of beef in order to throw it into landfill. Why not knock down some buildings, rebuild them, knock them down again, then rebuild them again? Why not scrap some bridges coming to the end of their life and rebuild them, as the construction industry need help too. The potential for destruction to create 'activity' is limitless, and might be applied to just about anything.

In all of these cases, there would be a destruction of wealth, and the economy would be 'stimulated'. The difference here, with the idea of scrapping cars, is that they are 'used', such that the principle of what is actually being done is not so evident. If the government were, for example, to purchase toasters and scrap them, there would be an outcry, but the underlying principle is identical to the scrapping of used cars.

As if the wanton encouragement of destruction were not absurd enough, this process is being undertaken with borrowed money. The government is therefore proposing borrowing money in order to destroy wealth. What that means is that, at some point in the future, £ 'x' million will no longer be available to, for example, build a hospital or pay for a school teacher. Alternatively, more taxes will need to be raised to repay the borrowing, meaning that you will have £ 'x' less to buy yourself a new car. It is perhaps in this latter example that we can best see the absurdity of the situation. Your future ability to purchase a new car will be diminished because the government is borrowing money to destroy the wealth that is inherently retained in another person's car.

A few months ago, I highlighted an article in the Economist magazine in which they discussed how Hurricane Katrina would create an uptick in GDP. In the post, I highlighted how the massive destruction of stored wealth represented by Katrina could be seen by Economists as a 'good thing', and how absurd such a notion was. However, this was the destruction of wealth through natural disaster, so perhaps might be excused on the basis of trying to look on the positive side of a bad situation. In the case of car scrapping it is an act of destruction devised and enacted by government.

If ever there were an indication of the absolute bankruptcy of ideas to fight the economic crisis, an indication of the underlying idiocy of government policy, then surely this is it. They are acting to destroy wealth to 'save the economy', and doing so at the expense of the future economy. They are spending future wealth in order to destroy present wealth.

Quite simply, the mind boggles.