Measuring Policy Success

NPR reported this morning that “Cash for Clunkers” style programs in Germany and France are “popular and successful.” Successful by what standard? I see that the Wall Street Journal has reported that in Europe “’cash for clunker’ programs have breathed fresh life into a battered auto industry.”

Yes, by that standard, no doubt subsidies for buying cars are successful in encouraging the sale of cars. Certainly subsidies to homebuying encouraged the buying of homes. A “Cash for Computers” program would “breathe fresh life” into computer sales. Make it “Cash for Compaq” or “Cash for Windows,” and you could direct purchasers to particular companies.

But to declare a policy successful, shouldn’t you mean that it makes the country better off? And that means that the subsidies produced more economic growth or more overall consumer satisfaction than a policy of nonintervention would have. That’s a much harder standard to meet. Subsidies by definition divert consumer choices from their natural outcome. Economists generally agree that subsidies create deadweight losses for society. And sometimes, by distorting consumer decisions and encouraging decisions that don’t make real economic sense – as in the long effort to channel consumer resources into housing – subsidies eventually prove unsustainable and unstable.

Indeed, it seems likely that another part of the Wall Street Journal was correct when it described “Cash for Clunkers” as “crackpot economics.”