According to William James in his 1890 book, Principles of Psychology, "[Attention] is the taking possession by the mind in clear and vivid form, of one out of what seem several simultaneously possible objects or trains of thought...It implies withdrawal from some things in order to deal effectively with others." Since our minds our limited, attention allows us to deal with the world effectively.
Well, somewhat effectively. In the realm of politics especially, the vagaries of attention often mislead us. For example, Edward McCaffery and Jonathan Baron find that people do not mind hidden taxes nearly as much as transparent ones. Income tax withholding, by reducing the salience of taxes paid on April 15, may make higher levels of taxation tolerable to the public.
Our cognitive limitations often debase political debate, making politics a battle for voters' attention. Hence, the power of soundbites and slogans, such as "Cash for clunkers." The way to make a policy attractive is to hide the damage it does, and make its alleged benefits salient. This point was made vividly by Frédéric Bastiat in his 1848 essay "What is seen and what is not seen." He points out, for example, that even a nutty policy like going from house to house breaking windows can seem attractive as a way of providing employment to glaziers. What is not seen is that the resources people spend getting their windows repaired might otherwise have been devoted, for example, to buying shoes. So even in the short run breaking windows is not a stimulus, because it puts the cobbler out of work. And in the long run, it reduces the total wealth of society.
As for cash for clunkers, one motivation for the policy is legitimate, encouraging people to switch from high polluting cars to low polluting ones--though the specifics of the program do not seem to achieve this very efficiently. But the other motivation for the policy, that it will stimulate the economy, is much like the proposal of breaking windows to stimulate the glass-making industry. A similar objection applies to wasteful spending in general, such as the economic stimulus package.
It could be argued that the auto industry needs stimulus more than the many industries that will be harmed by higher taxes. This would be based on the notion that in the long run domestic carmakers are due for resurgence, so current industry cutbacks and job losses are inefficient. In this story, government can help prevent the waste of resources by cushioning the industry until domestic carmakers bounce back. However, this assumes that the government is good at guessing which industries should grow and which should decline.
Unfortunately, government is not well-positioned to make these calls in a way that benefits society. Government incentives respond to political pressures, not to market fundamentals. This makes government especially responsive to entrenched parties, such as large, old, inefficient, ‘clunker' firms, at the expense of new innovators. Overall, government policy in the U.S. auto industry is to pay cash to keep clunker firms going as long as possible. This gives 'cash for clunkers' a double meaning.
This is part of a general tendency, discussed by Raghu Rajan and Luigi Zingales, for government to subsidize entrenched players and to protect them by hampering new and innovative ones. Large firms, even if inefficient, have resources to spend on political pressure, and a base of employees and other stakeholders with interests in the survival of the firm. Small innovators can't match that clout. And in the limit, an innovative new industry that does not exist yet will have no political clout at all. The public does not perceive the full costs of these taxes and regulations, because it's hard to notice innovations that have never occurred. This is the power of what is seen over what is not seen.
