Sound Economics or Loony Tunes Economic

So the cash for clunkers is a success. Wow, Congress is over the moon at the success of giving taxpayer money to you or your neighbour to buy a new car. Why not do it for fridges, couches, big-screen TVs.

$1Bn was set aside for the “cash for clunkers” and was supposed to last for several months. It all went in just a few days. And now they are going to spend another $2-3Bnmore.

The clunkers were supposed to be roadworthy before they could be traded. But when I saw a news reporter go down a line of cars it was obvious to me many could not possibly be roadworthy.

What is stopping a dealer buying a whole bunch of clunkers like this, filling out the paperwork and trading them for some new cars from other dealers. Then sell them again as demonstrators with more tax advantages. 

The way they have been treated, I would not blame them.

And what’s to stop dealers from selecting the better “clunkers” they trade in and quietly selling them through their second hand car outlets and possible replacig them with worse clunkers on the lot or buying even worse clunkers and using them as the trade?

Do you think the government is even going to check the paperwork? I doubt it? That’s not their aim. They are looking for political capital here.

The Greens are happy, Congress is happy, the dealers are happy and the new car buyers are happy. No one can complain because everyone is inon the scam (or could be). Anyone can get a clunker and trade it. So no one says anything.

Fraud is not an issue either if in the governments view it stimulates the economy – the greater good.

The real problem is this sort of thing distorts or destroys normal market processes. Let’s look at the normal auto sales cycle.

Every day thousands of people trade their clunkers for new cars. Many of those clunkers are on-sold to second-hand car dealers to be resold. The rest are either broken up for spare parts and/or crushed. It’s an efficient market.

It means there are cheaper cars for low income people who just cannot afford a new car, bringing more car owners into the market. There are also plenty of spare parts to keep these cars on the road.The system works.

Now for the stimulated auto sales cycle.

It has been reported that over three weekends $1Bn of “cash for clunkers” have been traded. These clunkers are supposed to be crushed within 48 hours of being traded. The cash is up to $4,500 per clunker. That means something like 222,000 clunkers or more may have been traded and are to be crushed.

That means the secondary market of cheaper cars for first time car buyers is dramatically reduced. That may be good for the green lobby but it might be a crisis for young or low income people trying to buy their first car.

So there will be no secondary car market of affordable cars and no spare parts for clunkers still on the road.

Who does this hurt. The poorest and those with the lower incomes. It will also hurt the dealers and the car companies as the $1Bn (now increased to $3Bn) brings forward thousands of car purchases maybe 1-2 years out.

This is a huge distortion of the car market.  It’s bad enough using a massive stimulus to bring forward new car sales. It is far worse taking all the traded cars out of the market by crushing them.

Markets take time to create and have to be nurtured and cared for. This short term gain may well mean long term pain as the distortion works its way through the market.

Markets work because many many people make individual decisions. Some make a good decision, others a bad one and the rest in between. But when you have government spending billions to get us all to make the same decision at the same time the momentum of all those decisions can lead to unintended consequences.

We can be sure that the cash for clunkers is here to stay because to stop it now could send the industry into another tailspin. Germany has found this out already.

This is just one of the bad decisions being made right now which has to hurt the economy.


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