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Cash for clunkers again

This WSJ piece argues that the only thing accomplished by the "Cash for Clunkers" program is to speed up the natural rate of trading in old for new, rathe than actually prompting otherwise uncontemplated purchases. What will happen to the automobile market when consumers get off this financial methamphetamine? Can you say "Crash for Clunkers"?

This WSJ op-ed is also critical of the program. A snippet:

On the other hand, this is crackpot economics. The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

Discussions - 9 Comments

That is the logic of mass consumerism. Throw out one cheaply made thing and buy a new even cheaper made thing every few years. It is somewhat surprising that it took this long for a push into the auto industry. I wonder if the government will put huge taxes on car parts soon so that those who try to keep a car running will find it more economical to buy a new car. Mabye the price of a head gasket will grow to 1/4 the price of new car. That is how consumer electronics and home appliances basicly work.

Brutus: Good points, esp. about the home appliance/electronics.

I wonder is lotrogold is a good hedge against dollar inflation?

I respectfully disagree.

Bastiat's broken window fallacy has its place but it is such an overused analogy that it neglects to point towards the entire line of reasoning behind inventory economics. Homebuilders have also been buying up homes and tearing them down, most of the time the homes torn down are blighted in some way, but sometimes the homes are perfectly decent and liveable homes. In the best areas with the most expensive real estate "blighted" is quite relative, and the Stardust Casino in Las Vegas was quite nice, but it was destroyed to make way for something better in its place. The reason homes are being torn down is to decrease supply, and therefore re-inflate/support prices. Earlier you were rather incorrect about the actual number of vehicle sales and how quickly these fell off a cliff. When demand falls quickly the thing that automakers can do is cut production(and to a certain extent not even this given the ratio of fixed costs to variable costs). This sets into effect a chain reaction involving cutting back on dealerships, trimming labor costs and in fact paying union workers not to work.

The broken window fallacy has a lot going for it among many things it supports the libertarian view of freedom and works very well in conjunction with the idea of perfect information. In this sense there is never any utility in breaking windows so as to replace them with energy efficient windows because if this had utility the consumer acting in accordance with his budget and self-interest would go ahead and make the switch. Another congressional stimulus problem actually pays people to break windows, and replace them with energy efficient windows if the windows in the house are deemed inefficient and drafty and the person involved is elderly and can't afford to insulate the house or pay heating bills. While all government programs run into problems with contractors ripping off the elderly and other oversight issues, from an engineering perspective it is often times rational to spend more money on insulation and more efficient appliances...this also reduces the overall demand for heating oil and energy such that one persons efficiency has a spread effect benefiting all in terms of lower cost(this isn't half as bad of an arguement as it sounds given the inelastic demand curve for energy) The broken glass falacy runs into trouble if in fact it would be efficient to break windows and replace them or break lightbulbs and replace them with the more expensive(fixed cost)and efficient phillips bulbs. Of course Bastiat or any libertarian would reply that the wisdom in doing so rests with the individual and not the state.

In the case of household furniture I agree, but in the case of vehicles that qualify for the program, I can't see how much more utility can be squeezed from these vehicles. As to which way the curves shift, I am in perfect agreement with all the critics, and I really have trepidation to go against Levitt, who is also a fierce critic. On the point about fears of an automobile market coming off a methamphetamine high, I am in perfect agreement, but crash for clunkers occured during the Bush administration with severe help from the democrats. Our deficit spending which in some ways Cheney was right to say didn't matter, did matter because the ownership society and the fight a war without feeling a pinch because of easy credit all contributed to drastically inflate credit. Deficits don't matter if you can stay on meth, and in a certain sense the economy(or at least the stock market) is rebounding because we are discovering that we can stay on meth, the treasury auctions so far have been strong.

The automobile market is currently in "crash for clunkers", so your inflationary worry is early, just as Brutus's worry is early. Another reason the market can rebound is that inflation is not on the horizon yet, which signals the continuance of easy fed money. But in fact deflation would be occuring if not for programs like cash for clunkers which step in and subsidize the difference between what customers are willing to pay and what car makers are willing to sell for. In many ways Cash for Clunkers is a smart and ideal stimulus program, in that its limited time horizon means that a billion can be spent quickly. If the Keynesian answer is the final answer smart stimulus ideas that really are shovel ready need to be in place ahead of time, and this one is particularily good given the discrepency between Michigan unemployment and the rest of the nation(this means roughly speaking that michigan stimulus is least inflationary.)

It is clearly not the case that technology in couches, sofas or tables changes in any way that would really mean that replacing these would show an efficiency increase, cars aren't quite as high tech as computers, but as you move down the horizon in this direction you do see the original intent that the broken window fallacy makes into a strawman.

Brutus if you really think the government will put a huge tax on used parts to nudge folks towards buying newer cars then one hedge against the dollar inflation is to open a junk yard and sell(the substitute) refurbished parts. But really it makes no sense to tax the auto-parts makers to help out the auto industry, because of the razor thin margins and economies of scale involved in producing car parts in the first place. This was another reason that the automakers put before congress in the bailout discussions, the failure of any US company would dammage the supply chain. The mass assembly of electronics is actually so cheap that repair is too technical/expensive and runs into shipping costs. You can enter the appliance or tv repair business, but the margins are slim. Look at the cost charged for providing warranties for products...the price of the warranty ends up being too close to what the product is worth when it needs fixing. I have a top line $1800 alienware computer I bought 5 years ago, it hasn't broke yet, but it is slow and has viruses and I wouldn't pay $100 for it today, but I foolishly paid the $200 warranty for it. Sadly enough for $400 I can buy a emachine at wal-mart that would outperform it considerably. Cars are closer to being computers than to being furniture, albeit they have both components.

I digressed quite a bit, but on a relative basis I can continue to justify why I think Cash for clunkers is one of the best programs in the stimulus.

But then again I also think the auto-task force is the smartest part of team Obama.

Despite Cash for clunkers lifting sales, overall auto sales declined 12% year over year in July.

So crash for clunkers is where we are now...and this stimulus is akin to a patch or medication to come off a methamphetemine(easy credit, homeownership).

Also lets not discount the salesmanship catalysts of a program like cash for clunkers...(and the fact that it was limited to a billion dollars initially is good structuring)

Brutus, have you checked out Vance Packard's 1960 book The Waste Makers? He was one of the very first to explore the idea of planned obsolescence.

If you can afford to buy a car and have a clunker, I am sure this looks like a good deal. Government gives you money so you will spend it -- it is actually, as John Lewis points out at length, a true economic stimulus, for car manufacturers. It is the most direct infusion of dollars back into the economy that I have read about, from the stimulus trillion. Does anyone know a better one? It does relate to individual choice, although if anyone owns a car that old, to qualify, how often was that a choice? We drive our cars until they fall apart, become too expensive to repair, or the kids wreck them, with the latter being the most likely cause for our purchase of new cars in latter years.

Maybe it is only reasonable for our government to do something for the auto industry after doing so much to hurt it in the past months. Still, isn't this a matter of our government picking winners in the national economy?

As I read it is popular with voters, I predict its popularity will tie to the national health care proposals, somehow. "If you liked what we did with this, you'll love how we apply the same logic to health care."

I will disagree on the computer concept. With minimal knowledge you could easily upgrade the components for less money than the emachine at walmart from newegg.com or another component retailer. As for virusses, you could have bought software to prevent that which would have worked out to a lot cheaper over five years than emachine. Although, your windows will probably go on the fritz if you switch out too many componments. Microsoft has a loose definition of what is a computer for that exact scenario so even if you keep the hardrive your windows might require you to repurchase. That is an example of something, mabye its similar. I have a custom PC that is going on four years ordered from ibuypower and I just got done doing an upgrade on it. Much cheaper and I have a lot better quality of components. Obviously you can't upgrade a car or appliance, the warranty is a scam....I worked for sears. They make money hand over fist on "extended Warranties." If you don't push them well enough as a salesman they will take you to the back and attempt to break you down in a similar manner as a scientology audit. As for lets say a $4000 dollar car and it's utility. My sister"s first car was a Nissan for less than that and she is still driving it seven years later. My dad and I have replaced struts, valce cover gasket and few other minor things on that car and the repairs cost way less than $500.

I will agree that some of the waste is caused by a lack of knowledge in most people about doing what are pretty simple repairs.

I will make a mental note to check to that out sometime Craig, thanks. I used to talk to older guys who worked for the GM and other auto sub manufactuers when I sold tools at Sears. They would tell me stuff about certain parts being sent back to get redesigned because they were lasting too long in testing. I guess the counter argument to all this would be International Harvester who made such a good tractor in the early days that some say they hurt their own business. That seems like more of a wive's tale, however, we still own a farmall super C that runs fine at over 50 years old.

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