I thought I would take a few moments to write a few thoughts about the latest ‘Cash for Clunkers’ program funding my our tax dollars. We all know what the program is supposed to do. Take the old gas guzzling cars off the road and put more efficient, environment-friendly cars on the road. Additionally, it helps put some extra money into the pockets of those who take advantage of the program (rich or poor). Even better, it provides some extra funds in the mix for the car makers who are producing these better cars. Then, as if it cannot get any better, it is helping out the economy by getting cash and finance moving in the system. How can we beat a program like this?
Well, lets look at the other side of the coin. Government is classically known for being short-sighted and usually missing the secondary effects (or any real primary effects at all). Some of which I thought I might share.
I will save the old government bashing lines for later. I only want to look at the Cash for Clunkers program. First, there are two pretty simple economic fundamentals that government seems to forget and is being ignored in the overall program. Economics never, ever encourages waste! “Wait,” you ask, “What is being wasted?” All those cars that are being traded in under this program are not being resold, they are not going to some auction for charity, they don’t even go to the kidney foundation. These cars are having a substance, usually a solvent, poured into the engines and the car is run until it seizes. That means the car is destroyed, unless you want to put a new engine in it. (I don’t know if these cars can even be parted out or sent to a junkyard. They might just be scrapped!)
Good economics always has a good being put to its best use. Good economics always has a commodity used, recycled, and used over and over. These cars, some of them perfectly good cars, are being junked because they don’t meet an environmental standard. No retrofitting, no alternative fuels, nothing. Junked. This is pretty much like everyone trading in their old radio for a newer one because the old one uses too much power, has a toxic chemical in its board, and has AM still available (which of course, nobody uses anymore). But wait, there is more, we have to take the radio, crush it, and put it in the dumpster. Do we realize how much energy went into creating that radio, do we know how much time, and all the other resources. A car probably takes 100 times as much power, planning, and expenditures to create though. What do we get in the end? We have a car off the road, but what about the multiplication of energy and capital in mining, relocating, and planning the materials for a new one? What about what those materials might have otherwise been put to use for. (Classic scarcity and trade-offs) In the end, we removed a few pounds of carbon from the air due to that one car, but put a few more pounds in the air to produce a new car somewhere else. I am very willing to bet, the loss of those new resources pulled from other items, and the energy to create each new car is pretty much a wash for the old one it replaced. Okay, for the sake of argument, there is a plus. But what about the additional scarcity by the new products? Oh, and we really cannot forget all the energy and capital (especially human resources) to cover the cost of that free $4,500 dollars they get for trading the car in. Ouch, that alone probably puts us back into negative territory.
I don’t know how many cars are traded in or disposed of in a month, but I am willing to bet you there isn’t much more than the normal business routine. Sure, we see a great swell. But everyone looking at trading in their car for the rest of the year probably jumped the gun. Who isn’t going to jump it for $4,500 extra dollars? So what do we have, those who were already looking to trade in a car. This could be either for necessity or luxury. Some just want an updated model. Others to update before their warranty runs out. Others because they have no other choice, their car is on its last leg. Here we are giving some money to the poor, the rich, and the middle-class. Leaving aside the arguments for progressive taxes, we cover the spectrum. But I am willing to bet most of these cars are for the middle-class and wealthier. Why? The poorer tend to have credit issues, especially in today’s market. Even with the $4,500, how many of the poor do you think can afford a new car? No, they are out looking for a used car, most of which will not qualify for the program. Here we have a program that appears to be cleaning up the environment and offers incentives, but only to those who can afford it! Odd twist isn’t it?
While we are talking about those poor people, of which I happen to be one. Let’s look how this will effect me in other ways. I prefer to pay cash for my cars. I prefer to purchase used and not to finance. Let’s say 100,000 cars are traded in under the Cash for Clunkers program. Those cars, the high quality and the legitimate junk ones, are all instantly taken out of commission. That is 100,000 cars which will no longer be circulating and will certainly not find their way back into the used car market. A shortage creates a higher cost because of higher demand. Sure, some of those cards would have been junked, but most of them would have gone on to auctions and other buyers. So that Lincoln with only 50,000 miles on it, that I may have bought on the second hand market is no longer there. In fact, NONE of them are in the second-hand market. The cost of buying a used car will go up. For how long, who knows. At least a year, perhaps longer. To some degree, it will probably never fully recover. After all, we are taking out of commission quite a few cars. So I better save up some more for that new used car, or keep my current clunker going for a little longer. I can afford to maintain and fix my car. What about those who cannot? Well, their cars will enter a state of worsening condition and you know what, one of those cars blowing blue smoke does more environmental damage than my whole block’s gas guzzling vehicles could have hoped. Give it a year or two, I am afraid most of our cars on the block may be blowing blue smoke in a year because we won’t be able to afford a new one or maintain it inevitably.
While the rest of the country is worrying about health-care, the politicians are trumping the success of the Cash for Clunkers. It really isn’t a success. Unless of course, you work for Ford, General Motors, or Toyota. Those of us who cannot afford to trade in our car are paying for someone else to get a new car, on our tab. Add to that shame, when we can afford a new car, or are required to get a new car, we have to pay more. Guess I am getting taxed twice. Oh well, I live in America, it is an honour to pay taxes. Twice the honour to pay them in two different ways.
While I am thinking about it, I have a radio to go smash and replace. Please send your $25 to me. All of you!