Indispensable Economics There’s a Bridge…

Aug 28, 2009

"Cash For Clunkers." This, as everybody knows, was the administration’s plan to get environmentally unsound cars off the road. The idea was that if somebody had a car that had been around too long, the piston rings were probably so worn down that you could drive a car through them, burning oil was spewing through the atmosphere, they were gas hogs, and were bought before the current environmental regulations on autos were imposed. If you turned your clunker in, you got $4500 in cash from the government which could be used to purchased a NEW car, which would be less harmful to the environment. The car you traded in would be destroyed so that it could not be resold and put back on the road.

Now, let me get this straight, and maybe put it in more truthful terms. If you were driving a real clunker, could it be that you could not afford a new car to begin with? Now you are to bring the ol’ jalopy in, and for $4500 in cash, go into debt for a new car costing, say, $25,000? While it is true that a clunker would not bring in much exchange value, so that this program would up the return, would you bring in your old car in for $4500 if you were not already going to sell it and buy a new one anyway? Just take my own experience. I drive a 2000 Buick. I bought it used, and it is a great car. I have no intention to sell it, but even IF I wanted to trade it in for a new one, and IF I could have gotten $4500 dollars for it, I still could not afford a new car. Would the promise of $4500 make me go into debt to buy a car I could not afford to make the payments on? Absolutely not. Forget the fact that I am a trained economist. My dog would not do that either.

Take another aspect. In my experience, real clunkers are driven by poorer people anyway. They can’t afford a new car either—hence they drive the clunker until it can drive no more. What do they do then? Buy another clunker from the used car market.

But, in fact, many people did trade in their cars. As mentioned above, some of those were going to trade them in anyway and buy new ones; they just got more on the trade in than they expected. What about the rest? Were these folks lured into the trade-in by the promise of government cash who never should have bought new cars? Is not this the same thing as the Community Reinvestment Act, which tried to persuade people to buy houses they could not afford? And what happened? Many lost their houses because the Act encouraged people to buy houses they could not make the payments on and subsequently they lost their houses. Don’t you think the same thing will happen to many people who foolishly brought in their old cars for brand new ones? I believe the repossession statistics will bear this out in a few months.

Maybe, despite the sucker ploy that this cash for clunkers program stimulated, the worst thing is that the country is in a recession. Just today, the Federal Reserve Bank of Atlanta said that the real unemployment rate is now 16%! Do families need more debt? If they can’t make the payments on their new car, they lose the car. If they do not live in a big city where there is lots of public transportation, how will they get to work? Did Obama do anybody any favors?

Then there is the used car market. Poor people live by the used car market. When their car dies, they cannot afford a new car, so they get a used car. But the cash for clunkers program has cut back on the used cars available. Assuming the demand is relatively stable, there are fewer cars to go around, so the price per car is higher. For all the rhetoric from Obama about helping the poor, and the Catholics who support him because he claims to be helping the poor, how did this plan help the poor?

Lastly, as we know, the plan ran out of money and had to be refunded and finally was recently stopped. What does this tell you? Coupled with the gigantic government debt, it says that government always underestimates the cost of programs. Social Security, Medicare, even wars are all underestimated in the beginning and always need massive injections of funds after that.

So, what does this have to do with a bridge? Well, a lot. If you thought that the cash for clunkers program was a good idea, there is a very nice bridge in Brooklyn, built in the late 1800s, beautiful style, and I will let you have it at a deep discount!