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Cash for Clunkers = Destruction of Wealth?

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Mixon

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http://www.cnn.com/2009/POLITICS/08/06/sen...kers/index.html

So basically the government is giving up to $4,500 cash to auto dealerships each time a customer trades in a car with a fuel economy of <18mpg and buys a new model car from an approved list. What I didn't know until today is that in order to receive the credit the "clunker" *must* be scrapped.

http://www.cashforclunkersfacts.com/bill-faq

Q: What will happen to the car I trade in?

A: The car will be sent to the salvage yard. Some parts may be kept but the engine and drive-train must be destroyed. Specifically the engine will be injected with a liquid glass solution to permanently disable the engine and it will be the responsibility of the dealer to make sure this is done to the engine.

This seems insane to me. Isn't the government essentially destroying wealth? I fully expect to open the paper one day soon and read about a new government initiative to burn down foreclosed homes as a means of increasing home values.

Edited by Mixon
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Isn't the government essentially destroying wealth?

Yes, I think the same. An owner possesses an old car is because it is still of value to him. If he sells it in the market (or for scrap), the little money he would make would be of less value to him than his "clunker". Cometh "Cash for Clunkers". The government offers him rebate on a new car if he sells his old car. In effect, he is offered more money on his old car than it is worth (to him). Whose money? The money extorted from the citizens of a country, especially those who have "too much". (Even if it is printed or borrowed money, it still amounts to real wealth being redistributed).

Net results on the whole economy:

1. Money extorted from everyone to unjustly reward someone.

2. Wealth/products of mind being destroyed.

3. Incentive for intentionally destroying working cars.

4. An artificially created "bubble" in the industry.

Above happens in some form or the other for every economic sector touched by the government.

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Yes, I think the same. An owner possesses an old car is because it is still of value to him. If he sells it in the market (or for scrap), the little money he would make would be of less value to him than his "clunker". Cometh "Cash for Clunkers". The government offers him rebate on a new car if he sells his old car. In effect, he is offered more money on his old car than it is worth (to him). Whose money? The money extorted from the citizens of a country, especially those who have "too much". (Even if it is printed or borrowed money, it still amounts to real wealth being redistributed).

Net results on the whole economy:

1. Money extorted from everyone to unjustly reward someone.

2. Wealth/products of mind being destroyed.

3. Incentive for intentionally destroying working cars.

4. An artificially created "bubble" in the industry.

Above happens in some form or the other for every economic sector touched by the government.

An astute analysis. I must concur. Each day the government prints money not backed by value brings it one step closer to the day it finds its account marked overdrawn. Frankly, I'm surprised the Chinese/Japanese haven't switched to buying more of our equity and less of our debt. I wonder whose wealth the government will expropriate when it needs a "bailout." Holders of dollars through inflating the money supply or perhaps a massive net asset tax on the top 10%?

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FDR did similar when he ordered the destruction of hundreds of thousand of farm animals and crops in order to drive up prices for agriculture, during a depression when people were starving. Marxist/Socialists aren't known for their great foresight.

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FDR did similar when he ordered the destruction of hundreds of thousand of farm animals and crops in order to drive up prices for agriculture, during a depression when people were starving. Marxist/Socialists aren't known for their great foresight.

Yes, but you wouldn't know that here in Detroit, where the Cash for Clunkers program is almost universally hailed as a great success. Of course, most people crowing about the program ignore the fact that it has raised prices in the used car market, making it much more difficult to find cheap transportation. It is also, by definition, a misallocation of resources when you are taxing one group of people to give an unearned subsidy to another group. Another little interesting tidbit about the program; the most frequently bought new vehicle under Cash for Clunkers is a Toyota. I wonder how that sits with the "Buy American" union boys?

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I am shocked. What the hell is going on over there in your country ? All I see is an increasing barrage of Statist enforcement that I personally find frightening - it makes my nanny- State (RSA) seem free by comparison. (Not that I'm going to get complacent, because sooner or later, the same policies will be adopted here as well.)

After all, the U.S. sets the exemplary 'model' that the entire world eventually mimics; if only for the reason that it was once the Land of the Free.

Is there any way this latest initiative can be ignored or boycotted en masse?

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President Obama has a vision for America that is very much like that of the European Social Democracies. Unfortunately, after years of philosophical and moral decay, I'm afraid that much of the US population shares his vision. They want something for nothing and think they can get it, despite the obvious contradiction inherent in such a proposition.

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Used car prices have been going up this year. I'm guessing that with bad-economic times people put less used cars up for sale while more people are looking for used cars to buy. Cash for clunkers is bad enough; but, destroying used cars is idiotic.

On the types of cars sold under the scheme, there's some ambiguity in how the classification is done. For instance, a Honda Civic with one engine size might come out in the top-5, but that does not count another type of Honda Civic with a less popular engine size. If one adds these engine-variations, then the models which have many variations get better totals, compared to the government's classification. Edmund's used traditional classification, and came up with a different top-10 (see table to the right of this article). Number 5 on the list is the Ford F-150 (14 / 18 mpg).

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That Edmunds list is an interesting breakdown Snerd. A recent report I heard on local media claimed that the Corrola was the number one vehicle, but that is way down on the Edmunds list. In any event, this program is just another subsidy for the auto industry, piled on top of the $100 billion or so that the government has already dumped into the domestic car makers.

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The latest figures show Toyota as the company that has benefited the most from C4C:

CHICAGO, Aug. 14 (Xinhua) -- Three major U.S. automakers lost ground to foreign rivals in the latest tally of "cash for clunkers" sales as Toyota Motor Corp. dethroned General Motors Co. (GM) as the top seller, reports reaching here said Friday.

Toyota has sold 18.9 percent of vehicles purchased through the clunkers program, surpassing GM, which has sold 17.6 percent.

http://news.xinhuanet.com/english/2009-08/...nt_11885688.htm

I wonder if the UAW is happy about that? :)

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http://www.breitbart.com/article.php?id=D9...;show_article=1

WASHINGTON (AP) - The Obama administration plans to end the popular $3 billion Cash for Clunkers program on Monday, giving car shoppers a few more days to take advantage of big government incentives.

[...]

"It's been a thrill to be part of the best economic news story in America," Secretary Ray LaHood said in a statement. "Now we are working toward an orderly wind down of this very popular program."

[...]

Dealers have complained of delays in getting reimbursed and backlogs of vehicle paperwork getting processed in the program. Dealers have said they face a risk of not being reimbursed but LaHood has pledged that dealers will get paid for the incentives.

Interesting how they seem to define an economic success story: promising people to pay them, then finding excuses to delay or avoid payment. What is that, if not looting?

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Right, the dealers are already in huge trouble with tight cash flow due to low sales. Now the Clunkers program boosts their sales, but the government doesn't pay them the money due, so many of them are in even deeper cash flow trouble. When someone shows up at your door and says, "I'm from the government and I'm here to help you".... my best advice would be to run the other way.

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There are many other considerations to the effects of this program:

1) Charitable donations of cars. Many charities receive cars as donations. The donor gets a tax write-off, the charities either sell the cars for money or give the cars to people who need them but can't afford them. Now, why give away your car if you can get a $4,500 rebate for it?

2) Younger, working people who need a car would previously find a cheap clunker they could readily afford. With this program there will be less clunkers, which also means their prices will go up (as the government drives up their prices by offering more money for them).

Right there two groups of "poor" people are hurt by this program. Who was it meant to help again?

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How do most youngsters get started in the vehicle market if not for the good old 'clunker'?

I fondly remember my first cars - in those days costing the equivalent of less than $1000 - which I either fixed up, and sold at a profit - or eventually went to the scrapyard.

But to see still useful autos being force-scrapped, is quite sad.

Artificial economics, all the way.

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  • 1 month later...

The cash-for-clunkers program boosted sales for August. From this data in for September, it seems clear that the program simply moved sales ahead by a month.

HT: "Calculated Risk" (IMO, one of the best info-centric (as opposed to opinion-centric) economics blogs)

Edited by softwareNerd
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A recent article in Barrons talks about a post-mortem done on the program by a couple of academic economists:

According to an estimate by two University of Delaware economists cited by the Detroit News, the costs of the $3 billion cash-for-clunkers program exceeded the benefits by $1.4 billion.

Still, auto sales surged to a boom-time 14 million annual rate in August as car buyers went ga-ga for clunker cash, bringing joy to them and dealers -- especially dealers. Now comes payback time.

"On closer inspection, we do not see lasting, tangible benefits for the economy," Citigroup economists write about cash for clunkers in this weeks Comments on Credit. "The sales spike probably borrowed from future months and will fall off sharply now that the program has ended.

"We believe that the program did not help that the program did not help auto makers much because the rise in sales was temporary, and gave car buyers only a small cost savings. The biggest beneficiaries of this program were the auto dealers themselves, who essentially received a huge transfer from the U.S. Treasury," they add.

http://online.barrons.com/article/SB125415...?mod=BOL_hpp_dc

Edited by gags
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  • 4 weeks later...

Here's an even more devastating review of the C4C program in its aftermath:

Taxpayers ended up paying an average of $24,000 per vehicle for the Cash for Clunkers program over the summer when sales that would have happened anyway are taken into consideration, says car buying research site Edmunds.com.

But Edmunds.com says a lot of those sales would have happened anyway, with or without the clunkers program. Of more than 690,000 vehicles sold, only about 125,000 of the sales were entirely due to the government's added inducement, Edmunds.com says. The rest of buyers just got lucky by getting the government to kick cash into deals that they would have proceeded with anyhow. When the cost of the program is spread over just those extra incremental sales, the total is $24,000 per vehicle.

http://content.usatoday.com/communities/dr.../10/620000657/1

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  • 1 month later...

... and the wreckage continues....

Last summer's Cash for Clunkers program has clogged auto salvage yards with a glut of trade-ins that are too damaged to drive but too good to be sent directly to scrap.

...

Edit: Some fun quotes from the article:

Cunningham said his business received 1,250 automobiles in just 45 days as a back-end participant in the clunker program.

"There is absolutely no way that we can process these vehicles and recycle anywhere near their potential," he said.

---

Were these normal trade-ins, the unwanted vehicles could simply be sold to new owners. In this case, the engines were destroyed under a federal mandate to take relatively low-mpg vehicles off the road.

Edited by freestyle
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