Econ 101. Or… What Congress And Obama Never Took In School.

The Question is the Story.  Is cash for clunkers a good idea? 

Nope.  Besides not seeing anything in The Constitution about The Federal Government’s ability to mandate anything of this nature; it violates the basic principles of economics.  If you have a product that sells for $X price and a market that is willing to pay at or about $X price for that product then you go and add to the pool of money $Y that can ALSO be spent on that product; the price will eventually rise to somewhere between X and X+Y. 

If you are Joe’s Widget Emporium and you know that people will reliably pay $10 for your widget; then you will charge $10.  If they stop paying $10 for that widget, you have to drop the price (or raise it and market it as an “exclusive product”, but that’s advanced econ and marketing) to get people to buy it.  So the price may stabilize at $9.50 or $9.00.

But then let’s say the Government deems the Widget industry too important to have to obey the rules of the free market and they offer a $3 incentive for anyone who will buy a widget.  Well that’s great news for the first people in the door of JWE.  They get their widget for $6!   But then Joe, being a man who knows a thing or two about math figures that his price can now safely go back up to $10 since the people will be paying only $7 in the end, it’s still a good deal for them. 

A few months later, Joe really needing to refurbish his Widget Production Center and increase his employees’ salaries to keep them from going to work for Willy’s Wingdings and Things, realizes that even if he raises his price to $11 dollars, People are still paying $1 less than his lowest price (11 – 3 = 8) and $2 less than his nominal price.   Let’s say he stops there and doesn’t raise the price anymore. 

He’s now charging $11 for something that was once $9.  That’s good. Right?  Well, then there’s the OTHER half of the equation.  Since this increase is artificial due to an infusion of money from a source that is essentially credit that someone will have to pony up for in the end, it may not be such a good thing.  That incentive money is a promise (credit) that the government is going to take money from someplace else (you) and pay off that debt.  That’s what a tax increase is.  It’s YOU paying for the cost of all those programs. 

So the widget started off at $10 and then fell to $9.  When the government got involved it went up to $11, with $3 of that coming from YOU.  When tax time roles around, Uncle Sam will take that $3 (plus a little more to pay the debt service on the loan they took out) out of your paycheck.  If you didn’t by a widget, you just spent $3 on someone else’s fun.  But since EVERYONE has to have a widget, which is why we have to subsidize the industry in the first place, you probably DID buy a widget. What did you pay?  $11 for the widget minus $3 in incentives plus $3 (plus a little extra debt service), which comes out to… $11! (Not counting the extra tax to pay for the debt service)

Let me kill the word problem part of that.  $11 – $3 + $3 = $11.  Simple.

But Dante, I don’t pay that incentive, I’m tax free.  I have enough deductions (or make so little) to keep from paying tax so I can stick it to the man and not feel it.  Every heard that expression about the stuff that rolls down hill? You pay it.  If you don’t pay it in income tax then you pay it in the increased costs to other areas.  None of this happens in a vacuum for your sole benefit.  It’s not only people that buy widgets; it’s companies.  When they have to pay the added cost (from $9 to $11) they pass that on to you.  And companies get taxed as well, when they get the bill for your incentive, you can bet they will pass that right back down the line to you.

So congrats!  In sticking it to the rich, you’ve also stuck it to yourself.  You buy any products that have to use the widget to get to market or in their construction and you just paid the increase.  Maybe you bought the widget at $8 ($11 – $3 incentive), but you just paid the $2 increase in other goods and services (from $9 to $11) that the companies have to pass on to you in order to stay solvent.  $8 +$2 = $10.  So yeah, we that pay taxes are getting stiffed on both cost increase (that extra $2) and the tax increase ($3) to total $13.  But you could have bought the widget for $9 and had to pay $10 when all was said and done.

This is a highly simplified model but you get the idea.  You will pay for that incentive the government promises either in tax or in increased operating costs and, in the end, the price of the widget will be artificially inflated with you footing the bill.   Wouldn’t it be much simpler to just pay the $9 and leave all the government corruption and power grabbing out of this?  Wouldn’t it be better just to pay the lower price rather than the slicked up sale price that has already factored in the increase. 

Not to mention that you are probably aren’t paying cash for this widget.  You are financing it.  You could go down to Widget Max and buy a used widget and for a fraction of the cost.  Sure it may look like poo and have dents, but it still widgets like other widgets and you only pay $3 for that widget.  Even if you finance the $3 widget, that’s a lot less interest, lower payments, and a quicker payoff time. 

So class, is Cash for Clunkers a good thing?

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Dante…

Conservative, educated, understands history, distrusts government, distrusts politicians, dislikes pop-culture, and carries a firearm. In short, I'm what The Framers of The Constitution were counting on and everything your government wants you to fear most.

The only thing I don’t have to complain about is some GI taking up space in my living room. I’ll let you know about the Civil Courts if someone ever owes more than $20 to me. ---If you didn’t get that one; sue your Civics or US History Teacher.


Your shortcut to Acute Dyspepsia
Any Spelling, Grammatical, or Typographic errors are the result of my keyboard, public school Elementary education, or Secret Government Ninjas and not fault of the author and his flying through his posts at lunch time. If you see any errors, ping me and I will correct them. Ping me often enough, and I will make you my editor.
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Remove the spaces and convert the -AT- to... you know the drill. In VB Script that's: Value = replace (replace ("dantes firing range -A T- hotmail.com", " ",""), "-AT-", chr(64))

For The Record


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