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Thread: Cars for Clunkers - Econ 101

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    Default Cars for Clunkers - Econ 101

    <SMALL>If only our elected officials understood economics....</SMALL>

    <SMALL></SMALL>

    <SMALL>Fallacy of Destruction as an Economic Advantage</SMALL>

    <SMALL></SMALL>
    <SMALL>July 16, 2007</SMALL>
    A young hoodlum heaves a brick through the window of a baker?s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies.
    After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier (window maker).
    As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles.
    The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
    Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has to replace a window, he will have to go without the suit (or some equivalent luxury or need). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit.
    If we think of the baker as part of a community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
    The glazier?s gain in business, in short, is merely the tailor?s loss of business. No new ?employment? has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten about the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
    Thus we see the fallacy of destruction as an economic advantage. Anybody, one would think, would be able to avoid this fallacy after a few moment?s thought. Yet this fallacy, under a hundred different disguises, is the most persistent in the history of economics. It is solemly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio and television commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities.
    ? Economics in One Lesson by Henry Hazlitt

  2. #2
    Olympic Champ RYou's Avatar
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    Default Re: Cars for Clunkers - Econ 101

    While the tale may be somewhat true, what if the baker had no plan to buy a new suit and had intended to put the cash away into savings where there was little benefit to anyone and minimally to a banker? In this tale, maybe the glazier now buys that suit, or a piece of furniture and spends the $250 in alternative way? Sure the tailor may be out, but someone else may be in and the cycle does in fact continue.

    Since you labeled this Clunkers Econ 101 - here's some background on my Clunker Deal.

    1) $4500 Clunker Cash

    2) The deal produced $1800 in sales tax revenue for the State of New Jersey

    3) The deal generated another $375 in revenue for the state in the form of title and registration fees. Almost half the $4500 is given back to the government already, albeit state government

    4) The deal was at "invoice" so purportedly the dealer didn't make a dime. Not true, I happened to be at the finance officers desk calling my insurance company and while waiting I happened to catch a dealer memo stating that Chevy pays the dealer $4000 for the sale. On paper the car is bought at $26500, back door Chevy rebates $4000 to dealer after the fact....common and typical mfg/dealer arrangement.

    5) That leaves $22500 for Chevy and I'll hazard a guess a $7500 profit over cost to build. Since you and I own $61 billion of GM, the vast majority of that profit is heading right back to the Washington as repayment of that loan.

    I'll hazard a guess $5500 of that $7500 profit goes back to Washington DC. As the loan gets repaid, the stock value of shares owned by the Fed goes up and you and I taxpayers, profit off the value of that stock increase.

    I may have over simplified here, but I'm not far off the mark. The faster Obama gets the econ to pick up, the sooner all those stock values increase and the loans gets repaid - to fund healthcare reform.

    6) That dang 97 Jeep was worth about $1000 at best. Yea the local auto parts store lost out on $300 in brake parts I didn't buy. If sold privately the state would have made $70 in tax, some more in title and registration fees. The sales tax alone that I paid on the new was more than the value of the Clunker car. (hmm, was I nuts?)

    7) The clunker got 15 mpg and the new Equinox 25 mpg, so there is some real value to the environment, not to mention the auto industry workers, the little deli down the street from the auto dealer and the manufacturing plant ( and maybe the marina where the dealership owner docks his boat).
    Life's not the breaths you take, the breathing in and out that gets you through the day ain't what it's all about. It's the moments that take your breath away.

  3. #3

    Default Re: Cars for Clunkers - Econ 101

    RYou, you failed to mention, who pays the $4500? It comes from someone's pocket. It didn't fall off a tree. All it does is move from one pocket to another. It may mean more money for Joe Smith, but it will mean less money for someone else. That someone else may not be willing to finance "your" new car. Maybe they had plans for something else.

    Now, let's look at your Jeep. $300 for brakes would have been $300 "new" money into the economy if you'd have just fixed your brakes. This transaction also just moves money from one pocket to another. However, it was between consenting parties. How would it go, if say, your neighbor had to pay for your brakes? Or better yet, how about you pay for your neighbor's next break job.

    I'm curious as to why you just decided to "junk" the jeep. Why didn't you try to "bail it out" by fixing the brakes?
    Last edited by CaneinBatonRouge; 08-05-2009 at 06:01 AM.

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    Default Re: Cars for Clunkers - Econ 101

    Quote Originally Posted by CaneinBatonRouge View Post
    RYou, you failed to mention, who pays the $4500? It comes from someone's pocket. It didn't fall off a tree. All it does is move from one pocket to another. It may mean more money for Joe Smith, but it will mean less money for someone else. That someone else may not be willing to finance "your" new car. Maybe they had plans for something else.
    The money is coming from the stimulus package that has already passed. The whole wisdom of the stimulus package is another debate but it isn't additional money.... it is money already allocated.

    FWIW the politics of this is fun. The Senate Republicans were going to balk on this, and hold it up until the recess so it wouldn't go through, but the dealers (huge supporters of Republicans) flooded them with complaints, so they backed off.
    I am 49, bald, ugly, and don't own a single cool thing. Kids like me though.

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    Super Moderator UGLY's Avatar
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    Default Re: Cars for Clunkers - Econ 101

    Scott,

    We still dont have the money to pay for it, it is essentially funny money. That includes the entire stimulus that has done nothing.

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    Default Re: Cars for Clunkers - Econ 101

    Quote Originally Posted by UGLY View Post
    Scott,

    We still dont have the money to pay for it, it is essentially funny money. That includes the entire stimulus that has done nothing.
    Like I said, the wisdom of the entire stimulus package is another debate (deficits, inflation issues, sustainable recovery, etc... are all legitimate concerns) it's just in this specific case, it isn't "additional" money being spent, it is money that has already been approved to be spent, and is - on the surface as RYOU pointed out - providing some benifit to a hurting sector of our economy.
    I am 49, bald, ugly, and don't own a single cool thing. Kids like me though.

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    Super Moderator UGLY's Avatar
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    Default Re: Cars for Clunkers - Econ 101

    Quote Originally Posted by sgallan View Post
    Like I said, the wisdom of the entire stimulus package is another debate (deficits, inflation issues, sustainable recovery, etc... are all legitimate concerns) it's just in this specific case, it isn't "additional" money being spent, it is money that has already been approved to be spent, and is - on the surface as RYOU pointed out - providing some benefit to a hurting sector of our economy.
    Right. I do find it funny that the government takes over causes tells them what to do and then comes up with a plan to help them sell cars, very odd.

    The bigger question is what happens if the money runs out and some of the deals cant be reimburse. Those dealerships could lose some money. I heard a figure the other day that said the money equaled about 15 clunker deals per dealership in the nation and some have been doing 15 a day.

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    Default Re: Cars for Clunkers - Econ 101

    Well okay, since this is money that has already been allocated - and that isn't going to change - and it is meant to stimulate - and for the moment auto dealers are clearly being stimulated - what do you want them to spend some of that trillion on?
    I am 49, bald, ugly, and don't own a single cool thing. Kids like me though.

  9. #9

    Default Re: Cars for Clunkers - Econ 101

    Quote Originally Posted by sgallan View Post
    Well okay, since this is money that has already been allocated - and that isn't going to change - and it is meant to stimulate - and for the moment auto dealers are clearly being stimulated - what do you want them to spend some of that trillion on?
    It may be stimulative for auto dealers but it's not stimulative for the entire economy. It's just redistribution of dollars. Or it's just borrowing from the future. However, to suggest or state that Cash for Clunkers is stimulative for the entire economy is not accurate.

    Scott, you did describe it correctly -- that it's stimulative for auto dealers. But it's a drag on current taxpayers and future taxpayers.

    Furthermore, to suggest the government should spend the money because it's already been allocated is not correct either. There's no reason the government can't un-allocate the money.

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