A blog experiment by Brad Mills.


A Prius in every driveway

I've seen several commercials today for the "Cash for Clunkers" program being run by the government. They start out like regular car commercials, but along the bottom of the screen they tout the "up to $4500 government rebate" and show the program's logo — and displayed more prominently, the MSRP of the vehicle minus the rebate to show just how much you'll save. Some of the cars I've seen end up with a net price under $6000 with this program.

Go ahead and click on that link to learn more about the program. Contrary to one popular but dubious belief, your computer will not be taken over by the government if you do.

I get the intent behind this incentive program. It gets old gas-guzzling vehicles off the road (and permanently — the cars are crushed after they're turned in), replaces them with more efficient vehicles, and encourages people to participate by offering the rebate. In theory, it will raise the nation's average gas mileage and thus reduce the amount of oil we're using, and I suppose somewhat reduce emissions in the process. I also find it interesting that more GM vehicles qualify for this program than those offered by any other manufacturer, which makes me think additional motives are at play.

Overall, we truly are living in a strange new era if we're seeing the words "government rebate" in a car commercial.

I'm waiting for the unintended consequences. For example, I've not seen anything restricting "car-flipping". Let's say you've got a classified ad junker in your garage you've not been able to get rid of, but you've not been driving it either because you already have a decent car. So you turn it in under the program, getting a new car for essentially a song — for the sake of argument, let's say $6000, and you sell it at a higher price — again, for the sake of argument, let's say $9000, which would be less than its book value ($10,500) and probably a fairly attractive deal to someone. So you end up with a net profit of 9000 minus 6000 = $3000, and somebody else ends up with a $9000 car loan. I guess you could see this as one way to stimulate the economy. It worked for the housing market... until the bottom fell out. Oops.

They did restrict it to cars which you've owned for one continuous year prior to trading them in. Had they not done that, people could easily buy classified ad junkers themselves (I'm thinking in the sub-$1000 class) and make some quick money.

How about all the people who take out loans for their new government-subsidized cars? The program has been a booming success, or at least, it's run out of funding once and has been refilled. However you look at it, there are a lot of new loans out there. This, in a market with a 9.4% unemployment rate and failing banks. Sure, a car loan is nothing like a mortgage, but it's still a loan — and the economy isn't yet what I'd call stable. Some people will default on their loans because that always happens. The chances of it are greater now because the economy is weak, and because there is an artificially high number of new loans out there, there will be a corresponding artificially high number of defaults. The banks don't need that.

Don't get me wrong. Like I said, I think the program has good intentions. But I've lately become fond of the concept behind "there ain't no such thing as a free lunch" — a good general principle which extends beyond politics and into finance, science, culture, and society, and one which echoes Newton's Third Law. Only time will tell, I guess.

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