Your Government At Work: Buying Dollar Bills for $3

From Edmunds:

Consumers who traded in their clunkers through the program also benefitted financially, generally speaking. Based on preliminary data, Edmunds.com estimates that the average cash value of the traded-in clunkers was $1,475. The owners of those vehicles earned rebates for either $3,500 or $4,500, depending on the replacements vehicles they chose. Edmunds.com Senior Analyst David Tompkins, PhD, points out that many will also save money on gas each month, thanks to their more efficient new purchases.


So the government is paying consumers $4500 for assets with a market value of $1,475.  Well of course it's a popular program with its participants -- Obama is buying up dollar bills for $3.

Left undetermined is whether consumers have been enticed into more expensive cars they cannot afford by this $3000 windfall.   It seems like just yesterday when the Obama administration was slamming credit card companies for enticing people into debt with low teaser rates or slamming mortgage companies for enticing people into mortgages they could not afford.

By the way, someone needs to explain the economics behind the theory that lining auto dealers pockets with taxpayer money is stimulative to the economy:

"Our analysts have determined that dealers are enjoying a 20 percent increase in gross profit per sale involving a clunker trade-in since the program launched."

  • Captain Obviousness

    Why don't you understand that it's good for the economy to pay people to destroy productive assets so that they can go into debt to buy a replacement? I bet you'd even cynically dismiss Obama's next economic stimulus, designed by Krugman, to create 5 million new jobs by giving unemployed people slingshots and paying them to go around and shoot out windows.

  • Don Lloyd

    Let's exagerate for effect :

    The Federal government will give a $7000 rebate for every new car purchased on 08/24/09.

    What will be the effect on the number of cars demanded and the number of cars supplied?

    The number of cars demanded will spike for 8/24 sales, but will drop for earlier and later sales days.

    The number of cars supplied for 8/24 sales can only be increased by holding off earlier sales of available inventory.

    What will happen to the pre-rebate car prices? They will roughly rise to the point at which demand is reduced to a level which can be supplied by available inventory.

    Bottom line : It is unlikely that more than 50% of the $7000 rebate will flow to consumers on a net basis, and some consumers are likely to pay more net with the rebate than if it had never been offered.

    Regards, Don

  • Larry Sheldon

    Now comes the Fun stuff. Omaha Weird Harold is saying (I'm told) that the county wants the tax ion the $4500. Can the state and the IRS be far behind?

    (I can't find it in their on-line thingus, so I might be misinformed. More likely they haven't put it up, the guy that updates both the paper and the electric versions only comes in on Tuesdays I think.)

    but I did find this: http://omaha.com/article/20090818/NEWS01/708189958

  • Mesa Econoguy

    One of the major flaws of the plan (other than the actual plan) is that it only applies to new cars, which, as we all know, lose $3500 - $4500 in value the minute you drive them off the lot, so you’re net flat.

  • JB

    "new cars...lose $3500 - $4500 in value the minute you drive them off the lot, so you’re net flat."

    Well, that's false, unless you're talking about high end luxury cars. A civic will lose about $2,000 after 1 full year.

  • Mesa Econoguy

    No:

    New vehicles lose an average of 20% of their value the instant they are driven away from the dealership. When coupled to the average yearly depreciation of 7% to 12%, your first year's loss is anywhere from 25% to 35%. That translates to a first year $6,000 to $8,000 loss on a $22,500 new vehicle, or a $10,000 to $15,000 loss on a $40,000 one. And that's for a vehicle only driven the average 13,500 miles.

    Also, probably the dumbest program ever:

    A few billion dollars worth of wealth was destroyed. About 750,000 cars, many of which could have provided consumer value for many years, were thrown in the trash. Suppose each clunker was worth $3,000 at a guess, that would mean that the government destroyed $2.25 billion of value.

  • Michael

    I have a 94 Ford Explorer that KBB puts around the $1,475 value. Though it has been hit 3 times, the AC clutch caught fire and the rockers rusted out, I would not part with it. SUVs today don't have rear windows that can be opened. This old vehicle easily totes heavy shop equipment, stone, tile, plaster, 20 ft crown molding and all sorts of other things to make my home a better place. I love my Volvo, but that old Explorer meets a world of needs. Not all value can be distilled to dollars.

  • [sarcasm]Oh, just think of how much better the world would be if we institutionalized forever these wonderful programs to deliver wealth, value, and a greener, sustainable planet.

    The Cash For Clunkers Program should be replicated repeatedly throughout the entire planetary kingdom! Turn your current home in for a greener one. Turn your appliances in for greener ones to! Oh, why stop there...get cows that don't fart as much...come to think of it, trade your wife and kids in for the same reason.

    Hey, insanity rules supreme in the Obamanation...Land of an endless sea of Mobocracy Looter Minions!

    Of course, the John Galt Solution and Starving The Monkeys is the only solution! The Mobocracy Looter Minions must be allowed to consume everything around them, then each other, and finally themselves.

    There is no other way.

    We didn't say it would be easy, we only promised the truth.

    Brothers and Sisters in Liberty, Sons and Daughters of Liberty!

    Sincerely,
    John and Dagny Galt

    http://www.starvingthemonkeys.com/

    http://voluntaryist.com/fundamentals/introduction.php

    Atlas Shrugged, Owner's Manual For The Universe!(tm)

  • JB

    Mesa, that's simply an unbelievable assertion being made as to the immediate loss in value of a new vehicle. Ask yourself how much you would pay for a "used" vehicle with 50 miles on the odometer compared to what you could negotiate for a new vehicle of the same model from a dealer with 49 miles on the odometer. I would be shocked that the difference be much more than ~10% of the dealer price (and that's because dealers can assist with financing and, on average, are likely more trustworthy than a random private party).

  • Sean

    I am one of the great unwashed that actually took advantage of the Clunkers program with a 94 Explorer. I don't disagree with the point that the government was purchasing dollar bills for three dollars but there is another side that has been mis-represented. When I was shopping on the first weekend of the program, I noticed a very specific demographic out shopping -- empty-nesters. In other words, people who had probably already raised their families, put their kids through college and were hanging on to the old beast as they rebuilt their finances. Another way to put it was the money went to a group of middle aged tightwads trying to get every last mile out of a 10-20 year old vehicle who probably did not need a hand from the government. However, it did nudge that group of people to spend a little of the money they were hanging on to. In this area (Baltimore-Washington) I heard that almost half the people taking advantage of the program paid cash for the cars. Given that with dealer incentives, the government rebate and such, it seemed people were purchasing practical, economical cars for 1/3 off, so a cash purchase was quite feasible. While it is true the government may be purchasing $1 bills for $3, it is getting $5 of stimulus for every $1 spent. They just should have called it bucks for baby boomers because it seems that is whose getting the benefit of this program.