Cash 4 Clunkers

The debate over additional funding for Cash for Clunkers (C4C as it is sometimes called) would be amusing if it were not so tragic. Amusing because Republicans oppose it but can't articulate why. Tragic because Democrats think it is the greatest thing since sliced bread and it is not.

It is easy to understand that no one will trade his vehicle for a $4500 credit if the value of the car is more than $4500. Therefore, this will impact cars with a market value of less than $4500.

"Unintended consequences" of the C4C program that the Administration did not see (or refuses to see)

1. It will take many low priced used cars off the market and put them into the dumpsters. This will reduce the supply of old, running, for-sale cars in the market. By the law of supply and demand, this reduction in supply will increase the price of old cars, making them out of reach of poor people.

Indirectly therefore, the very poor, who're in the market for cheap cars (those costing less than $4500) will be paying for those who can pay additional thousands to buy a new car.


2. It is being touted that the model sold the most is the Ford Focus, selling for nearly $15000. That means people are still putting in nearly $10500 from their own pocket to buy the new cars. Since this is significant amount of money, most people who will spend this kind of money are the ones who anyway intended to buy the cars in the next few months. So there's a likelihood of sales dropping sharply once the program is over, because all this program will do is to move the purchase dates forward, not genuinely increase demand.

3. People buying the new cars may be buying them for business (as I'll explain) or out of irrational exuberance. In either case, a lot of these newly bought cars will be out in the market for private sale. Consider this:

I can trade-in a $1000 clunker and put in $10500 to buy a $15000 Ford Focus. My total cost is $11500. I can now immediately put this Ford Focus for sale in the market at nearly $14000 - making a cool $2500 profit.

This will increase the supply of (nearly) brand new cars in the market from private sellers, and since a brand new car from the company and from a private seller are nearly perfect substitutes, it will reduce the sales of the cars from the company.

4. It will create a black market for people who will buy a clunker for x (where x < 4500) and buy a new car using the $4500 rebate, and make ($4500 - x) in the process. There is a provision in the CARS law to prevent this: "The trade in vehicle must be continuously insured and registered to the same owner for the full year preceding the trade-in". But nothing still prevents the dealers (or anyone else) from colluding with people who're just trying to sell their old car to ask them to take the 4500 credit, sell the brand new car to the dealer back immediately and split the profits.

Economics and politics don't mix!!