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August 10, 2009

"Cash for Clunkers"
just like FDR's
"Cash for Pigs"

Jack D. Hidary
Commentary: Why 'Cash for Clunkers' works

Back in the start of the last Great Depression, prices were trying to reestablish a normal market "supply and demand" level point, after some silly Wall Street speculation, brought about by some games being played by the newly created Federal Reserve.

Prices were falling fast in reaction to the Federal Reserve having created an artificial bubble of money in the late 1920's, which was artificially driving up prices on everything else, most noticeably the stocks on Wall Street. (Our canary in the coal mine.)

And then the Government stepped in to "help".

Kill the pigs, Save the day

In that day, one notorious proposed and implemented plan to keep prices artificially high was to kill pigs, cows, chickens and plow under fields of grain.

For they were smart Ivy-League scholars who had studied the economic Laws of Supply and Demand.

The white-collared government workers knew that if they could destroy a large part of the farmers "supply" of food, that would be a good thing for farmers, because that way, people's unending "demand" to eat would keep the price high on the now scarce food.

Our Farmers of 1932 were luckier than Ukrainian Farmers of 1932

Lucky for our farmers that our socialists in government did not go completely overboard as the socialists in Russia's government did, when they took every kernel of grain available, even seed grain, in the entire Ukraine and suffered 7 million men, women and children Christian farm families to die of starvation in the Holodomor.

The Jewish commissars reduced the food supply, not just by destroying the food, but by destroying the people who made the food as well.

I suppose that the Russian farmers were appreciative of the Jewish commissars, now that the competition from the Ukrainian "Breadbasket of Europe" was completely destroyed.

Economic theory of FDR's Cash for Pigs

Here in America, let's say you are old McDonald who had a pig.

That pig represents your wealth, your future income.

Before the Great Depression, if someone had bought your pig, you would have had the cash to buy one of those new fangled radios that factories had just started building.

The radio factory worker was happy back then, because he got to eat a pig at a reasonable price.

But during the Great Depression, as prices started adjusting back to normal levels, the FDR administration thought that the factory worker should still be paying you more for your pigs, so FDR buys the pig from you at a premium, and destroys it.

Cash in hand, you can still buy your radio, so you believe you are happy. After all you tell yourself, you could have been one of those Ukrainian farmers.

The radio worker though finds that pigs have become quite rare.

Not finding many pigs to buy, the law of supply and demand kicks in raising the prices higher.

As expected, the price of pigs rises back to the artificially high prices of pre-Great Depression times at a time when many are out of work.

(Side note: Artificially propping up the salary of remaining radio factory workers resulted in, you guessed it, even less factory workers working harder and more unemployed.)

But his over-time pay has been cut way back and he is afraid he will lose his job as his next door neighbor has.

He decides that he cannot afford pigs anymore, so he starts to eat beans.

For sure, the unemployed factory worker was already eating beans.

You, the pig farmer, find yourself now on government life support and your former customers have started buying from the bean farmer.

"The government is here to help," they say.

And you say sarcastically, "Thanks a lot!"

You, the farmer, finally decide that the money the government gave you for the pigs is not going to be spent on a radio. Why, you had lived all your life without a radio, so why buy a worthless contraption when your pigs are gone and you are scraping by on growing beans, if you can make the conversion in the first place?

And the radio factory guy lost his job anyway, because you never bought his radio.

Did Government help anyone?

All government did was ramp economic activity down more than it would have been.

The pig was real wealth that the government deliberately destroyed.

Now people had to work harder to replace it. -- AND THAT is where people let their ignorance shine, with the help of socialists misleading them!

If I have gangs break all the windows in town, the town is not richer, since everyone will be put to work making glass, something they already had made, instead of something else they needed or wanted, which would now not be made.

If I have an enemy who blows up all my buildings, I don't thank him, because now we have the opportunity to build all new, prettier homes, giving people lots of work in the rebuild.

The same with FDR's crazy plan -- killing all the pigs did not help matters, it made things worst.

Doesn't matter if there is more work from broken windows, blown up windows or killed pigs, we are still poorer as a society than we were before.

Economic theory of Cash for Clunkers

Now Obama is showing the same lunacy as FDR. It is in the blood of socialists.

Obama is paying money to destroy working cars, so that people can buy another working car.

How does that add to America's wealth? -- Answer, it doesn't any more than breaking a perfectly good window, so that you can buy another good window is good for you.

Oh there are "reasons" given that make it sound logical.

The "our gas usage will go down" solution

The cars that are being destroyed are nearing their end of life anyway.

The requirements are for the new cars to get 4 to 10 MPG better than the old one.

If without the Cash for Clunkers program, they would have been driven for say 3 more years, at around 12,000 miles per year then 36,000 miles divided by 10 MPG equals 3,600 gallons of gas saved.

Now gas at $2.50/gallon means that the total cost saved on gasoline is $9,000.

Adding the government discount of $4,500 to the $9,000 makes $13,500 or about the price of a negotiated, bare-bones Toyota Corolla for f-r-e-e!

Quite an inducement to the car buyer -- a brand new car that would be paid off in three years without spending anymore money than you would have spent on your old clunker anyway.

(Don't forget that the ol' clunker still had some value as a trade-in anyway)

But you are spending the same, because your three year car payment note exactly matches the reduction in gasoline usage.

So where are the real savings?

Did we forget that it takes energy to build a car?

How much of the $13,500 price tag for the new car, to save $9,000 in gas, is spent paying the gas bill of:

  • gas for the steam shovel that digs the iron ore out of the ground
  • gas for the energy to smelt the iron ore
  • gas to make all the plastics in the car (Plastics is oil)
  • gas to make all the electronics in the car
  • gas to run the metal stamping presses
  • gas to drive all the auto workers to work (from the auto workers' salary)
  • gas to drive all the auto worker's wives to the grocery store (from the auto workers' salary)
  • gas to heat and air condition all the auto worker's homes (from the salary of the auto workers)
  • gas to heat and light the auto factory
  • gas to drive the completed car to the dealer

    In fact, everything about the new car is either the cost of the true costs of the raw materials used in the car or in the equipment to make the car - versus - the true costs of the energy it took to shape the raw materials in the car or the energy it took to shape the equipment used to make the car.

    I can probably easily say that $9,000 of the cost of the car was in energy and the raw material costs were only $4,500.

    Someone tell me where I am wrong.

    But I can see a possibility that it took as much gasoline to create the new car as was gained in better gas mileage.

    Remember, the clunker would die a natural death anyway three years down the road. It would have to be replaced, but not as often.

    The "It puts people back to work" solution

    Well, if the average auto worker gets paid $35/hour and the average manicurist gets paid $10/hour, we could put more than three times as many people to work giving all Americans manicures.

    But in a give and take world, we forget that $13,500 going to an auto company is a lot of hamburgers, steaks, football or opera tickets, cell phones, bathroom accessories, and dental braces not being bought from all the companies that make these items.

    In fact, it will make everyone else's Depression into a Great Depression.

    Humanitarian Problems with Cash for Clunkers

    At least when you break the glass of a middle-class guy, he can afford to replace the glass in his window.

    But what if you destroy the clunker?

    Who loses?

    Frankly, the very people who voted for Obama by 96% -- black people and other minorities.

    A greater percentage of blacks and Hispanics desire a $1,000 to $4,000 car, than the people who did not vote for Obama.

    These poor drive the very cars that heartless Obama wants to smash.

    As a result, with a pervasive Cash for Clunkers program, the poor will be priced completely out of the market.

    Charitable car donations were already down 40% as a result of the depression, even before the Cash for Clunkers program.

    Not to fear, Obama has got mass-transit in store for them -- the dream of socialists for decades.

    Easier to control people if they cannot come and go as they please.

    Poor blacks and Hispanics are not the only one affected

    Some of the poor blacks and Hispanics will not have the option for mass-transit and will have to compete for the more expensive cars above the $4,500 level.

    And if supply and control works as it always does, these cars will be selling for a premium, increasing the prices for the normal used car buyers.

    But a double whammy for the poor, poor black man Obama says he cares so much about.

    Auto workers making $35/hr are happy, and upper middle class workers who can afford a brand new car are happy, but poor blacks will be found sitting in the back of the bus.

    All thanks to our new FDR.

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