Monday, November 07, 2011

 

Cash for clunkers caused used car prices to rise- That which is unseen.

Used car prices continue to rise, blurring value case for consumers

“Would you buy a used car from that guy?” was the old refrain. Now, that guy is desperate to buy your car.

Prices for used cars have been on an unprecedented upswing, and analysts do not foresee a leveling off during summer. The conditions are upsetting the long-held assumption that used cars are always better deals than new ones.

Poor and minorities hardest hit.

Stephanie Samuels went shopping for a used car but found prices for a late model car nearly as much as for new—and financing for the new car easier to obtain. "I was looking at buying a 2009 Ford Focus which was going to cost me about $16,000," Ms. Samuels said. "But for a couple grand more I could get a new Focus and a better interest rate. So now I am shopping new."

On Friday, wholesale auto auction house Manheim, a unit of Atlanta-based Cox Enterprises Inc., said its index hit 126.6 in April and adjusted wholesale prices of used vehicles rose 5% from a year ago. It's the highest level the index has reached since it started tracking prices in January 1995. The index sets its baseline of 100 at January 1995.

What can we learn from this episode of senseless destruction. That the parable of the broken window is true and that Keynesian stimulus is at best limited and at worst destructive.

In this case that which is seen is the government funds which went to buy the cars going into the hands of the sellers and then moving into the economy. That which is unseen is the rising prices of used cars which disproportionally affects the poor.

Now we seem to be absorbing this basic economics lesson.

So were the naysayers right? It seems so. A newly updated analysis from economists at Resources for the Future finds that the actual benefits of the program were pretty meager. The paper examined U.S. car sales using trends in Canada as a control group, and estimated that about 45 percent of cash-for-clunker vouchers went to consumers who would have bought new cars anyway. In the end, the program boosted U.S. vehicle sales by just 360,000 in July and August of 2009 and provided no stimulus thereafter. What’s more, the program increased average fuel economy in the United States by just 0.65 miles per gallon.

Now, there’s a case to be made that that’s better than nothing. For one, handing $3,500 vouchers to people who would’ve bought cars anyway still counts as stimulus. What’s more, as the RFF paper found, the program reduced overall U.S. carbon-dioxide emissions by between 9 million and 28.4 million tons. But even so, that implies that it cost between $91 and $288 per ton to get those reductions — a pretty lousy bargain as far as carbon policy goes. Even if the program did have some benefits, it’s hard to argue that it was an efficient way to dole out cash.


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