Looks like I was beaten to the punch before I got home, but I was glad to see Cole's rebuttal to his new guest blogger's misguided at attempt running the Obama administration's Cash for Clunkers programs through the Econ 101 bullshit grinder. I only have a couple of things to add:
1. It isn't "simply a matter of supply and demand," as one of Kain's linked sources insists. It never is. If the last ten years of Wall Street shenanigans have taught us anything, it's that consumer demand can be egregiously manipulated by any number of factors ranging from unrealistic projections to fudged numbers to outright fraud. What it is is a simple matter of examining the data. Take a look at the used cars that are fetching the highest prices now: BMWs, Cadillac Escalades, Acura MDXs. This isn't a sign of any shortage of used cars on the market but a sign of dealer prices rising to meet demand as more middle- and upper-middle class consumers opt to purchase a used BMW instead of a new one, or trade in their late-model low-mileage X5 for a high-mileage older model in return for lower payments and/or reduced insurance premiums.
Now, if Dodge Neons or Chevy Cobalts---that is to say, crappy subcompacts that poor and working-class people buy when they can't afford a new car---were also fetching a premium at the dealership, we might be able to infer an overall shortage of used cars. But because that's not happening (trust me on this; I had to sell my late father's 2002 Cavalier---Blue Book value $4,200---after he died last year, and no one but Carmax would touch it for more than a grand), we can just as easily conclude that this is not a classic case of commodity shortage driving prices upward but changing consumer spending habits driving prices of certain used-vehicle segments upward. Unless you believe that poor people go shopping for used BMWs and Acuras.
My guess is, used car sales are up, way up---they usually are in a recession---and dealers are taking advantage of the increased demand for certain kinds of vehicles by marking prices up on the models they're most likely to flip quickly. And in this case, they're the most upscale models on the dealer lot since the folks with money are buying used instead of new, and the po' folks ain't in the market for used Corollas, or Cobalts, or anything else right now.
Which is my long-winded way of saying it's not scarcity that's driving prices up, but gouging.
2. I think where Kain's argument fails is in his basic premise, which relies on this prototypical classroom boilerplate:
[M]oney isn’t wealth. Money is at best a measure of wealth, which actually consists of goods. Money retains its value as long as there are goods to be traded for it. When the goods disappear, the economy grows poorer, regardless of how the money is shuffled around.
That may have once been the case when people were trading cows for magic beans, or among certain Nevada primary voters in the present day, but for the rest of us in the real world who don't rely on a barter economy, cash equals wealth, regardless of the scarcity of goods to trade for it, because one can't acquire those goods without cash in the first place. In addition, one no longer needs to engage in the trading of goods or equities to amass greater reserves of cash. Ever heard of hedge bets or credit default swaps?
Second, for all intents and purposes, there is no such thing as "scarcity of goods" anymore. This might have been the case in the mercantilist economies of Adam Smith's time, when trading relied on primarily domestic sources, and imports were minimal and mostly limited to luxury goods. But thanks to the awesomeness of globalization and dozens of international free-trade agreements, the notion of scarcity---at least if we are discussing consumer goods, as opposed to raw commodities such as oil or minerals that can't be "manufactured" anywhere*---is virtually obsolete. If there was a shortage of widgets in the United States in the 19th Century, and the cost of imported widgets was prohibitively expensive due to high tariffs, then yes, you had a domestic scarcity of widgets. But now, if I can't find widgets in the U.S., I can get them cheap from China, or India, or the Seychelles, or wherever. It's because of this lack of scarcity that prices for all manner of goods nowadays, ranging from clothes to computers, can be kept absurdly low, which is great news for consumers but bad news for workers in consumer economies who find their jobs outsourced and their wages depressed.
Finally, it is obvious on its face that the statement
When goods disappear, the economy grows poorer
is unmitigated 18-Century horseshit. When money becomes scarce---as in, when it gets hoovered out of the general economy and into the hands of fewer and fewer people, the economy grows poorer as greater numbers of people have less cash to convert into the most commonly traded goods and services. That's what's happening in America right now, and supply and demand ain't got nothin' to do with it: a rigged financial system and a regressive tax code, however, do.
3. If Cash for Clunkers failed at all, it wasn't due to its economic intentions---which, as Cole mentions, were narrow in scope and which succeeded spectacularly---but its environmental costs, which didn't really factor in the carbon costs of replacing cars that were expensive to drive with cars that got better mileage and cost less money to operate initially but which could be driven economically for far greater numbers of miles, which in turn would encourage owners to drive more frequently---increasing their carbon output on the process---and depress public demand for more efficient, alternative forms of transit such as buses, trains, etc. There was also the matter of scrapping, disposing and recycling all of the clunkers and their assorted toxic by-products, e.g., tires, batteries, gear lubes, et al, which carried considerable costs in energy and money, not to mention secondary economic costs like the added wear and tear to roadways resulting from newer, more fuel-efficient cars being driven for greater numbers of miles.
If anything, however, I think that Kain's argument against Cash for Clunkers really highlights how utterly inadequate the conventional doctrines of neo-classical economics really are to explain the workings of today's gamed and ginned-up global economy. It just ain't about supply and demand anymore---there are too many other "market externalities" to consider, as they say these days---and frankly, it hasn't been for decades.
* Markets in these sectors of the economy also have long and storied histories of fraud and manipulation. See here and here and here.
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Vitelius