Tuesday, August 4, 2009

Cars, Cars, Cars....

As some of you know, cars are sort of a hobby of mine. I really enjoy a nice automobile, but the few years I spent in the car business convinced me that it is an incredible folly to purchase a new car. The depreciation curve is so steep on a new car that it's almost impossible to justify the purchase from an economic standpoint.

For example: In 2000, someone paid about $20,000 for a brand-new Mercury Sable. It's a beautiful car, with leather seats, a power moonroof, premium stereo, CD player, bigger engine and pretty much every luxury option available on that model.

That original owner drove it for two years, put about 30,000 miles on it and then decided to sell it on e-bay. That's where I first saw it, and in October of 2002 I paid $9,200 for it. Subtract $9,200 from $20,000, and you'll see that the original owner paid about $5,400 a year ($20K, minus $9,200 equals $10,800, divided by the two years of ownership) for the privilege of driving a new car.

The car now sits in my driveway, still running strong with about 96,000 miles on it. I've had it for seven years, so my capital cost is about $1,300 a year ($9,200 divided by seven years). That's $4,000 less per year TO DRIVE THE SAME CAR. And that cost will decrease if, as expected, I keep driving it another few years.

(And if the original owner had kept it this entire time, their costs would still be higher. $20,000 divided by nine years is still $2,222 per year.)

The same scenario plays out over and over again, everywhere in the country. Almost any vehicle can be purchased - two years after being sold new - for 60% or less of its original price. And with most cars now built well enough to run to 150,000 miles or more (General Motors products excepted), those first 30,000 miles just don't make much a difference in the amount of time a car can continue to function for you. I may never experience that "new car smell," but I also don't experience the "new car payment." It's a trade-off I'm happy to make.

Which brings us to the "Cash for Clunkers" program currently underway, in which the government gives you a chunk of cash - $3,500 or $4,500 - to turn in your old vehicle and buy a new car with better gas mileage. This is economic folly on a number of levels, the simplest of which is the fact that the government doesn't just "have" money to give these new-car purchasers. That money was either taken from you and me in taxes, or worse yet, it was borrowed as part of this year's $1.8 trillion deficit.

Secondly, the program requires all of these trade-ins to be destroyed. So, instead of 500,000 or so used cars hitting the used car market, they'll go to the junkyard instead. Basic supply-and-demand tells us that a decrease in the number of available used cars will drive UP the price of the remaining used cars. That makes it more difficult for the people who can't afford a new car - low-income families, college students, two-worker families that need a second vehicle - to purchase one.

Bottom line: We're going to spend about $3 billion of money that is either borrowed, or taken from one taxpayer and given to another, to help people make a purchase that is most likely detrimental to their own financial health, while at the same time making it more difficult for those on the lower economic rungs to afford their transportation needs.

And even the car manufacturers and dealerships who are loving the selling spree aren't really being helped in the long run. By artificially accelerating consumer's buying cycle with "free" money, almost every sale made this year is a sale that WON'T be made next year.

Makes you wonder if any of the people who came up with this program studied basic economics in school.

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