Not only is the “Cash for Clunkers” givi…

Not only is the “Cash for Clunkers” giving money to the car companies, it’s creating deadweight loss in the used car market.

Under the federal law authorizing the program, dealers must disable the engines of the traded-in clunkers so they can’t be resold and wind up on the highway. The most common method is to drain the engine’s oil and pour in sodium silicate, which “seizes up” the pistons.

So the dealers disable the engines and sell them to junkyards, who are required by law to crush and shred the cars within six months. So, first of all, they’re destroying the engines of perfectly good cars making them useless as cars, which reduces the supply of used cars on the market. By definition cars must be “drivable” to be eligible for the rebate and therefore could be serviceably resold.

Secondly, they make the cars much less valuable for scrap. According to the article, the engine is worth some 70% of the money that can be recouped from a scrapped car. And, of course, the junkyards can’t test anything (the article cites automatic transmissions) to make sure it works before pulling it out and selling it. So the overall supply of used parts is diminished, as well as the reliability (you’ll never know if the part you got from a junkyard “clunker” is good until you’ve already installed it).

This is all on top of the fact that they’re arbitrarily labeling functional and useful cars that don’t meet an arbitrary standard as “clunkers”. I guess the idea is any car that isn’t new must be a clunker (i.e. bad).

A case could be made here that this is an attempt to weaken the used car market to the benefit of the new car market. I guess the idea is that if there are fewer used cars, then folks that normally wouldn’t buy new cars will do so now. That may be true for a thin slice of the economic spectrum but for the rest of us who continually buy used cars, we might should be angry.