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January 13, 2009

Automotive bailout

So now we are giving billions of dollars to the automotive industry. With this money they will come up with some new efficient car designs and do all the navel-gazing they need to become strong companies once again. Soon people will leap at the chance to buy a new GM car.

An alternative plan:
$1000 tax rebate for buying a new car
$3000 tax rebate for buying a car that gets over 40 mpg
$10,000 tax rebate for buying a plug-in electric car.

Why this plan? As it stands there is no short-term incentive to build cars people want and no long-term incentive to build efficient cars. They can spend it on whatever they want, build a few crappy electric cars, sell SUV's when gas prices are low and go into bankruptcy the next time prices rise. With my plan they would have to convince a lender that they have an efficient product people want. If the lender sees a good product and knows that the tax rebates create a strong market then it will loan the automaker enough to retool the factories.

This still doesn't help with overproduction. Before oil prices spiked and the economy tanked there was an overabundance of vehicles, because the market is only so big. Maybe the automakers should encourage people to drive crazily to increase crashes to increase demand.

Wealth disappears?

What was lost in the stock market crash of October, 1929? "Still, most academic experts agree on one aspect of the crash: It wiped out billions of dollars of wealth in one day, and this immediately depressed consumer buying." - http://query.nytimes.com/gst/fullpage.html?res=9B0DE4DC1F3BF932A15753C1A961948260&sec=&spon=&pagewanted=2

How exactly does wealth disappear, and especially disappear because of a lack of confidence? The day after the crash, were there fewer factories? Fewer automobiles? Fewer farms or crops in the field? Less gold in the bank? In any practical sense nothing changed except there were fewer dollars. There weren't really fewer dollars, either, because no one burned up their cash. So what was wiped out?

What disappeared that day was all of the hypothetical dollars. These were all of the dollars that people were counting on other people to give them in the future for something that might or might not exist. For example, if you and I each buy a house for $100,000 we can then sell them to each other for $1,000,000. Did we just make $900,000?
-Yes, IF we can sell to someone else at that price. The last one to pay is the sucker. See the housing market of 2008.
- No. We got no physical goods from this process. What we did was cause inflation, because now there are all of these extra dollars and no additional goods to purchase with them.