Opportunity Costs for Dummies

As we discussed during a previous post, we noted that our betters in charge do not have the slightest clue as to how people actually respond with their own money when an economic incentive is thrown their way. Economics just doesn't stand still. If it did, we could pick and choose legislation as we now do , make it law and everything just might turn out all right. But since there is nothing static in our economy, the best that we can do is set sensible guidelines that will encourage known trends to move in an expected direction. Not understanding this is the reason why there has not been any other incentives from the 787 billion dollar stimulus program that even appeared to cause any visible economic movement.

This 'Cash for Clunkers" may even be more illustrative of just the total madness that we are now witnessing. From the Ace of Spades, Video: Cash for Clunkers Destroying Perfectly Good Cars. This should bug you.

For direct viewing of the video, http://www.youtube.com/watch?v=waj2KrKYTZo.

Now, from this video, there appears to be a pretty decent late-model Volvo having its engine destroyed by operating at high constant rpm's after pouring in a sodium silicate additive. It's obviously a pretty good car because it took so long to burn up the engine. It really is tough to watch.

'Cash for Clunkers' should be named the Intentional Asset Destruction Act of 2009. That Volvo was an asset, if not for the previous owner, then at least for someone who would like to drive a decent used car like we saw in the video. It didn't appear to be worn out and past its useful driving life. And even if it was ready for the scrap yard, in salvage the engine parts would still have some value in supplying repair parts to other car owners. However, it's value is minuscule after being burned up, and therefore what we have actually done is destroy just a little bit of wealth.

This madness apparently will continue. We'll burn up good car engines, deny farmers a consistent water supply in central California, and tell Alaskans that they cannot thin out predators in their own back yards. But just consider the opportunity cost that is incurred in both time and money by pursuing economic growth in the wrong direction. We now have lost six months and we will see more lost time and money because most funds in the stimulus went to public sector programs that do not create wealth. This is opposed to stimulus to the private sector where it would have done more good by creating a larger, more active economy. I should say, more good, only if the private sector incentives make sense. Otherwise, if we see more of this same kind of logic in legislation, we are going to have to create the 'dummy version' about sunk costs.