August 26, 2010

The Power Of Incentive

Humans do everything we do because of some motivation.  There is always a perceived incentive to our actions.  Be it direct or indirect or tangible or intangible, we do things because of incentive and motivation.
The Government is completely incapable of creating anything.  They can no more create demand than they can create gold from lead.  They are capable of motivating people to take action, and they can create powerful incentive; but they cannot create demand for a product or service.
Let me explain my meaning. If you were beginning to ponder buying a new vehicle, if it had already been on your mind, or if your present vehicle was of a certain age and the government declared that all people who were going to trade in a car would get extra cash back on the purchase of a new car; that could incentivize or motivate you to action.  But if you had just purchased a car, or if you were dead set against buying a new car, then that announcement would not create that demand for you to take action.  The demand has to be there first.  The numbers prove this out with Cash for Clunkers as well as the home buyer credit that just happened.  Those people were already in the market, or leaning towards making a purchase.  The Government only pushed them to take action on a decision they were already contemplating.  The news just came out that new home sales and new car sales are both down from prior months and the yearly expectation is no better than last year, in fact it looks a little worse.
To put it another way; would you rather sell one hot dog a day for thirty days, or sell 30 hot dogs in one day and none for remaining 29 days?   The net result is the same, sure the one day profits look great on the one day, but the long term outlook is identical. How about if you spent a thousand times as much money to sell the thirty hot dogs one day as it would have cost to sell one a day for thirty?  This is what we are now seeing in the economy, except the government spent a great deal of taxpayer (that is, “our”) money to incentivize sales that were likely to happen anyway.  The true net cost per auto sold is much greater.
This is because the Government cannot create anything; all they did was incentivize a temporary shift in resources.  They influenced the “When” not the “If” ; they BOUGHT themselves some time.
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