Sunday, August 12, 2012
A true-life parable from Beldar on low interest rates, "free money," and Democrat logic
In July, for the first time during this millennium, I bought a car. I'm very happy with it and with the transaction by which I acquired it: I test-drove at the dealer closest to my home, did further comparison shopping and took competitive bids on the internet, and then struck a fair deal with no game-playing by me or the salesman I dealt with. But when I was arranging the paperwork, one of his colleagues was tasked by the dealership with selling me something I was not much interested in buying — one of their various extended warranty packages.
For some people and on at least some kinds of purchases, extended warranties can make economic sense. In my circumstances, for a purchase like a car, they don't: I'm at a lower than average risk than many other car owners whose vehicle use is more demanding than mine, I can usually tolerate the kind of cash flow disruption caused by unexpected car repairs, and when you add in the transaction costs and profit margin that's necessarily part of the price for an extended warranty, it just makes more sense for me to rely on the original manufacturer's warranty (which on this vehicle was already excellent) until it runs out, then to self-insure.
So I knew going into the conversation that there was zero chance that this fellow could persuade me, even though he was charming and professional and knowledgeable. I cut through most of the chase and told him my decision, and my rationale for it, right away. He didn't argue with my facts or logic.
But he had to at least give it one last try. So he pointed out that I could finance the entire up-front cost of a multi-year extended warranty using very attractive manufacturer-provided financing at less than one percent interest! "That's like doubling your original manufacturer's warranty using practically free money! It's too good a deal to pass up at those rates, even if you normally wouldn't buy the extended warranty package."
(I'm thinking to myself: Either this guy is a Democrat, or he thinks I think like one. He thinks I'm an Obama voter.)
"So," I asked, "this 'free money' — that means if I finance the cost of the extended warranty package, the manufacturer will loan me the entire cost and I'll only ever have to pay 1% of it back, and they'll just write off the rest at no charge to me, is that it?"
He looked at me with puzzlement; I think he was wondering if he'd overestimated my financial acumen. "No," he replied, "You'd just pay it back over several years' time at this very attractive interest rate."
"So I would still have to pay back every single dime that I borrow, plus a little more," I continued, "in order to buy something that I really don't want anyway and that I otherwise couldn't justify buying. Is that what you're telling me? And you think that because the extra I'd have to pay back is just a little more instead of a lot more, that makes this too good a deal to pass up?"
The confusion disappeared and was replaced with a moderately respectful grin. He pushed the paperwork to my side of the desk. "Check here and here to acknowledge that I explained the extended warranty options to you and that you declined them," he said, "and we're all done." I did, and we were.
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(1) Gregory Koster made the following comment | Aug 12, 2012 1:49:25 PM | Permalink
Dear Mr. Dyer: Convert that into a sixty second TV ad, and Mitt Romney would have something...We need more thinking like this. Press on!
(2) Sammy Finkelman made the following comment | Aug 14, 2012 4:39:39 PM | Permalink
It's true - you would probably have to pay the whole thing back at one time or another - but the Federal government of the United States doesn't!
It just needs to pay the interest.
Since nominal GDP should grow by at least 3% a year - and that is low - 3% is maybe a good estimate for real GDP growth - the debt can increase by 3% a year without adding anything to the burden.
We no more need or expect to pay the debt than the moon will fall into the earth or the earth into the sun. We are in orbit!!
The problem now is simply that the debt has increased too fast, and for no reason.
Fortunately anyone who speculates against the dollar would have no place to put his profits.
I was attracted by the title of the post, but disappointed when there was no evidence offered in your parable that the salesman was a democrat, that he thought you thought like a democrat, or for that matter that democrats would in any way be more susceptible to this particular sales pitch. It was pure parenthetical supposition on your part. On matters of fiscal responsibility and acumen, I am mindful of the young Republican sorority sisters I dated or met along the way who did not realize that in order to be able to write checks, SOMEone (like Daddy)had to first put money into the account. I suspect they would be equally susceptible to the pitch. On the other hand, I suppose they might not be AT the dealership in the first place.
It's a fair cop, guv'nor. You got me bang to rights, and no mistake! 'Twas indeed supposition for which I have no direct evidence, Eric. I concede, too, that there are overspenders in both parties, and that's been true for a long time.
To whatever extent it may be fairly said that each party's presidential tickets and other politicians reflect their constituents' preferences, though, there's loose circumstantial evidence that Democrats tend to permit, overlook, and indeed rely on overspending even more than Republicans. One need look no farther than the series of trillion-plus dollar budget deficits that Obama has run up to conclude that recent Democratic overspending has set new and depressing records. I may well have been wrong about the particular individual who was trying to sell me the product I didn't want. But I've explained the mental sequence that led me to the inference I did in fact draw on the spot, so each reader can do with that, or think of it, what he or she wishes. Thank you for the discerning comment, old friend; very nice to have you "drop by." I'm sure that a large portion of my few readers would value and welcome your contributions in comments here, as of course would I.
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