In the hypothet, Mr. Smith wanted a new car. Perhaps he was tired of driving the Jeep. Perhaps some of his neighbors had shiny cars with all the bells and whistles. But does Mr. Smith's desire for a new car really equate to true economic demand?
It has been noted by supporters of the Clunker Program that "people who wouldn't otherwise have been able to afford new cars have been able to buy new cars. Isn't that great?" No, actually, it really isn't great at all. What the government is doing here is indulging peoples desires.
Again I ask, is the "purchase" of a million or so new cars, supported almost exclusively by the borrowing of the U.S. government and individual "purchasers" true economic demand? It is not because there is no current or past economic production to stand behind the desire of the individual "purchasers", only debt. It is only simulated demand.
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