As my tweets reflect, I’m not a big fan of the Cash for Clunkers program. Economically, destroying perfectly drivable cars that have value, particularly during a recession, makes little sense. The United States is a country where jobs continue to be shed, real incomes have been on a downward slide since late 2006, people are in debt up to their eyeballs and savings rates leave much to be desired. Asking people to consume and take on more debt makes little sense. That is, until one remembers the economy is based on 70% consumption. Then, it makes perfect sense.
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Anyone whose paid any attention whatsoever since the financial crisis hit, knows that an economic mix of consumption and debt, like the U.S. has, is unsustainable. People should be paying down their debt and saving. Meanwhile, we have government leaders over the years who advocate going to the mall or destroying property to buy a new car.
Of course there are Americans who like Cash for Clunkers; it’s a recipe for a free rebate check up to $4,500, allowing a person to trade up to a car they like better. But once again, nothing is free when it comes from the government. Initial “Clunkers” funding was $1 billion, an amount that has already been used up. An additional $2 billion has been passed by Congress to extend the program. So, all of those “free” rebate checks are costing taxpayers a bare minimum of $3 billion. Considering it’s likely money we don’t have, like most new government spending, we’ll finance the program by printing new money, borrowing and/or taxing. Printing money causes inflation, an invisible tax on everyone as prices rise, borrowing increases the debt burden on every individual as well as puts upward pressure on the interest rates on American debt (making it more expensive for taxpayers to pay off) and taxing goes without saying.
While many industries struggle, why might the auto industry get a boost from a government program? Oh yes, that’s right; the Treasury owns 60% of General Motors, and a chunk of Chrysler. They backstopped these companies despite poll after poll of Americans opposing the idea. Like Cash for Clunkers, I’m not a huge fan of polls, either. They’re often misleading, and questions can be asked to drive a person to a particular answer. But, people are tired of their representative government being completely unresponsive to their wishes.
The Cash for Clunkers moniker exposes a disappointing marketing phenomenon: people are dishonest to sell things. “Clunkers” portrays the image that these cars are disposable, worthless piles of junk. In fact, the drivability or quality of these cars to be destroyed is irrelevant in this program. Cash for Clunkers is all based on fuel economy. If the “clunker” gets 18 miles per gallon (MPG) or less, bring it on in.
To top it off, a portion of the “free money” being distributed for new car purchases goes toward the purchase of foreign automobiles. Toyota gives the administration a tip of their cap. What’s a little inflation, debt and taxation to Americans when it comes to helping out foreign companies?
Cash for Clunkers is yet another example of government selecting winners and losers in the marketplace. While it gives automakers a short-term sales bump, it is highly likely the program will rob future car demand. And when I say short-term, I mean short-term. According to the research firm Edmunds.com, interest in the program peaked July 29th as people rushed to “act now” before funding ran out. Since, demand has sputtered. Based on internet-shopping data, Edmunds reports if current trends continue, auto purchase intent will fall back to pre-Cash for Clunker levels by August 20.
Based on Edmunds surveys, the first billion dollars of the program probably stimulated only about 50,000 sales that would not have otherwise occurred.