Monday, August 24, 2009

Cash For Clunkers - A Bad Idea

I will admit that I am not an economist, so those far wiser than me can likely refute some of what I say here. Still, with the CARS program, commonly known as "Cash for Clunkers", ending today, it seems a good time to reflect on this government stimulus plan.

When the government bailout of General Motors and Chrysler Corporation took place, I was skeptical. After all, these are companies that had failed for a variety of reasons, most of them self-inflicted. So while I understood the need to try to save jobs, why reward these firms from the public till, for poor management decisions? We had already bailed out the banks, who turned around and rewarded their executive teams with big bonuses from the emergency taxpayer monies. Now we repeat the bailouts for GM & Chrysler?

Then there is the fact that even if these companies survive in the short term, what will change in the long term? What would they do differently than what they had done to arrive at such a sorry state of affairs? The real problem is people are not buying their products in sufficient quantities to sustain their businesses. With unemployment soaring, even if people want to purchase one of their cars, how can they do so? It is a bigger problem than paying the current bills coming due.

So now we come to the CARS program. I understand the desire of the government to get us all into more fuel efficient automobiles. I also understand the fact that this program creates a short-term spike in demand, which is good for the economy in general, and for the automakers specifically. It also is one stimulus plan that actually addresses the demand side of the equation and does something for the average person. But at what cost?

As a matter of principle, I am opposed to taking tax money from all of us to subsidize the purchase of new cars for a few. Why should any of us pay for our neighbor's new vehicle?

I also believe that the program is flawed in that it doesn't have any requirement that the rebates apply only to cars manufactured in the United States. We need to stimulate the economy at home before sending the tax monies to companies in Japan, Korea, and Europe. Sure, our economies are all interconnected, but for our public tax dollars, let's make sure they go to work at home before sending them with an express ticket to Tokyo.

Another issue is that many of the cars deemed to be "clunkers" are perfectly serviceable autos that are much better than many folks can afford to purchase. It seems extremely wasteful to purposefully destroy a perfectly good car that could help someone get to their job. It would be better if these vehicles were donated to charity rather than ruining their engines and crushing them. Sure, it doesn't get them off the road, but they won't last forever anyway. In the meantime, they could do much good.

And what about the parts market that will be negatively impacted by this destruction? Used replacement parts are one way that families can save money on repairs. Is this right to destroy what may be difficult to locate parts? This can conceivably create price inflation for those parts as a function of a more limited supply.

It isn't the proverbial bed of roses for those taking advantage of the program either. In hard economic times, how many people who have their cars already paid for, will rush out to buy a new one under this program, only to lose their jobs and be left without any car at all. Even if they don't become unemployed, a big downside to this is that instead of having a perfectly good auto with no payments and lots of good miles left in them, people now have locked themselves into a new monthly payment.

Then there is the fact that while the program was running, there was an expected spike in demand. But this is just a temporary spike. If someone was going to buy, they would likely do it during the program, and not wait until it expires. Artificially induced demand dries up once the stimulus for the demand ceases to exist. Will people also hold back on purchases waiting for an encore of the program?

Overall, I have come to the conclusion that this is a misguided program that likely began with good intentions, but the net result is not worth the cost.

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