"Cash for Clunkers" Is Really Economics for Dummies
In confronting a crisis of epic proportions, one can do the heavy work of crafting a well conceived, comprehensive strategy. But why bother, when short-term gimmicks are politically more feasible. Thus we have this absurd counter-cyclical gimmick, the so-called "cash for clunkers" boondoggle, being offered by the Washington establishment as their "answer" to the massive problems confronting the automobile industry, not only in America but globally as well.
Throughout the world, a vast car manufacturing infrastructure has been constructed at great expense and high leverage, designed for global demand of almost one hundred million cars per year. However, the Global Economic Crisis has unleashed massive demand destruction in many key categories of consumer durables. In the case of autos, worldwide demand is currently just above fifty million units per annum, rendering it almost impossible for most automobile manufacturers to generate a profit, whether they are located in Detroit, Tokyo or Stuttgart. The challenge is massive, global and complex. Yet, the geniuses in Washington have come up with a solution that is small, local and simplistic beyond all measure.
The concept of the "cash for clunkers" program is very simple and superficially enticing, as are most gimmicks. Trade in the old jalopy that was on the verge of being junked anyways, since it had no trade-in value on the open market. The federal government will fund a $4,500 credit that will go towards the purchase of a shiny new automobile, thus stimulating the economy. As to be expected, the response from those with dilapidated vehicles on the verge of being dropped off at the local scrap yard has been substantial, in the process depleting the original one billion dollar appropriation for the program. Also not a surprise, the politicians rushed to provide another $2 billion for the program, to the delight of car dealerships across the land.
While on the surface the program may be seen as an economic stimulus initiative at work, no one should be fooled into believing that this is a carefully designed, long-term strategic answer to the worst economic contraction to occur in the United States since the Great Depression. And most notably, the supposedly strong response to the program actually betrays its supercilious essence. For one thing, four of the the five most popular cars being purchased under "cash for clunkers" are foreign brands, meaning the impact on the domestic auto industry is minor at best.
Beyond the fact that domestic car manufacturers are only partially benefiting from the program, it must also be remembered that every dollar of credit being distributed under the program's auspices is from U.S. taxpayers, at a time of massive, multi-trillion dollar deficits. Using borrowed money to subsidize the purchase of foreign made automobiles, along with domestic models, does not make much economic sense. However, there is another aspect to this program that has thus far escaped scrutiny.
A major driver of the Global Economic Crisis was the stampede of consumers who were enticed into buying new homes they could not afford, due to the Federal Reserve lowering interest rates beyond prudent levels. This created a real estate bubble, and we all know the consequences of that. Now, with "cash for clunkers," it just may be possible that many of the consumers taking advantage of the credit largesse from Washington are those with incomes that were inadequate for a new car purchase, but have been persuaded by their own government to take the plunge on a new automobile loan, courtesy of this deficit-financed program. What happens if many of these new car owners end up defaulting on their auto loans, as the recession deepens? This is by no means a small possibility, given the current dynamics of the nation's most severe economic contraction since the 1930s. In effect, the American taxpayer may be financing a new wave of consumer loan defaults down the line, further exacerbating what some are now calling the Great Recession.
"Cash for Clunkers" is really a showroom lemon, masquerading as brilliant economic policy. The politicians may think it is ingenious; my own view is that it is symptomatic of the intellectual bankruptcy that has come to dominate Washington's response to the nation's descent into financial and economic doom.
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We are still trying to get out of one of the greatest financial crises since the great depression that was fueled by people overspending and taking on too much debt. So now our government comes along with a $3 billion program to get people with cars, most that are most likely paid for, to take on more debt in the form of new monthly car payments. Another reason to believe that past government policies and regulations were major contributors to our current financial crisis.
I disagree and i will tell you why... I work in the media advertising industry. Obviously seen layoffs at my company. THIS CLUNLER PROGRAM HAS BROUGHT MUCH NEEDED AD REVENUE TO OUR INDUSTRY. In fact last week a guy I know who was laid off was rehired. It was not specifically related. But all I know is we have been been getting alot of sales from car dealers with main selling point of auto AD's being the cash for clunkers program. Whether they are domestic or foreign auto's. I think the cash for clunkers idea was/is a great idea but unfortunately it's a stimulus idea that is only helping certain segments of economy. Such as mine. Therefore you are seeing criticism and frankly jealousy from other industries and thus criticisms. All I can say is it is helping and I know someone who got rehired because of it.
He has a point about the clunkers program creating the next wave of defaulters.
But their defaults will probably be more contained, than housing defaults. It's hard for me to imagine these car loans being rolled into CDOs and other leveraged crap.
But what do I know.
Very well said. Thank you.
Yes, yes, we should do nothing unless it is the perfect solution in every aspect - budget, tax, benefit, and environmentally neutral, a velocity impact far greater than the amount invested, no undesired or unforseen consequences, equally acceptable to teabaggers and tree huggers, and all positive impacts confined withing the territory of the U.S.
I am quite upset as the Cash for Clunkers had been sold to us in major campaigns as the single solution to all our economic and environmental woes, and gosh darn it, people are allowed to buy cars that are not 100% domestic content made entirely in the US by wholly US owned companies with a workforce free of illegal aliens and green card engineers.
In the vein of Jon Stewart, I suggest the money better spent in funding efforts to disprove conspiracy theories called "Cash for Debunkers" or maybe exchange for German WWII aircraft ordinance called, "Cash for Junkers"... How about weight loss programs for women with large rears called, "Cash for Junk in the Trunkers? (Sir MixaLot opposes)....
We should do things that make sense. If we had given $2000 per car, for instance, we would have double the number of cars purchased for the same amount of tax payer money. The program might have taken two or three times as long to run out of money... in this case that would have been four weeks... tops.
We could have had this program for the past 30 years, funding it with higher gasoline taxes and now would have a fleet with 50% higher efficiency, if not better. And not one manufacturer would have gone broke...
There were many solutions imaginable that were perfectly possible and would have been effective. This one is not even a solution.
I think the fact that my taxes are going to help bail out banks and car companies is MORE than enough help from me! I certainly won't go out and buy a new car and go into debt to help save them! They could have saved themselves by being MUCH more in touch with people's and the planet's needs.
One other thing that I was reading, this has put the brakes on people donating cars to the needy. Granted that still doesn't "help the environment" but it helps in other spots.
"it just may be possible that many of the consumers taking advantage of the credit largesse from Washington are those with incomes that were inadequate for a new car purchase".
This is unlikely.
Due to the failure of the bailout monies to increase the availability of credit, people with poor credit ratings would not be able to obtain a car loan. The CARS program does not change that. The consumers buying new cars have sufficient credit ratings to obtain a car loan. The CARS program persuaded them to purchase a new automobile.
Look at the cars that are traded in. Most are not "clunkers". The working poor are still driving their true clunkers because they can not obtain loans even with the government kicking in a few thousand dollars.
This article seems to be just another complaint about the government diverting money from the huge giveaways to the wealthy which have not stimulated the economy into a giveaway program for the middle class that has stimulated the economy however slightly.
Disclosure: I traded in a 1995 Cadillac with a 17 mpg rating for a Pontiac G5. Yes, a PONTIAC.
Great article!!! This program is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Hello...this is precisely the behavior that got us into this mess!
I am a subprime finance manager at a car dealership, dealing with folks who have less than perfect credit. I have seen no increase in my department whatsoever from the so called cash for clunkers program. We have done aproximately 25 CARS deals so far, not one of them has been a subprime deal. For the most part buyers are either paying cash or obtaining prime financing at the dealership. For anyone to suggest that all this program will generate is an increase in loan defaults is misinformed. These are deals that would not have existed were it not for the CARS program. Buyers are saving on the average of $700-$1000 annually on fuel expenses. Further stimulating the economy , not to mention the environmental benefits of less air pollution, and less dependence on "foreign oil". In my opinion this has and will continue to be one of the best stimulus programs our government has enacted to date
I don't know how the heck we're going to get there but mass transit is the ONLY effective solution.
Environmentally this program does more harm than good. According to a report at NPR it takes 12 tons of CO2 to produce one car.
I'd rather have taken the money and turn LA into a model of effective mass transit.
Effective mass transit would have to include small fuel-efficient vehicles to transport people from their homes to the larger common carriers.
For as nice as mass transit was in Chicago, here in San Diego it's just not set up for it. Chicago was designed in a grid whereas SD meanders all over the place. We are stuck with cars here for the foreseeable future.
And yet San Diego has a better public transit system than Chicago has had for DECADES!
the comment about "long term debt" for those who can't afford just like with housing is way wrong. No one is making banks give loans. They are only lending money to people with 700+ credit. Also, I don't understand how we can't afford anything, but tax cuts and 700 billion to companies is ok.
In short, the only short-sided comments are yours. This has created work. For those complaining that the money goes to foreign countries, even if the cars are manufactured here, shows how brainwashed you are to only think of the corporate bottom line. I have news for you: the American workers in the plants make money, the manufacturer makes money, the car salesmen make money, the dealership owners make money, the insurance company makes more money, everyone profits. Remember trickle down economics? This is from the bottom up economy. Get used to it.
This is not from the bottom up economy this is does not represent change this is trying to hold on to a broken status quo. This is about how much money stays in circulation in America, this is about debt and paying our own way and making the structural changes in America that will set us on a course of long term sustainability.
it is not about shortsighted slave wages working for the man who doesn't even shop or drop their money at local country clubs or even pay the going Union Wage and benefit. American workers are taking pay cuts based on the lower wages paid by this pump.
We are talking about a short term pump that benefits a fraction of the work force who pay a pittance in taxes. We are going in debt to put others in debt to pay for the profligacy of a bunch of morons at the top.
Get used to paying higher taxes and receiving less services, it is a bottoms up economy all right but when we are getting raped like this it isn't something I want to get used to.
I can't even tell what you are on about. You hate money staying in circulation? Wow. I thought I'd heard everything.
Apropos, go to a payday loan company and see if they even ASK about your credit. Anyone can get a loan, it's just that the suckers with poor credit are paying 13-16% interest. That's what's sad about this deal: entice those people to give up fully paid for cars, and go in hock when they may lose their jobs. Plus, just to make it even more logical, let's destroy a 2002 Ford Aerostar instead of giving it to the guy who's unemployed because he has no transportation, or trade it for the 1985 Oldsmobile that's leaking AND burning oil. This is your typical idiotic Washington idea. Can't wait to see health care.
how people get their money is what you've been touting as self responsibility. So why do you now care how people get their money? Plus, pay day are more like 20%. No one is enticed to do anything. The rest of your post I can't even comprehend. Now you think people should just give away cars to the unemployed. Yet you don't think people should pay taxes because it goes to other people and you don't want to pay for other people's health care. I don't even see you deny anything in my post. All you want to do is be negative, no real ideas, and made up examples.
My "clunker" was maybe worth $1,000 but only after I put about $2,000 of transmission work into it. This I was seriously considering. The program made it worthwhile to get it off the road and get something with better MPG. This program was the right one at the right time. Sheldon you don't know what you're talking about.
So the fact that we gave you $3500 more for your car than what it was actually worth is "good" for the US taxpayer? Sort of like the $1200 hammers.
Now in return we need $3500 worth environmental savings just to break even. I think Sheldon was dead on.
In that he bought a car, paid taxes on it, helped keep people employed, who are ALSO paying taxes, and is helping the environment AND his pocketbook by using less gas..... Yes.
Yeah, so we (all of us) subsidize you to the tune of a few thousand dollars. Now, how about you return the favor. My old Zenith television isn't digital t.v. compatible. I don't want the converter box, so may I count on you for a check for $2,500 so I can get the flat-screen SONY I really want?
Mo. ron.
um, yeah, subsidizing your fellow Americans for the good of the whole country is bad.
OK. Why not? Our government has had a free money policy for the wealthy, the large corporations, the oil industry and Wall Street to name a few of the recipients. Why not get you a television. If Sony was making the televisions in the U.S. like the Japanese car makers are manufacturing their products here, the impact might be greater than the CARS program impact.
"While on the surface the program may be seen as an economic stimulus initiative at work, no one should be fooled into believing that this is a carefully designed, long-term strategic answer to the worst economic contraction to occur in the United States since the Great Depression. "
I think this is where your logic falls on it's face. You are assuming that people believe this is the be all end all answer to the economic crisis. It's obviously designed to be a temporary quick fix band-aid.
Why didn't you wrote an article about the Bush tax cuts for the rich and richer that wasn't paid for? Now that would have been a good read!!! All this is nonsense!!
1088 - this article is calling a gimmick a gimmick with pertinent facts. You are getting confused with the Reps vs. Dems issue.
Foreign corporations have a lot muscle power at the White House. Every country spends its taxpayer money locally. Only the US politicians aid and abet foreign corporations from stealing US taxpayer money ... In return those politicians get campaign contributions, lobbying donations, long term-consulting gigs (after retirement), board seats, grants, speaking engagements worth tens of millions of dollars. Getting a billion (1000milllion) back now for a 100 million future cost is a great investment if you were a large foreign corporation. Of course this applies to large domestic corporation. Of course there is no such thing as a "large domestic corporation" ... their employee base is in China and India, their manufacturing base is in China, they hide profits in Aruba/Bermuda/Switzerland offshore, get tax breaks anytime they ask for.
This is not a Reps vs. Dems issue. In fact I regret supporting Obama and have never voted Republican.
The outraged among us just can't seem to get this whole proportion thing right.
"...no one should be fooled into believing that this is a carefully designed, long-term strategic answer to the worst economic contraction to occur in the United States since the Great Depression."
I certainly hope not. It's funny how every little string on here starts with someone (who presumably doesn't write for a website dedicated to complaining about non-Libertarian economic policy) pointing out how this is a relatively small, successful, stimulative program, followed by the same three people writing the same five 'counterpoints.' Well, four: 'you're not a real american' is not a counterpoint. It's too bad you guys can't just shout down people with a Just Say No chant.
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