THE BLOG
09/14/2009 05:12 am ET Updated May 25, 2011

Cash for Clunkers Rated an Economic Clunker

Like a glass of ice water in the scorching desert, it sure sounds enticing -- Uncle Sam giving you as much as $4,500 to trade in your old gas guzzler in exchange for a new and more fuel-efficient car. Why not?

The media loves the idea, virtually every day lauding President Obama's Cash for Clunkers auto program, so far a $3 billion outlay.

But while the public and the press may be enthralled with the offer, one skeptic -- and he's hardly alone -- views the program as an economic bummer. That's Tony Sagami, a savvy tracker of the investment scene who functions both as an analyst for Weiss Research in Jupiter, Fla., and editor of Asia Stock Alert, a newsletter out of BigFoot, Mt. that monitors the Asian markets.

Sagami acknowledges Obama's stimulus program spurred the purchases of a lot of new cars this past week, but he argues that the chief beneficiaries were actually auto dealers and Asian car makers. Americans, he points out, bought 184,304 new vehicles last week, according to the U.S. Department of Transportation, but he notes that more than half of the sales went for foreign cars, notably Toyota, Honda, Nissan and Hyundai.

"It's ridiculous; America shouldn't be in the business of bailing out Asian auto makers," Sagami says.

Even more important, he observes, the auto program, economically, is not leading to any one of three hoped-for significant happenings -- the construction of new factories or the reopening of old ones, increased production or the creation of new jobs.

"Obama may be the greatest presidential orator of all times," Sagami says, "but he knows squat about economics."

Obama, recently commenting on the auto plan, noted that "businesses across the country -- from small auto dealerships and suppliers to large auto manufacturers -- are putting people back to work as a result of this program."

Responding to some media outlets that expect Obama's auto program to boost car production, Sagami says "that's wrong." General Motors' inventory currently stands at 466,000 vehicles, roughly a 76-day supply. The industry norm, he notes, is around 60 days, so the ailing carmakers are unlikely to ramp up production. Cash for Clunkers, he says, is going to do nothing, but eat up some of the already bloated inventory.

"Instead of giving people $3 billion for new car purchases, Obama might just as well have saved $2 billion by writing a $1 billion check and sending it to Japan.

As he sees it, the Cash for Clunkers program is a shining example of "voodoo economics." Any time, he observes, the government starts giving away money, it invariably ends up taking away money from one group of Americans and transferring it to another group. Cash for Clunkers, he contends, is merely transferring money from one taxpayer's pocket to someone else's.

Worse yet, Sagami says, he suspects a lot of people getting this government money would have bought new cars anyway. All this program is doing, he says, is pulling in sales from the near future into this current quarter.

One of the requirements of the Cash for Clunkers program is that all used cars traded in must be must be scrapped and parts like the engine and drive train destroyed. That does two bad things, Sagami says. One is that people are junking cars that are still in working order. The other is that the auto parts market is going to be flooded with inventory. Car dealers may be happy, it's pointed out, but the auto parts industry will be badly hurt by this program.

One shortcoming of the program, notes Sagami, is that you can't buy a Cadillac or a SUV, but only small fuel-efficient economy cars, which are dominated by Asian auto makers. "I ask you," he says, "what are we doing promoting the Asian auto market?"