Thursday, August 13, 2009

"Cash for Clunkers" Losing Steam

Today, Reuters informs us that:

Red hot auto sales under the U.S. government's "cash for clunkers" incentive began to cool as dealer inventories tightened and showroom traffic showed signs of leveling off from its frantic pace of a week ago.

One industry analysis released on Tuesday forecast a steady decline in "clunker" related business even though the Obama administration and Congress added $2 billion to the program in recent days with hopes of matching the success of its first weeks. Sales during that period topped 250,000 and rebates exceeded $1 billion at least, according to government and industry figures.

I have several criticisms of the "Cash for Clunkers" program.

1. Why the auto industry? Practically every sector of the economy in the United States is hurting. Some are hurting very bad. Why did the government choose to subsidize auto sales? Especially considering it has already been quite generous, to say the least, to General Motors and Chrysler. Why not help, say, non-auto-related manufacturing? The auto sector is hurting but there is no indication that it will permanently leave the United States. In contrast, there are some other manufacturing sub-sectors that are more at risk of completely disappearing from the U.S.

2. This program is encouraging consumers to take on additional debt. Of course, if consumers were to devote all of their income to solely working off debt the U.S. economy would likely grind to a standstill. But, still, how smart is it for the government to be haphazardly encouraging consumers to assume additional debt in the midst of a debt-fueled recession?

3. The "clunkers" must be less than 25 years old. So we're not talking about scrap heaps. Anecdotal evidence suggests that many of these cars are still in good, working order. When traded-in, these "clunkers" will all be sent to the junkyard. In short, the government is destroying working assets that still have some value to them. Why? The argument is that these cars have low fuel efficiency and therefore have lost a lot of value in this recession. There are many poor people (and many young people) in this country who could use a cheaply-priced car. Maybe they only need a car to make short trips, or to get them to work, or to go to the supermarket, and the low fuel-efficiency doesn't matter to them. Instead, the government is trying to "protect" consumers and the auto re-sale market from price declines. What gives the government the right to interfere with the economy to that extent? As I see it ... valuable assets are being destroyed, a few consumers get to take on a new government-subsidized debt load, auto corporations (and thus the government, when it comes to General Motors) get a big payday and, worst of all, the economy is prevented from re-purposing valuable assets towards a more efficient use.

Anyway, I thought I would air out my grievances with the program but that's not the real story here. The real story is that even though the federal government is out-and-out subsidizing car sales, the program is already weakening and car sales are already declining from when the program first began. That says a lot about the current state of the American consumer. Not even a few thousand dollars towards your down payment courtesy of Uncle Sam is convincing people to buy cars. Can we imagine what would have happened if this program had been put in place in say, 2005 or 2006?

Feel free to read more in-depth about the Cash for Clunkers program (official name: Car Allowance Rebate System) on Wikipedia.

No comments:

Post a Comment