Home › Blogs › Matthew Gagnon's blog ›

The Real Problem With Cash For Clunkers

Submitted by Matthew Gagnon on Sun, 08/09/2009 - 21:15
in

This morning on Meet the Press, Erin Burnett brought up an argument about the cash for clunkers program - an argument that opponants of the program have not effectively made to this point.

Most people who argue against cash for clunkers have made general points about the absurdity of the government paying consumers for junk cars, the inherent unfairness of subsidizing new car purchases for often middle and upper middle class citizens, and of course the wasteful nature of the program.

But there is a larger point that is much more important.

 

Any time the government gets involved in any market - in this case, the auto industry - it artificially manipulates it.  When it manipulates a market, it has certain consequences - such as "bubbles". 

The cash for clunkers program has the potential to do just that.  By creating an incentive for consumers to purchase a new car, the government is driving the decision making process of car buyers and causing them to make purchasing decisions at a different time than they normally would.

Essentially this changes the timeline - people who may have bought a car in a year or two are buying cars now.  This causes a "boom" in car sales, but what else does it do?  Those who buy cars now will invariably keep those cars for several years, and instead of buying a car next year like they would have previously done, they will buy one four, five, six or more years from now when the car must be replaced.

By "moving up" the date, the government will cause an increase in car buying now, which they will of course hail as a success.  But what happens when the program ends and all of those people who would have been buying a car next year already have a new vehicle?  They will obviously not buy, which will again slow down car buying - and the bubble will pop.  Classic boom-bust.

This is the eternal problem of government intervention.  However altruistic the motivations of lawmakers are [and I happen to believe they are] when they come up with programs like this, by tinkering with the market they artificially change the market, and end up causing pain to the economy for relatively minor near-term benefits.  We've seen this countless times, most recently with the catastrophic housing bubble.

The motivations behind cash for clunkers are indeed good.  Getting old, gas sucking automobiles off the road and replaced with newer, more fuel efficient cars is a quality goal.  But being aware of the destructive nature of market interfearance in this and other cases should invalidate it as a serious policy. 

By avoiding foolish programs like this, we can stop another market bubble from destroying another industry.  More importantly though, we can stop arbitrarily giving away presents to some citizens who had the benefit of lucky timing while others [like me] traded in their clunkers for reliable, fuel efficient cars two years ago with no $4,500 benefit.

2.5
Your rating: None Average: 2.5 (2 votes)

Comments

Don't disregard pragmatism

Submitted by Mead50 on Mon, 08/10/2009 - 10:20.

The motivations behind cash for clunkers are indeed good.  Getting old, gas sucking automobiles off the road and replaced with newer, more fuel efficient cars is a quality goal.  But being aware of the destructive nature of market interfearance in this and other cases should invalidate it as a serious policy.

Let me offer a different example: Santa Fe, NM. In the 1990's it was recognized that its water use was unsustainable, and that there were no new sources of water to be tapped. Among other things, this meant economic growth would have to stop - you can't build new houses and bring in new businesses if you can't supply them with water.

So the city launched a program designed to reduce consumption - including giving away FREE low-flush toilets. How's that for a market disruption? They also outlawed Kentucky bluegrass lawns. Seriously.

I'm sure you'll find both of these measures (and a lot of the other things that were done) to be outrageous from an ideological point of view. However, per-capita water use has dropped 40%.

Conservatism doesn't have to be just about free-market ideology. It can also be about smarter government; pragmatic responses to communal problems.

where is my share of $4B??

Submitted by jilljosephsen on Mon, 08/10/2009 - 10:26.

I agree with you 100% Matthew. It disgusts me to no end to see "Big Brother" stick its nose into our everyday lives. I don't see how a few cars can make that much difference in terms of global warming. Also,  I don't see why we should reward those who buy SUVs and big vehicles. If they can afford to buy one before, why subsidize their "fix" now. We could have put that $4 billion dollars to better use. I had read that Fidel Castro promised his people a free car for every family when he first came into power.  Are we heading in that direction??

 

 

 

____________________________

bluehost bluehost hostgator

Pragmatism?

Submitted by Dean_L on Mon, 08/10/2009 - 20:20.

Mead50,

There's pragmatism in government and there's throwning bad money after bad.  Government interference in the free market more often than not results in unintended consequences.  In the Cash for Clunkers deal, the government is promoting in some percentage, likely in the 50% range, some of that stimulus effect to go overseas to Japan, Korea and Germany.

I'm pretty sure that's not the goal.  It's primarily about the environment which in itself is a dubious objective.

Here's a pragmatic response to this idea - take the government money back yourself; http://bit.ly/3T6bWw.  Just a thought. 

Dean_L

Can't possibly be correct

Submitted by Mead50 on Tue, 08/11/2009 - 09:33.

You can't possibly be correct in you assertion that 50% of the cash for clunkers goes overseas.

First, while it is true that half the cards purchased under the program are foreign makes, except for the Prius, most of them are fully or partially assembled in the US, with a portion of their parts and engines manufactured in the US. The UAW supports Cash for Clunkers - that should give you a clue as to where industry insiders see the cash flowing. Also, you are pretending that the full amount of the incentive goes straight to the automaker - never mind the portion that the auto dealer pockets, nevermind the increased revenues for all the other ancillary businesses involved, ranging from the firms that deliver the vehicles to the local television, newspaper, and radio companies that are carrying all the the local dealers odious advertising.

Ford Focus is assembled in Mexico.

Submitted by noufa on Mon, 08/17/2009 - 13:38.

Fusion, too. The Escape is assembled in Thailand. UAW never has been very good about considering the long-term consequences of their positions..

BTW-explain how it is pragmatic to destroy a functioning car engine. Seems extremely wasteful. This is the kind of throw-away mentality that supposedly pushed X-Con out of the tent.

Except for the ones that aren't

Submitted by Mead50 on Mon, 08/17/2009 - 14:24.

WAYNE, Mich., April 15, 2008 – Ford Motor Company said today that North American production of the Ford Focus will increase by nearly 30 percent in 2008 to keep pace with strong demand for the newly redesigned small car.

The new Focus – which delivers 35 miles per gallon and industry-first technology such as Ford SYNC™ – has been a hot seller since it began rolling off the assembly line at Ford’s Wayne Stamping and Assembly Plant in late 2007.

In the first three months of 2008, Ford sold 49,070 Focus units – an increase of 23 percent from the same time period last year. Importantly, retail sales were up 35 percent, while fleet sales declined slightly. The Focus now claims 7.6 percent of the U.S. small car market, 1.2 percentage points better than a year ago.

 

Cash for Clunkers appeared to

Submitted by Corbin U on Tue, 08/11/2009 - 01:12.

Cash for Clunkers appeared to be heading for the graveyard – but it appears it will be making a return.  Congress has approved a further $2 billion to the program, so Cash for Clunkers will continue.  The program was lauded by the Department of Energy, for promoting more fuel efficient vehicles, and dealerships for possibly stimulating auto sales.  It has been lambasted by critics who claim the government is spending too much.  At any rate, it still won't save many from needing payday loans no faxing for car and insurance payments.

<a href="http://www.christianlouboutinmart.com">Christian Loubou

Submitted by xinyexinye on Tue, 08/11/2009 - 01:30.

 

<a href="http://www.christianlouboutinmart.com">Christian Louboutin</a>

<a href="http://www.christianlouboutinmart.com">Christian Louboutin shoes</a>

http://www.christianlouboutinmart.com

 

Artificially Manipulated

Submitted by pinklaptop02 (not verified) on Tue, 08/11/2009 - 01:51.

That is an excellent term for this.  This incentive for people to buy cars isn't real.  Car dealers are having a field day getting people that probably can't afford cars into loans.  I'm wondering how that part of this deal is turning out.  Are car lenders giving buyers outrageous interest rates and so forth?  Could this buy another mess like the housing market? 

government grants for women to start a business

government grants for women

Cash for Clunkers as stimulus

Submitted by amorphous on Tue, 08/11/2009 - 14:18.

The primary reason for Cash for Clunkers was stimulus, not carbon emission reduction.  Its inclusion in a stimulus bill and it's timing (during a recession) should be clues. 

Cash for Clunkers points a real and substantial difference between conservatives and liberals.  Conservatives either proposed reining in government spending (like Herbert Hoover) or tax rate cuts (GW Bush).  Liberals favor direct government spending or subsidies such as aid to states or Cash for Clunkers in order to create or preserve jobs and the consumer spending those jobs create.  Liberals won in 2006 and 2008, and control Congress and the Presidency, so they are trying out their ideas.  What people should be looking at is how efficient Cash for Clunkers is at creating/preserving jobs. I haven't seen much there period.

The criticisms of the program because it includes upper income people and might be causing asset bubbles strike me as unfounded.  The issue with recessions is people have reduced spending because they are worried about their economic prospects.  This results in a cycle of a drop in demand, which causes businesses to lay people off, which further cuts demand, etc.  The stimulus is aimed at stimulating consumer spending; whether it's upper or lower income people is not as important.  You also need the support of upper-income people for political support, just as you do with Social Security.  The criticism that it is simply moving forward purchases misses the point as well:  the idea of economic stimulus is to break the cycle as soon as possible in order minimize the overall damage caused by the slump.  Also, car sales have fallen because of the recession, Cars for Clunkers is just fighting that.  Lastly, you're not going to see an "asset bubble" with cars.  Bubbles happen because too much demand is chasing not enough supply.  The current situation in the auto industry (and the economy as a whole) is not enough demand and too much supply.

pinklaptop0:  My guess is not they are being reckless with lending, they are being too cautious.  Investors are bipolar:  4 years ago, they were manic (reckless); today they are depressive (overly cautious).

 

 

 

 

 

 

 

 

 

Mostly agree with you.

Submitted by noufa on Tue, 08/25/2009 - 11:47.

But OP was still correct that we have a bubble problem. Government money is being thrown at used cars, not new ones. The used car market was already pretty tight because of the recession. "Clunkers" is elimating contributions to the used car supply.

Unintended Consequences

Submitted by ChuckT on Tue, 08/11/2009 - 15:12.

As with most, if not all, government interventions like Cash-for-Clunkers, aside from the artificial boom being created now, with the bust to come later, the program will also create other problems.  What do people want to do when they get a new vehicle?  Drive it!  Many will, in all likelihood, take the long way home from work, go for a Saturday/Sunday drive, perhaps attend an out-of-town ballgame, etc. - all things they might not have done in their clunker.  Consequently, (the hoax of) greenhouse emissions will rise, therefore, offsetting those from the clunker had they kept it, and perhaps more so, even though they may be getting better mpg.  Another unintended consquence of bad policy and Uncle Sam being a buttinski.

The only saving grace out of all this is that Congress may not get their new toys, the Gulfstream jets they ordered so they can be more equal than the rest of us.

Good point

Submitted by XCon on Tue, 08/11/2009 - 19:49.

Fortunately, Kentucky Bluegrass is unlikely to be an invasive species in Santa Fe (where I lived a few years earlier at St. John's).  Free market environmentalism has its part, but there are some things that it can't do, or can't do and still seriously be called free market environmentalism. 

One big reason I'm an XCon is that everywhere I'd like to live is far more associated with liberalism than conservatism.  Conservative places simply suck.  They are poorly designed, cheaply built eyesores as a rule.  Hey, people like WalMart!  I won't shop there (mostly) because their stores are so ugly.  Fitting for a company whose business practices are so ugly, too (not that they are alone, however).

Am I an elitist?  I dunno, but I do respond to thoughtfully designed space.  And I respond to white elephant eyesores. 

Personally, I think conservatives are hopeless.  In no important area do they really offer anything relating to a life worth living.  Narrow-minded self-help Christianity and making money: that's it.  Social inequity, not their problem.  Idiots who want a Kentucky Bluegrass lawn in the desert - they're payin' fer it.

Over-regulation is a curse, but so is under-regulation.  Property rights are great, but they are also politically defined in ways that change over time (See "Chattle Slavery" and "American Civil War").   They certainly are not sacred, and the fact that they are often referred to as such tells us a lot about what conservatives really believe about religion (or what their religion really is).

I suppose I might have kept believing free market ideology had I believed in the slightest that it mattered to elected conservatives.  It doesn't.  So when they spout it, I just think they are lying, naive, or simply don't understand what it really asks of them (that is, dumbasses).

The REAL problem..

Submitted by Jim Dandy to th... on Tue, 08/11/2009 - 20:38.

with Obama's Cash for Clunkers program is that it WORKS. And it works on many different levels. 

It is helping dealers with desperately-needed traffic and cash flow, it is helping the auto industry move some inventory, it is helping buyers caught in the credit crunch, it is helping us retire clunkers that guzzle precious gas, it is making America's roads safer, greener, and giving people a boost. 

Therefore, to people who bitterly oppose the President and the Democratic Party, it is an absolute, unmitigated disaster.  If you are invested in FAIL, it has to be a total loss for your side.