Cash for Clunkers and Bulldozing Apartments
You can’t visit any media outlet right now without hearing all about the Cash for Clunkers program and its supposed success as well as its failure. The coverage, as exemplified by the link I just shared, tends to focus on the overwhelming popularity of the program and on the technical snafus that make it challenging. What’s missing in much of the coverage is a critical assessment of the program itself. I hate it. It is just another program where we’ve taken tax dollars and handed them out in a way that benefits very specific constituencies, but with oddities in terms of market impact as well. Auto dealers and manufacturers will clearly benefit (short term) from this artificial demand stimulant assuming that those bureaucrats who administer the program can actually figure out how to process the demand.
But once we get beyond targeted constituencies, this program absolutely reeks. We’ve just emerged from a period where we Americans took advantage of easy access to cash (via our homes, with artificially inflated values due to loose credit) to go on a consumption binge. It has led to a wrenching readjustment as we return to a healthy savings and investment rate. And yet to ease the short-term pain of the re-adjustment, here comes the government offering a program that essentially encourages us to engage in a similar behavior. How so?
What is a car? It means many things for many people. But its essential function is to provide a safe, reliable means of going from one place to another. The Cash for Clunkers program mandates that the purchased vehicle must meet certain MPG requirements, but what really caught my eye is that it must be a new vehicle. And that the old vehicle be scrapped. So what we’re doing is:
a) Taking taxpayer dollars.
b) Redistributing those dollars to incent a very specific behavior (take your old vehicle, trade it in to be trashed, and buy a new vehicle).
c) And thus, via government intervention, we’re artificially reducing the supply of used vehicles and simultaneously artificially equalizing price between certain new cars and certain used cars.
d) In the short term, this will have a stimulative effect on new car purchases and because the supply of viable driving substitutes (i.e. used cars) will be reduced, prices for cars will be stabilized, further helping the car companies.
Well if it’s good enough for the car makers, why not extend Cash for Clunkers to other woeful industries. Then the absurdity will become apparent. To demonstrate the absurdity of this, let’s play with another analogy. We’ve encouraged homeownership through a variety of tax credits. But like with autos, the supply of homes currently available (as well as apartments, a viable substitute for a place to live) is exceeding demand, thus leading to a long-term price drop. Homebuilders are hurting. Contractors are hurting. Someone should help. Well, let’s follow the Cash for Clunkers model. Perhaps coupled with home buying incentives, we should mandate that for anyone who moves into a house, their old living quarters, whether an apartment or a house, should be bulldozed so that it’s no longer supply on the market. That way we could stabilize housing prices too. True, we’d be artificially making it more expensive in the near and mid-term for residences, but we’d be helping home builders and contractors. GREAT IDEA!
Just one more thought on this. As I type this, the U.S. Senate is considering $2 billion in additional funds for Cash for Clunkers, bringing the total allocation to $3 billion for the program. The vehicle allowance is $3,500 to $4,500 per car. With $3 billion in funding approved, at an average of $4,000 per car trashed, we’ll essentially have confiscated $10 from every man, woman, and child in order to:
a) Take 750,000 cars off the road.
b) Trash them (literally).
c) And put 750,000 new cars on the road.
Seems like a good use of dollars, right? I’m reminded of the Broken Window Fallacy first discussed by Frederic Bastiat and expanded upon by Austrian economists. Bastiat and the Austrians had it right then, and they have it right now. We’ll talk about that further in other articles. But in the meantime, how ’bout we start bulldozing some apartments? Surely trashing $3 billion in assets is a good way to start recapturing our wealth!
Spot on. Unfortunately, only a few of our politicians have even a rudimentary understanding of economic laws, and even fewer care.
Over the weekend, I saw a commercial for a Chevy dealer. Of course, it touted the big rebate and the shiny new truck you could get by trading in your old, rusty one. The things that really irritated me about it were 1)the old, rusty truck was probably paid for, so the person trading it in would now have additional debt, and 2) the rebate, even at its max, only makes a dent in the selling price, which I’m sure dealers aren’t going to negotiate much since they’re already factoring in the rebate. So here we are again, sending people down the path to over-extension and bad credit. And all for the low price of $3,500-$4,500.
…not to mention all the excellent points you made above. Great post, David!!
Laura
I stumbled on your site and liked the article so I thought I’d add a different perspective:
If you look at C4C in a vacuum, then all of the points you’re making above are valid. However, I don’t believe its quite that simple. The C4C came fresh of the heels of $42 bn of bailouts in the auto-industry and the bankruptcy of two of the three largest US car makers. Still, backstopping cash flow needs is only one part of the bailout equation, without a return of demand Ford would be just as vulnerable to fail and neither restructured company could recover. Hence the problem; 1)debt is essentially unavailable due to the credit crisis and lock up of the debt markets and 2) economic factors (unemployment, market losses) are crushing consumer confidence, a factor highly correlated to consumer durable purchases. So how to you incent demand to support the auto bailout? You devise a way to subsidize sales without the downside effect of increasing inventories further.
Now before you go calculating the cost, remember that between sales tax, registration and licensing, the average tax burden on a new vehicle is 10%+. Taking the edmunds.com average vehicle cost for 2009 of $28k, that means from each C4C payment made, 60-80% goes right back to the state tax coffers. Obviously, you have to make the assumption those sales wouldn’t have been made without C4C, but the pronounced jump in sales for the month of August suggest that to be the case.
So now instead of “redistributing” dollars from taxpayers to targeted groups, you’re sending those dollars, in-part, to states that are hurting for tax income due to lower income tax revenues(from lower payroll and layoffs), lower property tax revenues (from foreclosures and lower real estate valuations) and lower sales tax(from decreased spending and increased savings rates), all in the face of increased unemployment filings.
So in my opinion C4C was justified and a success. The greater question here is “Was Detroit worth saving?”. There is an ocean of difference between the bank bailout and the auto bailout. The short version is that there is no projection that results in the gov’t ever getting paid back for the auto bailout. My only guess is that the military production argument that was used in the 1979 Chrysler bailout.