Cash For Clunkers – Stimulus Or Boondoggle?

The media can’t get enough of the Cash for Clunkers program. Either can car buyers, judging from the overwhelming response in its first 10 days. The program offers critical thinkers, and good business managers must be critical thinkers, a great opportunity to test their skills. The key to this type of analysis is to look at the obvious, then look to the unintended consequences.

Designed to stimulate new car purchases, the program is a success. So popular is the program that it ran out of money in its first 10 days. The feds budgeted $ 1 billion dollars to give about $ 4,000 to each consumer who traded in an older vehicle getting less than 18 miles per gallon for a new car getting more than 22 miles per gallon. That was enough money for about 250,000 cars. Congress extended the program by injecting an additional $ 2 billion dollars which President Obama immediately signed. So upwards of 750,000 vehicles will be sold under this program.

There are several benefits to the program. First, American consumers are buying new cars. With the economy in a prolonged recession dating back to December 2007, consumer confidence is down and the economy is anemic. A little good news is necessary to get things moving again. The speed with which the program went through its first allotment of funds is testament to consumers’ readiness to re-enter the economy once they have a good reason and sufficient confidence to do so.

Auto dealers are selling cars. This is a great thing for dealerships beleaguered by the recession, a shortage of lending capacity, and daily bad news coming out of Detroit. Sales reps are earning commissions, transport drivers are moving cars, and manufacturers are moving inventory and building replacement vehicles. At each step of the process, wages and profits are being earned which creates a multiplier effect throughout the economy.

One of the primary goals of the program is to remove gas guzzling cars from the roadways and replace them with more fuel efficient vehicles. This is good for the owner of the vehicle and certainly for the nation, helping to reduce our dependence on foreign oil. The program is reported to have increased the average mileage of the cars purchased over the ones traded in by 61%.

Some good news is needed right now and there is plenty of good news. At the risk of raining on the parade, we must look at the entire picture to see where there might be some information that is less positive. To make certain that the guzzlers don’t find their way back on to the roads, dealers are required to destroy the engines and then crush the cars. Teenagers and low-income workers are seeing their cars disappear. The frugal person who prefers to buy a low cost used car has fewer options.

Charitable organizations depend on these vehicles for much of their operating funds. Individuals donate these cars which are then sold to fund their mission. The donations are used to provide auto repair training to kids in need of a saleable skill. The cars are then given to single mothers in need of a vehicle to get to work and to transport their kids. Instead, those cars are being crushed ruining the hopes and dreams of many people.

The auto salvage industry is being hurt as their inventory is being crushed. These businesses employ thousands of workers at many different skill levels recycling billions of dollars of replacement parts keeping older vehicles on the road. Replacement engines, transmissions, seats, trim pieces and body panels used by body shops and do-it-yourselfers are all being taken out of the economy costing thousands of jobs.

As the older cars needing more maintenance are eliminated, repair shops see their inventory of future work eliminated as well. New cars need less maintenance and for the first 5 years most repairs are covered by warranty. This leaves the independent repair shop owner and his employees with less work and less income.

A fundamental principle of economics says that when there is less of something that people want, the price increases. So taking 750,000 inexpensive used cars out of the economy will serve to increase the price on those vehicles that aren’t crushed. While this might be good news for the people selling the cars, it is devastating to those buying them. The price increase affects the available cars and the recycled parts.

Another economic principle is opportunity cost – what could I do with the money I spend on the car if I used it instead for something else. Most of the cars being traded in are fully paid for; the ones being purchased require a loan. This means that the average car buyer is now spending, say, $ 200 per month on a car payment they didn’t have before. That’s $ 200 that isn’t being spent on a movie ticket, a sporting event, dinner, or new clothes. It’s money that isn’t being saved and made available to invest in productive capacity. Likewise, the additional money spent on used cars and parts is not available for other purchases. Therefore, the government, by selecting winners and losers, has given an advantage to the auto industry over all other industries.

Reports indicate that 6 out of the top 10 cars being purchased are foreign-made cars. So the government is taking $ 3 billion from American taxpayers and subsidizing foreign automakers and their employees. That’s another $ 3 billion dollars that will come from every taxpayer in America to subsidize their neighbor’s car purchase. Couldn’t the taxpayer use that money to buy groceries for their family?

The Cash for Clunkers program may be stimulating the purchase of new cars, but it is far from certain whether it is stimulating the economy. It is moving future car purchases to the present by pushing present purchases of other goods into the future. When will the American taxpayer realize that we can’t buy our way out of a recession by continuing to use the federal government’s credit card? If the tech bubble, the commodity bubble, and the housing bubble have taught us anything, it is that the day of reckoning always comes. The more we try to push it away, the nastier it is when the bill finally comes due.

© Copyright 2009 Bill Gschwind, inPURSUIT Consulting, LLC.