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Cash for Clunkers UPDATE

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UPDATE

Today is the final day for the Cash for Clunkers program.

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Cash for Clunkers or Cuckoo for Cocoa Puffs???

Economic Stimulus, Economy, Infrastructure, Politics, Public Policy

Jesse

Recently, the most popular topic on the news outside of Jackson custody battles and estate issues is the Cash for Clunkers program, also cleverly (?) known as the CARS (Car Allowance Rebate System). The program is relatively simple based on its website: www.cars.gov and includes just five simple steps to keep dealers in business, minimize the exposure of underperforming dealers and cars from UV rays on dealership lots across the United States, and get gas-guzzling dinosaurs off the streets in favor of cars with better fuel efficiency. The biggest issue is that the CARS program is a 5-step program to keep more dealers from tanking when the real focus of any current and future economic policy should be a 12-step program to help the economy recover.

One thing to ponder is the basic economics and environmental logic of the situation. If you have a good, working car whose only flaw is its MPG, does it make sense to scrap it to take advantage of this program? Additionally, scrapping these cars might reduce the dependence on natural resources, but will the scrap industry properly dispose of all the additional transmission fluid, oil, gas, windshield wiper fluid, auto components like old brakes made of asbestos and other things that may be worse than gassing up? Finally, unless an incinerator is environmentally-friendly, there’s a good chance that we might be better off without a mad dash of clunkers to the scrapyard.

More importantly, from a free-market economy perspective, the numbers from the last 10 years show that the Big Three have lost significant market share from a demand perspective, but few dealerships perished until recently from a supply perspective. Based on data from the National Automobile Dealers Association, the Big Three’s combined market share was nearly 72% in 1997 and dropped to 52% by 2007, the most recent year with full data available. Interestingly enough, over this same period of time, advertising costs per dealership doubled from an average of $300 per car sold to $600 per car sold. Additionally, the average dealership has been losing money since 2006. So, dealerships were losing market share, losing money, spending more money on advertising, and cars weren’t moving off of lots.

Moving from cars that don’t move, at least not off of dealership lots, to the people who must sell them, the average dealership employs approximately 50 people per dealership. So, for each dealership that closes, 50 people lose their jobs, some right away, and some at a point in the near future. More importantly, dealership employees are classified in the retail sector of the economy, which has been hit significantly with losses for the last several fiscal reporting quarters. This reality begs the question…When will we have a Green for Jeans program that will subsidize the cost of new jeans when I turn in my old jeans? This way we can prop up the rest of the ailing retail industry, including The Gap, Abercrombie & Fitch, Macy’s, and all the other retail stores on life support.

Perhaps most important is the fact that the program only exacerbates the situation that got the nation into this mess…the American consumer’s insatiable appetite to buy. Only part of the current economic crisis is related to the cyclical nature of the economy; the other part of the mess is the impact of failed financial policies across the board, including consumer debt. If a dealership provides a rebate of $4,000 for a new car, and the government’s CARS program adds in another rebate of $3,500 to $4,500 that the dealer may or may not pass on to the consumer, where does the additional money come from? If the consumer does not have the cash, the consumer must take out an auto loan, thus adding more debt on top of an already impressive mountain of debt currently drowning the economy. If we just keep buying stuff regardless of the future implications, then at least the current implication is that we will buy less gas due to more fuel-efficient cars.

But, if those cars are only driving us to jobs that no longer exist, then we’re on a road to nowhere, which the Talking Heads (the group) seem to understand but not the Talking Heads I see on my TV. In July of 2009, the economic numbers from the Bureau of Labor Statistics show that for each current job opening, there are roughly 6 people applying for that job. This information comes from the Job Openings and Labor Turnover Survey, which carries the ironic acronym of JOLTS. So, CARS might save some dealerships from closure and stabilize this number, but if these dealerships have been underperforming for years, aren’t we doing our economy a disservice by throwing more money at the problem and generating more debt for American consumers who are already maxed out? Moreover, by the end of September, half a million people will lose their unemployment benefits and this number could top one million by the end of December. Given those numbers, are old cars that are not fuel-efficient really the problem facing the nation today?

Whether this program creates more problems than it is worth won’t be known until we get out of the current mess, which many economists say we’re already headed toward a recovery. I am not an economic expert, but I do know that policies geared towards underperforming auto dealerships is likely not the best policy to stabilize a shaky economy. If everything works out, I promise to be relatively quiet and we can all drive happily ever after, even if we still won’t have any idea where we’re headed.

Adam

Jesse, I’m happy to see some conservatives showing concern for those Americans who have newly entered the unemployment world. I agree that the spending that has gone on for so long is one of the central issues of our current economic crisis.

Obviously, there are a few points that I hold a different opinion though. The first difference, and more important, is that I have never thought of the CARS program as a program strictly focused on propping up failing auto dealerships. The program’s most important goal was to get inefficient cars off the road and provide an incentive to the consumer to buy a vehicle that was more efficient (and very possibly more efficient than the car they would have preferred to buy).

So, rather than forcing consumers to buy more fuel-efficient vehicles through taxation (which is what I favor as a policy), the government provided incentives to effect the market. This market manipulation is the form so many conservatives have favored in the past across varying industries. A major difference this time is the level of the market that was reached. It effected small dealerships and consumers the most, not extremely large corporations.

The program brings two positives. One, it keeps people working at dealerships (no matter how inefficient they are). Two, it moves a large number of Americans to purchase fuel-efficient cars at a time where fuel costs are not the motivation. This short-term and long-term outcome are what the goal of so much of the economic stimulus package was about. Are we helping a person get a job for their life if they are working on laying tracks for public transit or building a new bridge on the interstate system? No. We are temporarily putting someone to work during an economic downturn, and at the same time making an important investment in the nation’s infrastructure.

A more fuel-efficient car will not save the environment over night or get our country off of foreign sources of oil, but it is a good first step in bringing positive change to both of those serious problems.

Government intervention is useful at times, and this time I feel it did help. Now, next on the agenda, updating the federal gasoline tax!

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