Cash for Clunkers: A Program to Scrap

Hot off the bad idea assembly line, and direct from the unintended consequences warehouse, our government has cobbled together yet another ridiculous idea in their drunken stumble of an effort to revive the economy.

So let’s consider what is really going on with this program.  First, let’s take a perfectly good car…an older car, one that we’ve all had at some point in our lives, even one now that might be a little older than we’d like…the kind of car you want to upgrade out of because you have that, “let’s move the furniture around in the living room” feeling.  And despite the green spin the government has put on this program, remember these cars passed emissions.  They are street legal, smog legal vehicles.  Let’s take that car, one that works just fine, gets you where you need to go, an asset on your balance sheet that probably still has some residual value…and smash it to bits.

Now that that’s done, let’s hand this new car-less person (careless?) $4,500 in cash…oh wait, not cash…a rebate that has to be used to buy a new car.  Well…ten minutes ago before the sounds of twisted metal were heard, this person was debt free (and mobile).  So in return for crushing their perfectly good vehicle, they get introduced to the bondage of debt.  There will be two kinds of people that take on this debt.  The kind that can afford it and the kind that can’t.

Let’s assume we can afford it.  The majority of people so far who have destroyed a perfectly good car for a few thousand dollars were going to buy a new car at some point anyway.  When these buyers are surveyed, they were already in the market for a new car but they had postponed the purchase because of uncertainty with the economy.  That uncertainty in the economy is still there people, so these buyers let their common sense get steamrolled by a government carrot.  So with the very real possibility of a job loss or pay cut, a reality they respected before and are now ignoring…they could find themselves in financial trouble with the added problem of a car payment that they didn’t have yesterday.

Let’s consider something else while we’re at it…these people were in the market for a new car, which could also have been a ‘new used’ car.  Many people seek out new used cars, to avoid the ‘new car premium,’ the several thousand dollars a new car depreciates the moment you drive it off the lot.  These newer used cars are  ones with very low mileage and maybe a year or two older which shaves tens of thousands of dollars off the price of the car while getting little to no wear and tear.  Since this program only provides the rebate for new cars, these buyers could have purchased a ‘new used’ car, but instead now destroy a perfectly good car to get a rebate they have to use to buy a new more expensive car (maybe a little more than they were originally willing to spend) which depreciates in value for far more than the value of the rebate the moment they leave the parking lot…so they apply a rebate that covers the depreciation from their first day of ownership.  Great idea.

Now let’s consider the buyers who can’t afford to take on a new car payment.  Dealers are incentivized to make this deal happen.   Between the combination of their own cash back programs with the rebate program and lower interest rates, they will attempt to qualify as many people as possible.  Consider that most, not all, but most people who are driving an older car probably bought it used, or paid it off and continue to drive it because they can not afford to buy a new one.  If you can not afford to buy a  new car, there’s probably a pretty good financial reason for that.  And qualifying to buy a new car is not like qualifying for a house.  Repossessing a car is much easier than repossessing a house, car payments are much lower than a house payment, and a repossessed car can be re-sold pretty quickly.  This smells familiar.  What is that smell?  What else have we seen that ended badly when lenders were incentivized to provide loans to individuals who were less than perfect borrowers?  Well, we can certainly expect similar results then.

Supply and demand.  Let’s discuss it without all the P1 and P2 curves, that’s the only way I know how anyway.  Really simple, (cause it is in fact really simple), if you suddenly increase demand you will outstrip your supply.  If your supply starts to run low, then prices of what is left will go up.  So thousands of people crushing good cars to get new cars has caused the price of new cars to rise, which in turn causes less sales.  Why does it cause less sales?  Remember “price equilibrium” or “market clearing price?”  As you raise the price of something, you clear out a certain percentage of buyers who will not buy it at that new increased price, but would have at the lower price.  Well…those buyers that “would have” are walking away and not buying the car.  So for every car sold through this program there is an absolute number of people who are not buying a car as the prices rise.  Those people now have to wait until prices come down again before they buy a car, whereas if the program had not existed at all, those sales would have happened.  So you might argue, well hey – without the program the high volume of sales that stripped out the supply would not have happened, so that’s a good thing.  I’d agree except…the program ultimately does what our government does best…kicks the can down the road.  By incentivizing buyers to buy cars now, buyers that were going to buy one eventually anyway, they are borrowing from future sales so there will be fewer sales in the future since we piled them all into the now.  In other words, we traded lost sales that would have happened now and have to wait for the future, for sales from the future to make them happen now.  Does that sound like a government idea or what!? Hell yeah!

Last but not least is the insidious desire of government to borrow from Peter to pay Paul.  Just call me Peter.  This program takes money from me, in taxes, and transfers that wealth to someone else so they can destroy a perfectly good car they already have to buy a new car they might have bought anyway without any of my money, and then assume a debt they may or may not be able to afford to pay back, while their own personal economic stability, and therefore their ability to pay the loan in the future,  is still a question mark because of an uncertain economy.  And that Paul guy…he never does pay me back.  Ever.

The program was a bad idea from day one.  The concept behind the program was to stimulate the economy by incentivizing consumers to trade in their vehicles for a rebate that would of course require them to spend their own money for the amount the rebate did not cover.  They could not just receive cash because they might put it in the bank and putting the money in the bank would not be the consumption spending that the government wants to kick start the economy…it must be spent, hence the rebate on a new purchase.  And don’t even talk to me about the “environmental” incentives of this program.  That was just government putting a green spin on it for good measure.  No amount of reduced emissions is going to make up for the car you just buried in the ground.

If the purpose was truly to stimulate consumerism, it  makes me wonder why more useful programs were not considered…such as a rebate for consumer products as a percentage of what you bought.  For example, if I buy a $2,000 flat screen, and let’s assume a 10% rebate program, I should get a $200 rebate from the government.  Or if I buy an $800 laptop, I could get an $80 rebate.  This type of program would appeal to almost everyone, and everyone is more than just the potential car buyer population…not everyone is in the market for a car but almost everyone is willing to trade up a laptop or buy a new television or get that new stainless steel fridge, etc…   But then…the government doesn’t own a computer company or a television manufacturer…they only own some car companies.  So you have to wonder…when you watch your government use public sector funds (i.e. your paycheck) to offer rebates for products that they now manufacture…wouldn’t every company like to use some of your paycheck to offer discounts to their customers so they can make more sales and look profitable?

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