$5k Vouchers for Car Purchases: Utter Nonsense

Speaking of nonsensical proposals to encourage car purchases:

(From the WSJ): "The persistent slump in the U.S. auto industry promises to take center stage once again as car companies report January sales today, and the big question continues to center on what is needed to jump-start demand.

John Bergstrom, an auto dealer with a substantial collection of stores in Wisconsin, has a potential solution. Uncle Sam should dole out $5,000 discounts.

“If the government, manufacturers, the financial institutions, and the dealers all work together, we could give our economy a huge positive jolt,” he wrote in a letter to President Barack Obama late last week. “If for 90 days, February 15 through May 15, everyone who purchased a new vehicle in America (no matter where it was built) will be given a government voucher for $5,000; and the manufacturer would match it with another $5,000 voucher…we could get this industry rolling again in a hurry.”

Mr. Bergstrom’s plan assumes that dealers would agree to sell vehicles at the invoice price, and that auto finance companies would finance qualified buyers with a 72-month loan at a 5% interest rate. “We could eliminate the stranglehold inventories of new vehicles piled up across the country, and we would generate new vehicle orders…

...The initiative has generated some support among Mr. Bergstrom’s peers in the auto retailing sector, but it would be costly. In order to get sales back to a more robust level — 15 million annually — or nearly 4 million sales during the three-month period in the plan, the government would need to spend about $19 billion, and the auto makers would need to match with $19 billion in discounts.”

In all honesty I would normally ignore something like this but considering some of the proposals that are floating around congress, I think I have to take this seriously as this proposal doesn't seem so far-fetched anymore.

However when some car dealers are already offering cars at 50% off, selling cars at $10k less than invoice isn't that much of a deal anymore (if at all). Not to mention the fact that heavy discounting and incentives didn't exactly prevent Detroit from losing money during the credit boom, which suggests that it's unlikely to show positive dividends now.

But aside from the specifics of the proposal, it's really more of an example of how disconnected some in the auto industry are from the financial realities many households are dealing with. While some are trying to portray the decline in car sales as being merely due to a loss of confidence and tighter credit standards, the real truth is that consumers are pulling back for some very valid reasons and their loss of confidence didn't occur in a vacuum.

There is nothing the government (or automakers) can do to give people confidence, when the reason they've lost their confidence is rising healthcare costs, strapped budgets, high debt loads, and risk of job loss (if they haven't lost them already). Not to mention the fact that banks are no longer able to originate auto loans that enable people to spend above their means, an ill-advised practice in the first place.

I think automakers, industry leaders, politicians, etc, need to wake-up to the fact that many consumers have decided to make decisions that are in their own economic best interests, as opposed to the interests of those that want them to spend their households into financial oblivion.

The way to save the economy is to figure out a way to adjust to being a nation of savers (or a nation that saves more at least), as opposed to trying to figure out how to make bad financial decisions.

You can read more here.

Sources:

The WSJ: "Dealer Suggests $5,000 Government Vouchers To Boost Sales" -- John D. Stoll, February 3, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[reality chk:]

History tells us the formula if only we wanted to see it. Bring Manufacturing back to this country. Put people back to work, to Support their family needs and wants. Working people are Employees seen as a liability , but they are also Consumers seen as customers. Where is the balance? Looking back 100 years it was manufacturing growth that got this country back on it's feet after all the down turns in the economy, including the recesions and depresions.
To suggest 5,000 or 10,000 vouchers for the purchase of a car will get the economy going again is absurd and it fits in with the temporary fix mentality that has taken over this country. We need long term sustainable growth provided by manufacturing. We need to keep money circulating here in this country, Money leaving to pay for imports is never seen again. It is removed from the treasury and is made up with IOUs and deficits. Have you noticed that wages adjusted for inflation have stayed static or reduced in the past 4 years? That my friends is not growth. People are settling for less, and less.
I think the auto makers and auto workers are fully aware of their position in the financial sheme of things. Here is a group of people and companies that have been under the microscope in the last 20 years.
Have you noticed how many articles, stories and blogs are writen on the American big 3 and their people everyday? Thousands everyday. Have you noticed how many are writen on the transplants, Japanese, Koreans? 2 or 3 maybe 5 on a busy day.
The American big 3 and their people are under the microscope.

Feb 05 09:42 AM

[kelm:]

Martin Wolf had a great piece in the Financial Times yesterday where he stated that Davos Man, though blaming the US for the entire crisis was looking for the US to lead the world out of this crisis. Like you, I am unfortunately seeing little real intelligence and depth of understanding on the part of our economic leaders as chits for cars illustrates. The administration ad congress seem more focused on placating voters as opposed to doing the right things for taxpayers to get the economy fixed and the crisis resolved.

Voters should equal taxpayers but don't seem to lately.

Feb 05 10:02 AM

[phaf:]

The "new economy" that everyone talks about developing, a nation of savers rather than spenders, bringing manufacturing back into this country, etc, requires changes that no one seems to want to acknowledge, or are at least unwilling to speak of directly. That is, to bring about those changes will require a drop in our standard of living across the board. Manufacturing jobs went overseas because its cheaper to pay for transoceanic transport of raw materials and then finished product back again when labor overseas is 1/10 or 1/20 what it is here, plus the lack of environmental awareness/willingness to pump all manner of mess into their air/rivers. We can't pay well, keep our land clean, and compete effectively in the manufacturing arena in a free trade system. Likewise, we can't have a $60k or $70k lifestyle on a $40k income for very long. Living within our collective means will require that virtually everyone takes a haircut. Proposals like this car giveaway only delay the inevitable.

Feb 05 10:18 AM

[jeeper:]

I'd buy a vehicle with a $10k incentive, if it was real, not a 'mark it up to mark it down' scam. I need a new car and have been looking, but even with rebates and employee pricing, the prices are still too high.

Easy loans and leases with low monthly payments have been masking the fact that prices are too high. Now the easy money is gone and the auto industry has developed a false sense of their worth and the worth of their products relative to our true income and ability to pay.

Feb 05 10:24 AM

[jeeper:]

Phaf -- I agree with your post, but I disagree on the car giveaway.

Prices for cars are too high, therefore demand is low, and they're piling up in parking lots at the ports. $10k incentives would clear those parking lots and re-price cars going forward. People won't go back to paying $30k after seeing them sell for $20k.

So -- that supports your very good point that the cost structure of our lifestyles need to come down. For that to happen, the absurdly high prices of houses and cars need to come down even more than they have so far.

For anyone interested in these topics, there's a blog called "Of Two Minds" that posts in-depth discussions of these very issues.


On Feb 05 10:18 AM phaf wrote:

> The "new economy" that everyone talks about developing, a nation
> of savers rather than spenders, bringing manufacturing back into
> this country, etc, requires changes that no one seems to want to
> acknowledge, or are at least unwilling to speak of directly. That
> is, to bring about those changes will require a drop in our standard
> of living across the board. Manufacturing jobs went overseas because
> its cheaper to pay for transoceanic transport of raw materials and
> then finished product back again when labor overseas is 1/10 or 1/20
> what it is here, plus the lack of environmental awareness/willingness
> to pump all manner of mess into their air/rivers. We can't pay well,
> keep our land clean, and compete effectively in the manufacturing
> arena in a free trade system. Likewise, we can't have a $60k or $70k
> lifestyle on a $40k income for very long. Living within our collective
> means will require that virtually everyone takes a haircut. Proposals
> like this car giveaway only delay the inevitable.

Feb 05 10:34 AM

[Guero:]

How about a $5k voucher towards a used car? That's something I can get behind!

Feb 05 11:01 AM

[Paul Killinger:]

In the world of merchandizing, that's called a LOSS LEADER. The only problem is the more you sell, the more you lose. The guy who thought this up should run for Congress. He'd fit right in!

Feb 05 11:05 AM

[babyray:]

I would buy a GM vehicle tomorrow!! I like the idea.I agree that we have to build up our manufacturing base. Call me a protectionist if you want but I believe we have to heal our economy before we can start helping others. The way to do that is for Americans to start building and making things again. The Trade Deficit is over 850 Billion dollars!! the only way to shrink that is to Be American!!! Buy American!!!!

Feb 05 12:31 PM

[Mr. Ed, Jr.:]

People have lost confidence because they have seen their home equity and their 401k wiped out. The banks are broke, taxes are high (The parade of Cabinet nominees who don't pay their taxes isn't helping anything) and their job might be gone any day.They no longer have ANY confidence that the fools in Washington DC have a clue as to what they are doing. The fear is that they are actually making things worse.

And now, some clown comes up with a new scheme to try to get the consumer spending again. Sure, a few who need a new car and have been putting it off might buy, but hucksterism is dead with the consumer for now. They will start buying again when things get fixed, not because there is some new trick to separate them from what is left of their money. Give it a rest, because the consumer sure is , for now.

Feb 05 01:05 PM

[eBay's Savior:]

This is the stupidest proposal of them all. Why don't we just save ourselves the trouble, and just give auto dealers $5,000 for every car they currently have on the lot, cash. And they can keep the car. Finance this by taking the cash from Ford, GM, and Chrysler, and also make all Toyota, Honda, and BMW dealers fork up another $5,000 to pay the US-OEM dealerships.

Hey, how about we give each person that writes a comment in this article $100k? I'd also like to get paid for doing what I'd already be doing.

Feb 05 02:42 PM

[econjunkie:]

Sure you could spend $40 Billion dollars to get cars. Do the car companies have $20 billion to give? No. So you're looking at $40 billion from the government to get each person 10 grand off a car. You'll sell some cars, but there won't be a mad rush to buy. I agree, people don't want to spend yet, period. Spending on their behalf is going to put the car companies in even worse shape in the long-run. For every car sold in a recession, there is one less car sold in a recovery.

Feb 05 03:38 PM

[PROXIMO:]

I get a kick out of the solution to save America by John Bergstrom, the auto dealer. Like he doesn't personally have a vested interest in the government's reallocation of funds to the auto industry. Why don't we just have a representative from every industry that's currently in the sewer come up with a plan on how society can best socialize their industry with our infinite supply of taxpayer funds? Last I checked, the entire economy is headed south, not just autos. My hunch is that taxpayers who are not in the auto industry are not remotely interested ponying up.

Feb 05 04:15 PM

[Did U Think...:]

On Feb 05 10:24 AM jeeper wrote:

> I'd buy a vehicle with a $10k incentive, if it was real, not a 'mark
it up to mark it down' scam. I need a new car and have been looking but even with rebates and employee pricing, the prices are still too high.

So basically you would "buy" it if they gave it to you for nearly free, right?

LOL.

Feb 05 05:10 PM

[geewow:]

How about the US car companies guaranteeing the whole car with a bumper to bumper 100% warranty for the new car buyer!!!!! That would definitely sway a new car buyer to buy American!!! But, they are more willing to declare bankruptcy.

eye-on-washington.blog...

Feb 05 06:22 PM

[jeeper:]

I wouldn't say that spending $20k is 'getting it for free.' Or maybe you didn't read the entire comment.


On Feb 05 05:10 PM Did U Think The Ponzi Scheme Would Last? wrote:

> On Feb 05 10:24 AM jeeper wrote:

Feb 05 07:33 PM

[drwhizdumb:]

If we bail out bankers and housedebtors, why not car-buyers? what's the difference?

Feb 05 07:40 PM

[drwhizdumb:]

commented econojunkie "For every car sold in a recession, there is one less car sold in a recovery."

The point is -- selling cars IS the recovery! Why wait?

Feb 05 07:43 PM

[thatguy57z:]

why doesn't the government and the big 3 just give each one of us $ 10.000 in cash vouchers, that sure would kick start the economy.

Feb 05 10:54 PM

[America_In_...:]

On Feb 05 12:31 PM babyray wrote:

> I would buy a GM vehicle tomorrow!! I like the idea.I agree that
> we have to build up our manufacturing base. Call me a protectionist
> if you want but I believe we have to heal our economy before we can
> start helping others. The way to do that is for Americans to start
> building and making things again. The Trade Deficit is over 850 Billion
> dollars!! the only way to shrink that is to Be American!!! Buy American!!!!


I couldn`t agree with you more. If more people bought American products maybe we might have a more well balanced trade deficit. However, I have just one thing to say.

I am an American currently living in Japan. A lot of my Japanese friends always comment on how stylish American cars are compared to the more "Practical" Japanese car. That in it self is the problem. Yes, there is appeal for american automobiles, but after 2 or 3 years what is going to happen to your ford or Gm vehicle? Yes, that is right, your mechanic will be busy and enjoying your credit card. Why cant we actually build cars that reflect style and also can be called dependable? That is the boat am I am in. If I am going to drop 30K on a new car, well damn the Honda, Toyota and Nissan manufacturer will have my money. Until the big 3 can get their heads out of their butts, there is no way in hell, I will waste my money on garbage. Sorry if this offends anyone, but I am sure others feel the same way.

Feb 07 03:00 AM

[Kman58:]

In my opinion, the last thing that the people in the UAW want to do is to have a rational discussion about their industry because the result would be thay they would have to acknowlege that they get paid so much in total compensation that their company(s) have limited choices at this point as to what they can do.

For example, GM has made decisions over the years and made such lavish labor agreements that now thier fixed costs per auto produced are so high that they can not make much money at all producing competetively priced smaller cars. As a result, right at a time in our lives when China's and India's (2.5 billion people together)economies are really growing, consuming more petroleum, GM has decided to focus heavily on large passenger trucks that get low miles per gallon. This was their business strategy. Tragi-comical.
GM can not compete successfully until they lower their costs quite a bit.

Feb 07 09:41 PM