'Cash for Clunkers' Incentivizes Americans to Take On More Debt

Well, H.R. 2751: Consumer Assitance to Recycle and Save Act -- better known as the "Cash for Clunkers" bill -- passed the House of Representatives on a 298-119 vote and is awaiting action by the U.S. Senate. The bill gives buyers a $3500-$4500 tax credit for trading in their used car for a new car at a dealership. The dealers then have to ensure that the used car is either crushed or shredded; they cannot even sell it overseas!

Edmunds has reported that the average price of a new car is $27,800. BankRate.com reports that an average car buyer puts down 5%; this would mean that an average new car buyer would take on about $26,410 in new debt. The tax credit (let's say an average of $4,000) would take this down to $22,410.

Just as with the $8,000 first-time homeowner tax credit (and a "first-time" homeowner is anyone who hasn't owned a home in 3 years), the federal government is tempting Americans with more debt. Yet again, Washington proves that it does not get it: debt is the problem, savings the solution.

Instead of creating an economic incentive for Americans to take on new debt, Congress should pass incentives for Americans to pay off their debt. For example, how about a $3,000 above-the-line tax deduction for paying off an auto loan? How about a $1,000 tax credit for paying off one's mortgage? Of course, these incentives would do nothing to further the interests of the real estate industry or the automobile industry (which is and/or will be run by the government and its UAW supporters).

I sincerely hope that not too many Americans fall for this foolishiness. Why would a person trade in their unleveraged, perfectly-working 2001 Saturn SL1, for example, so that he or she can take on $20,000 in new debt?

Disclosure: No positions

Comments

[Mad Hedge F...:]

Good. Perhaps it was the newspaper gene in me that made me screech my car to a halt when I saw a near riot in progress at my local total Toyota dealer. The showroom was more jammed than the unemployment office, with eager salesmen recalled from vacations manning card tables set up in every available space. I managed to grab one peripatetic salesman by a lapel, who gushed that they sold 45 cars yesterday, compared to ten for a normal Friday, and that 35 of these were due to the Cash for Clunkers program. Sure I could get a $4,500 credit for my 1995 BMW (17 mpg), and apply it to a new Prius (50 mpg), taking the price down to $19,500 and the monthly payment to $450/month for five years. In fact, the government stimulus program was so successful, that it ran out of money in the first four days, and congress rushed to triple it to $3 billion on Friday. It was like the survivors of a ship torpedoed at sea were swimming frantically for the only piece of wreckage that floated. Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports. I asked to see the cars that were traded in and was told that the lots for the dealer, the used cars, and the detailer were all full, but I could see some if I went to the Target nearby where they were renting extra spaces. There I saw the fleet condemned to clunkerdom, GM Safari’s, Jeep Cherokees, Buick Regals, Dodge Ram pickup trucks and vans, and Chrysler minivans by the dozen, all with “CFC” marked on their windshields, a certain death sentence. These sorry excuses for transportation will never belch blue smoke, nor drip oil on our interstates again. I can’t imagine a sorrier commentary on the management failure of the US car industry for the last 30 years.

2009 Aug 01 04:38 PM