Cash-for-Clunkers Makes No Sense

Although I hate taxes, I like the fact that taxes affect behavior. In general, if you want less of something, tax it. If you want more, provide a tax subsidy.

Americans used to smoke a whole lot of cigarettes. Today, they smoke less than they used to. No doubt, some gave it up for health reasons. Others, however, decided it costs too much. We have taxed the hell out of tobacco products and we got less smoking as a result. That's good news for health, but bad news for politicians who thought higher taxes would create more revenue.

On the other hand, many of our politicians decided long ago that home ownership was a good thing. They wanted to encourage people to buy more homes. So they decided to allow home buyers to deduct the interest payments on their mortgage payments. Those who don't own homes are subsidizing those who do. Things worked as planned and we got more ownership as a result--maybe more than was optimal.

Now our politicians want us to buy cars. So they came up with the "cash for clunkers" idea. Trade in your old car for a new one now and the government (read: taxpayers) will pay a good part of the cost. So today's car sales figures should be no surprise. Stocks like Ford (F) took a big jump.

Unfortunately, the sales jump will not last. All we are doing with this program is bringing future sales forward. The more cars we buy now, the fewer cars we will buy later.

Auto stocks that surged on Monday will likely give up at least some of their gains today.

Comments

[jala:]

Well thought out. Thanks!

Aug 04 02:05 AM

[Mad Hedge F...:]

Unless you want to buy a new car. 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 Toyota (TM) 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 the fruit of 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.

Aug 04 12:29 PM

[Sam Ro:]

200,000 cars in driveable are getting scrapped. (I hope they're using green-friendly scrapping equipment.) There are 14.7 million unemployed Americans. At least some of them could work if they had a car. Why not give them the clunkers?

Aug 04 03:21 PM

[Mad Hedge F...:]

nmdf So now we have euthanasia for cars. The Wall Street Journal tells us that a government condition of the Cash for Clunkers program (see my last report at www.madhedgefundtrader... ) is that clunker buyers total the engines by pouring sodium silica into them. That way they can’t be resurrected like Frankenstein at the junkyard. What’s next? Free Viagra for the high mileage, new car buyers? There’s a certain poetic resonance there. Anything that works. In the meantime, the Republican Party is slashing its wrists by trying to block an expansion of the program. Is Mc Cain trying to lose the election a second time? I think he is oblivious of the warm and fuzzy feelings the program is generating, which is far more valuable than any direct economic impact. Don’t they have Ford dealers in Arizona? I never thought I’d run a car company chart again, but here is Ford in all its glory, up a mind boggling 65% since Cash for Clunkers started. Like virginity, confidence is very hard to recover, once it is lost.

Aug 04 05:37 PM

[KYConserv:]

And I would rather "donate" the clunker to an unemployed person who needed transportation to get a job than to see the car destroyed. The government is buying these cars, let's do something with them besides "nothing".


On Aug 04 03:21 PM Sam Ro wrote:

> 200,000 cars in driveable are getting scrapped. (I hope they're using
> green-friendly scrapping equipment.) There are 14.7 million unemployed
> Americans. At least some of them could work if they had a car. Why
> not give them the clunkers?

Aug 04 05:49 PM