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Clash for Clunkers Increases Car Sales

The much maligned Cash For Clunkers program has three remarkable features that differentiate it from the other wide assortment of endless government stimulus/bailout programs.

1. The Cash For Clunkers program, at an initial $1 billion cost, is relatively “small” compared to the trillions of dollars that have been deployed for other stimulus and bailout measures. The concept of the Cash For Clunkers program did not originate in Congress but rather was the brainchild of Jack Hidary, an entrepreneur who noticed the success of similar programs in Texas and Turkey. Mr Hidary’s lobbying efforts ultimately resulted in the Clunkers program approval by Congress.

2. The Clunkers program is the only stimulus/bailout program enacted that allows participation without regard to income or financial need status. A Clunkers applicant does not need to be unemployed, facing foreclosure, financially inept or destitute.

After seeing trillions of taxpayer dollars spent to bail out banks and homeowners for making stupid financial decisions, it is almost refreshing to see a program that helps those who probably don’t really need any help. A purchaser of a new $30,000 car who can obtain financing or pay for the car in cash is probably still employed and doing quite well.

It would be interesting to see the income and credit stats on new car buyers under the Clunkers program but my guess is that many of the new car buyers are frugal, financially responsible individuals who had driven the same car for many years and would have purchased another vehicle soon anyway. The Clunkers handout merely pulled forward future car sales - but that was the intention of the program.

3. Without debating the merits of the Clunkers program, from a strict Keynesian economic theory standpoint, the program was a resounding success based on the multiplier effect.

Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.

In the Clunkers case, assuming increased unit sales of 250,000 at a cost of $30,000 each, sales revenue of $7.5 billion was generated based on a $1 billion government cost. Compared to other government stimulus, the Clunker program can only be viewed as a resounding success.

Clunkers Encore

Under the theory that government programs never die but only get larger. I would expect that the government will expand the Clunkers program to the point of absurdity. The original program has already been extended and doubled to $2 billion.

Lobbyists for the car industry should have an easy time convincing Congress to expand the program based on its “success” in generating sales. Let’s not forget, of course, that the government and the UAW now own General Motors.

How Congress Can Double Car Sales

If Congress really wants to get creative about stimulating car sales and lending, they may start by looking at the average age of US vehicles currently on the road.

According to USA Today, the automotive consultants R.L.Polk calculate the median age of cars in the US in 2007 at 9.2 years and the median age for trucks and SUVs at 7.1 years. Over 41% of all cars in 2007 were over 11 years old. There are 235 million passenger vehicles in the US, including 135 million autos and 100 million SUVs and trucks.

For the sake of saving the environment from old polluting cars and stimulating the economy, Congress, by legislative fiat, could prohibit the possession or use of any vehicle over 10 years old. The mandatory new vehicle replacements could be phased in gradually over 5 years, and would effectively force the purchase of at least an additional 60 to 70 million vehicles. Vehicle sales for the next five years would easily double from the 2009 estimate of 11.5 million units.

The government’s investment in GM would be worth a fortune, and the States’ budget problems would disappear with the flood of sales and property tax levies on all those new vehicles. Government guaranteed easy financing would be provided to all, regardless of income or credit. Cash rebates on traded in vehicles would be increased to offset the new vehicle’s cost.

Result for the US economy - large GDP increases as $2.5 trillion dollars in new car sales jolts the economy back to life. Unemployment drops to low single digits as the multiplier effect of booming car sales ripples across the economy. How does the Government finance the cost of this “Super Clunkers” program? Not a problem - the Treasury Secretary is already requesting a large increase in the national debt limit.

What politician would not vote for this plan?

Disclosures: No Positions

Source: Three Great Aspects of Cash for Clunkers