Three Great Aspects of Cash for Clunkers

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

Comments

[Jiang Nan:]

Wonder just how much of that 2.5 trillion would stay in US?

Aug 14 07:47 AM

[scoad:]

Maybe after that we could have a plan to destroy every house over 15 yrs old and while we're at it we could snuff every human over 50. This might include you, but too bad you're obselete obviously and producing pollution. NEXT - lets see- pets over 5 yrs? lots of pollution there. ANY fat person?
But just one minor problem. What happens to the millions of people unable to afford a car and get to work after the politburro [sic, intentional] destroys every car over 10. Oh well lets eliminate them too, less pollution obviously.

Aug 14 08:24 AM

[Bruce Krasting:]

This clunkers deal will sell 750,000 cars. The end result will be that consumers will take on $18b of new car loans (average of $400 per person per month).

This deal has a short term benefit, but does nothing for us long term. Keynes would not have liked this. He would advocated programs that increased demand from the public sector to offset a decline in demand from the private sector. This is backward.

Watch retail sales after this is over. They will be weak as a result of clunkers. This just moves the deck chairs on the titanic. Encouraging already over indebted consumers to take on more debt is just bad policy.

The average foreign content of cars sold is 50%. We are stimulating Germany, Japan and Korea.....

Aug 14 09:12 AM

[daarkcar:]

How Congress Can Double Car Sales:
The impact of unintended consequences dictate that there be other dominoes that fall if such a scenario gets legs, such as (1) The reduction in gasoline will reduce the gas tax revenues - precipitating an increase in the taxes. (2) newer cars cost more for insurance. this will pour an outcry that the car insurance industry has obscene profits. The insurance industry will be unable to 'total loss' fewer accidents causing them to cry claims are too high. (3) service departments of auto dealers will not keep up with the warranty work, independent auto repair shops will notice the drop in business. (4) Older mechanics will retire and there will be a lag bringing younger mechanics up to speed.

Aug 14 11:35 AM

[j-dub:]

I am thankful that this article extols the virtues of long term benefits and avoids any immediate satisfaction propaganda that always finds a way to get us into to trouble.

BRAVO

Aug 14 11:52 AM

[Old Trader:]

How did the alleged environmental "benefits" get overlooked? Wasn't that touted (along with cutting our dependence on imported oil) as big part of the rationale behind the program?

At best, this is an economic "stick save" that'll buy a bit of time, in terms of saving/repairing the economy, for TPTB to come up with another one (stick save, that is..). Kicking the can down the road is being elevated to quite the art form.

Aug 14 07:57 PM

[The Geoffster:]

Democracy ends in socialism.
-Karl Marx

Aug 15 08:42 AM

[dustbusterz:]

Three Great Aspects of Cash for Clunkers??? so your advocating the theft of your kids future and your kid's kids futures to artificially stimulate the economy? your so sick you need to be taken out and stomped on a few hundred times till some sentence is smashed into that head . and this next statement is so stupid I don't even have words to express my disrespect for you. your words---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.

How about this. by putting laws against driving cars older than 10 years, you destroy many lives , as most older cars are driven by those who have no means to buy newer than 10 years. So they get to go shopping with their kids by walking to the store with kid in tow.Great ideas from someone so stupid.

Sep 16 08:51 PM