Cash for Clunkers -- The Final Phase

I've been obsessed with this topic because it is perhaps the most obviously and perfectly stupid government program I have ever seen. It's not all that important because it represents only a few billion dollars (as of this moment, $3B in total) of government waste and distortion in a $13T economy, but it does serve as a reminder that government can enact incredibly bad policy in a very short time. The forces of rationality and prudence take time to gather and gain critical mass, but by then it is often too late. Something to ponder as the Democrats try to ram health care reform through Congress without meaningful analysis and debate.

I predict that by the end of the year, you will see stories appear in the media which are highly critical of the results of the Cash for Clunkers program.

To wit:

1) the boost in GDP for the 3rd quarter was temporary -- this will be exacerbated by the way GDP is calculated; inventory drawdowns count towards GDP, but inventory builds do not [Update: Oops, I got this exactly backwards. Inventory builds count towards GDP and drawdowns do not. What I described would be correct for what is called the Final Sales number];

2) the boost to the auto industry was temporary; although domestic car sales had until recently been running at an unsustainably low level (9MM/yr, although there are over 200MM cars in the US), the Cash for Clunkers boost is unsustainable as well and has cannibalized future sales; in addition, Cash for Clunkers has induced many people to buy new cars who probably shouldn't have bought them, and those people will either be dumping them soon or going a good long time before buying another new car;

3) a detailed analysis shows the environmental/energy savings of the program (in terms of carbon emission or imported oil -- both questionable metrics in any case) was nil or negative because the mileage improvement was offset by the energy used to make new cars and destroy old ones, and the old cars weren't driven nearly as much on average as the new cars;

4) used car market prices rose making it harder for poor people to afford a car;

5) engine parts for older cars became scarce making it difficult for owners of clunkers to keep them running at an affordable price;

6) the lion's share of the government largesse actually went to car dealers rather than clunker owners because dealers raised prices on eligible new cars in the face of very high demand;

7) many clunker trade-in buyers ended up with buyer's remorse as they realized they traded in a $2,000 car for a $4,500 rebate but actually paid $2,500 more for a new car than they would have had to if the government hadn't distorted the market;

8) many clunker trade-in buyers were tricked into spending more than they could afford for a new car that they didn't really need or want;

9) new car buyers who didn't have a clunker to trade in had to pay far more than they would have had to just a couple of months before;

10) Cash for Clunkers was effectively a huge subsidy for car dealers as the program provided them with free cash, free advertising, and a huge distortion in customer preferences towards consuming new cars;

Keep in mind points (7) and (9) above as you read stories about auto inventories becoming depleted in the face of huge Cash for Clunkers demand. I suspect that clunker owners are getting no advantage out of the program at this point relative to the deals that existed in June. And yet they will keep buying anyway because human beings are susceptible to marketing schemes that make it look like a special deal is to be had. On top of that, they will be buying "eligible" new cars from depleted inventory, which means that they probably won't even be buying their first choice car (e.g. model, options, color).

Clunker trade-in buyers, regular car buyers, and taxpayers have become dupes of the auto industry.