Clunker
The term “Cash for Clunkers” refers to a government program under the acronym CARS (Car Allowance Rebate System). Under the program, recently extended by Congress, consumers receive $3,500 - $4,500 towards the purchase of a more fuel-efficient vehicle. Details are available at http://www.cars.gov.
The program accomplishes two things. First, it provides a boost to reeling automakers beset by sharply declining sales. Secondly, by exchanging vehicles of less fuel efficiency for those with more fuel efficiency, the average MPG of the US fleet improves, thus driving down our reliance on imported oil. On balance, it appears a laudable goal. Let us examine the efficacy of this government program.
Does this program make economic sense? Discard political loyalties for a moment. Think about this in terms of economics. In 2003 Congress passed legislation offering a $100,000 tax credit for business owners purchasing vehicles weighing 6,000 lbs or more. The $100,000 represented an increase from $75,000 the prior year. Curiously, there were many SUVs fitting that description. What happened to large SUV sales during this period? According to the watchdog group Taxpayers for Common Sense, 100,000 people claimed the credit in 2002 (out of 3.6 million large SUVs sold). During this same period, a $2,000 deduction for hybrid vehicles was set to expire.
There are two operative points to consider with the program encouraging gas-guzzlers. Taxpayers not desiring large SUVs subsidized those qualifying for the program. What led Congress and the Administration to consider this is worthy program? Was the market for large SUVs in a state of decline (3.6 million sold in 2002)? Keep in mind this does not consider other SUVs of smaller dimensions who were already selling quite well. Next, was the oil importation equation from 2003 significantly different than it is now? We were quite reliant on oil imports in 2003. Our geopolitical interests in oil-bearing regions certainly confirm this.
Now we have a sea change at hand. We reward former purchasers of gas-guzzlers in their acquisition of a more fuel-efficient vehicle. The new program is multiples larger than the original. A taxpayer originally purchasing what the government considers a fuel-efficient vehicle loses again since they never purchased the gas-guzzler in the first place. The point is not to castigate purchasers of gas-guzzlers. Is the attempt by government to stimulate demand in this instance economically worthy? The site http://www.CNN.com suggests this program will stimulate demand, increase production from the automakers and have a ripple effect on the economy.
If government stimulation of demand by spending or tax subsidies such as this is the magic potion to remediate our economic ills we can envision two scenarios. The government could commission defense contractors to build warships and tanks. Our military could then unleash a massive wave of target practice, without humans occupying the ships and tanks, and spend quite a bit of money. The economic stimulation occurs and there are ripples throughout the economy.
In another case, a group of vandals is unleashed in a suburban neighborhood to break as many windows as possible. A sympathetic member of Congress proposes legislation, with Presidential support, to provide a tax credit for people replacing those windows with more energy-efficient ones. Window makers and installers rejoice since their industries were struggling with the recent collapse of new home building.
Two problems exist in the aforementioned examples. A) Our present government has no money for either program, which means further borrowing. B) The spending for military target practice or windows replaces other spending in the market. In both of these cases, a wealth transfer from taxpayers not directly involved with military production or window production occurs. We also did not create any wealth but we certainly created debt.
The current Cash for Clunkers program is a wealth transfer from taxpayers not purchasing cars to those who actually may have purchased cars regardless of the tax incentive. More likely, the Cash for Clunkers program accelerated some number of future car purchases. Another unintended effect is the removal of a supply of used cars from the market since the Clunkers program requires dealers to scrap the vehicle or disable its engine. Americans dependent on the used vehicle market will see the supply of available cars diminish.
Government is seldom an agent of positive economic change. We have literally come full-circle with this program. The initial incentive to purchase a fuel-inefficient vehicle is replaced by a program to purchase a fuel-efficient vehicle. Compounding this “solution” is the destruction of real value of many previously owned cars now rendered useless. Kafka would be proud!
Jim Mosquera publishes The Sentinel Economic and Financial Newsletter
Comments
In response to hearing that foreign cars are making up the majority of cash for clunkers new car purchases.
I cant believe that the people are not required, at least to buy an american built car, if not from one of the big three.
Instead these people are cluless or dont care about helping our economy, right here in the US where we need the jobs.
As far as the whole program its a nice gesture the pick up votes from people who have old cars with little value.
But realy its just a way to slip a little socialistic test run through to the American people. I somehow doubt that the people who bought these cars are the same ones who paid the taxes in the first place. Oh wait, thats right we dont have the money as a country to pay for this, so I guess that we will get to pay for the cars afterall.
Please contact your senators and representitives and share your point of view on the looming health care issue
The TAX-AND-SPEND loony-left d-crat socialists never saw a taxpayer dollar they wouldn't waste on pork, bailouts, give-aways or socialist welfare.
Based on this massive waste of taxpayer money, I have a question:
I need some new underwear. (My current pair got stained when I heard that the American-values-hating socialists had taken full control of the federal government.) It will be environmentally friendly to replace my current pair with new ones, so the tree-huggers, who drive loony-left policy, will love this, too.
When will I get a cash give-away of taxpayer money from the loony-left d-crat socialists' "cash-for-cr*p" program to pay for my new underwear, when I trade in my stinky, old, soiled pair?
P.S. I feel strongly that this trade-in rebate will definitely stimulate the economy just as much as botox pelosi's PORKULUS has, and it will further end the already ended recession.
P.P.S. Unlike that car cash give-away that goes primarily to non-American companies, I
P.P.S. Unlike that car cash give-away that goes primarily to non-American companies, I promise I will buy underwear made by an American company (which, of course, uses child labor in Haitian sweat-shops to make the underwear.)
Your article is littered with inaccuracy and your provided evidence is opinion and speculation.
This is an excellent article that should be required reading for all. You correctly identify that this program creates absolutely no new wealth, and is nothing more than a wealth transfer from people not buying cars to people who might very well have bought one anyway (I read another blog earlier this afternoon where a guy who claimed to have 2 cars, 2 homes, a boat and an 800 credit rating was bragging about how he got a new car under this program... true? Who knows.)
If anything, however, you let the government off the hook far too easily by saying "Governmnet is seldom an agent of positive economic change." The fact of the matter is that government, in any active sense, is *never* an agent of positive economic change. To the extent that the government acts to terminate and eliminate its own interferences in the market, that is beneficial, but so long as it is acting actively in any way, it is *always*, without exception, an agent of market distortion and real wealth destruction.
Inaccurate nonsense.
can we please give the program a more accurate name: "debt for clunkers" because the US government has no "cash".
If we had some folks working I guess they could pay some taxes. That kinda thinking is far above this writer's thinking.
Cash for Clunkers did not help the American economy. The Bailout had no affect. The economy continues to self-destruct. American jobs continue to move to other countries. Few people on Wall street saw this coming because they are simply not intelligent people. Nobody in Washington saw this coming because they simply are not intelligent people. CEO's and Congressmen are grabbing all the tax money that they can with the pretense of taking "urgent action." It was urgent that they pass a bill to pay their college debts in full. It was urgent that they buy jet planes for themselves. It was urgent for them to give themselves more huge pay raises and health benefits.
America cannot keep on going because it has the most corrupt and least intelligent "leaders" in its entire history. So, learn to say, "Yes master" in Chinese because the Chinese military will certainly get the money that you owe China one way or another.
I think this program will work. At least our president is trying to do something to turn around our dismal economy. Mr. Bush did nothing while in office to help our economy. NOTHING.
The point of this program is to get less fuel efficient cars off the road. We all know that us Americans buy some of the most illogical cars to drive. We buy cars like the Hummer H2 and the Chevy Suburban, and the Ford Explorer, even though most of these cars are never taken off the concrete. Why should I buy an American car if the mileage is terrible?
The fact of the matter is the the big three had a chance a long time ago to start producing fuel efficient cars, and cars that lasted a long time. But instead GM, Chrysler and Ford just fattened their wallets and look where it got them.
Has Honda or Hyundai, or Mitsubishi, or any foreign auto maker declared bankruptcy? Heck no. As a consumer that must lead me to believe that American cars are not worth my money.
Thank you for this well-written piece. I think if readers evaluate this article on economic terms and not political terms, they will see how inefficient and misdirected these programs are. The government originally wanted gas-guzzlers and now does not. This is why government making economic policy (regardless of whether it is a republican or democratic administration) is dangerous!
Program runs through Nov 1, 2009 or when the funds are exhausted, whichever comes first.
Jimhenry
Blogger
www.cashforclunkersfacts.info
The CARS program is actually worse than the $100,000 SUV tax credit because the government could recover some of the $3500 - $4500 money through the proceeds of selling the clunkers for scrap. Just another boondoggle!
To the commenters who claim this program stimulates jobs: How long would a business survive if the owner paid for their workers with money borrowed from a Credit Card? When his credit runs out, so does his business because the payroll was *not* based on productivity. We are simply stealing money from our children to pay a select few today.
Jim is exactly right on this point. We are headed to the USSA and the picture is not pretty.
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