Fundmastery Blog

Kurt Brouwer August 18th, 2009

The so-called Cash for Clunkers program has been an eye opener for many people because it illustrates the many problems with well-intentioned, but misguided government programs.  And, it has done this in a very short time span, so Americans have seen firsthand how it has gone off the road.  In fact, stories about collateral damage from the program are popping up.

What’s wrong with Cash for Clunkers?: The original Cash for Clunkers authorization was for $1 billion.  The program has already - in a couple of weeks - run through that $1 billion.  However, the $1 billion was somehow used up without actually paying car dealers the money they are owed under the program.  This report from CBS News gives the details:

Since Cash for Clunkers was launched last month it’s been seen as a big success.

“We’ve delivered over 100 cars under the program,” said dealer Matt Luzio.

But it’s been a complicated process. Luzio’s Flemington, N.J. dealership has only gotten a federal refund for just one of 103 he’s sold.

“It amounts to about a half a million dollars outstanding right now,” Luzio said.

While consumers get a discount when they trade in their clunkers, the cash from the rebates goes to the dealer - as much as $4,500 dollars for each car. And if the government rejects the application, it’s the dealer who is on the hook. So Luzio is holding on to the clunkers in case he needs to sell them like he would any trade-in…
Now, clunkers are piling up, costing him an extra $2,500 a month to store them on a separate lot.

“We are worried if the approval process isn’t sped up, we’ll have to secure more space to store clunkers,” Luzio said.

Nonetheless, the $1 billion is spent or allocated or whatever, so what should be done.  Simple.  Spend more.  Another $2 billion has been authorized confirming a classic governmental solution to a problem program.  If it is not working well, give it more money.

Congress and its actions are frequently based on political opportunism and crackpot economics.  As a result, regulations for programs such as Cash for Clunkers are absurdly complicated.  Also, in crafting this legislation, Congress devoted little or no effort to find out what happened to similar programs in other states or countries.   And, the very folks who created the program seem to be surprised at the strong public demand for government giveaways.  Finally, the solution is, as always, give away more money.

Unintended consequences are cropping up:

• Used car costs have risen by 30% as this video reports
• Reports are surfacing about problems at charities that depend on used car donations
• MarketWatch reports that July retail sales fell despite Cash for Clunkers:

U.S. retail sales fell 0.1% in July despite a boost from the government’s cash-for-clunkers subsidy, the Commerce Department reported Thursday. It was the first decline in seasonally adjusted sales in three months. The report shows that consumer spending is still weak despite attempts by the government to stimulate demand. Sales at most kinds of stores declined in July. Economists surveyed by MarketWatch were looking for sales to rise 0.8%. Falling gasoline prices in July led to a 2.1% decline in sales at gasoline stations. Excluding gas, retail sales rose 0.1. Excluding autos, retail sales fell 0.6%, against an expectation of a 0.1% increase.

Is Cash for Clunkers a success?

I suspect Congress would say yes, however I would say no.

Let’s review the scoring here.  First, Joe Consumer turns in a decent car, which gets destroyed.  He then buys a new car for, let’s say $25,000.  Government borrows $4,500 and pays auto company the dough, which offsets that portion of the cost of Joe’s car.  However, Joe Consumer has to come up with the balance of $20,500 which has to come from his savings or from a loan.  Of course, when Joe drives the car off the lot, the value drops by 20% or so.

Joe Consumer: Loses older car that was paid off.  Now, he’s making payments on a loan of $20,500 on a car worth $20,500.

U.S. Government: Now owes another $4,500 to bondholders.

New car company: One new car sale

Other consumer product retailer: One less sale

Environment: One more scrapped car plus environmental costs of making new car

Environment: Slightly higher average mileage for gasoline

Charities: Fewer folks donate old cars to needy charities

Used Car Buyers: With used car costs soaring, those who need a decent car end up paying more

U.S. Taxpayer: Grab your wallet

Update:  ABC News’ John Stossel does a very good job of pointing out the economic fallacy in government programs at his blog:

…Now it appears that Congress will ask not just for another billion, but another TWO billion. Look how generous Congress is with your money!

The idea is that by destroying used cars, people will buy new cars, which creates jobs. But this commits the “broken window fallacy”. That $3 billion taken from taxpayers to, essentially, destroy used cars now cannot be put towards college, or a new home, or new clothes, or anything else. Some used cars are no longer available for poor consumers to buy. If the “new car” market is helped by “Cash for Clunkers”, every other market is hurt because that $3 billion cannot be spent on anything else…

The government cannot just make up the billions needed for Cash for Clunkers out of thin air.  That money has to come, ultimately, from us as taxpayers.  Government spends more; we spend less.  Result: no net benefit. If you are interested in more on this topic, go to Stossel’s link above on the ‘broken window’ fallacy as put forth originally by a 19th century French economist, Frederic Bastiat.

If you want to see how much actual environmental benefit we have accrued under Cash for Clunkers, go to the Political Calculations blog right here.  They have a handy online tool that helps you do the calculations.  Here is a summary of the findings:

…Using the default numbers, we find that it takes a very long time for taxpayers to get their money’s worth for what they were required to spend to support the “Cash for Clunkers” program. At 26.5 years, the time needed to obtain the perceived benefits of reduced CO₂ emissions will very likely outstrip the useful life of the new “green” vehicle, suggesting that taxpayers will never realize a positive environmental return on the $4,500 they provided to subsidize the new car sale…

The cost for the unintended consequences and the collateral damage from Cash for Clunkers is rising. As is quite common, Congress never really did its homework on this issue.  As a result, they have wasted money on a program that did very little, if any, economic good and clearly has had a net, negative environmental impact.

• Business , Economy , Energy , Geopolitics , debt , deficit , income taxes
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