Cash For Clunkers Program Is A Lemon
Im sure that everyone has heard about the “Cash for Clunkers” program. This is another one of those government programs that sounds like a good idea until you really think it through.
In an effort to both stimulate the economy and aid the environment, Congress and the Obama Administration enacted a $1,000,000,000 [$1 billion] which allowed people to trade in old cars with low gas mileage and receive a discount of up to $4,500 on new cars with high gas mileage.
Because protecting the environment was one of the goals of this program (and to protect against fraud), dealers were required to pour a solution into the engine of the car that was traded in which permanently disables the car. The car is permanently taken off the road and is recycled.
Sounds good, right? Not quite.
Who buys new cars? People with money, of course. The rest of the driving population buys their cars used from people who feel the need to buy a new car every few years. By disabling used cars, the government is permanently removing their supply from the market. Doing so prevents lower and middle class Americans from buying that vehicle, and has the net effect of raising the prices for used cars.
Someone who is still driving the 1995 Cadillac DeVille that they bought from their neighbor 7 years ago probably isnt very likely to go out and buy a 2010 Honda Accord, even under this program. But, they would be much more likely to purchase the 2003 model DeVille that their neighbor bought after selling the 1995 DeVille 7 years ago.
But, rather than allowing the market to work in this fashion, the “Cash for Clunkers” program removes the 2003 DeVille–a perfectly good car–from the market and makes it tougher for the person still driving the 1995 DeVille to find a used car that fits his budget.
My personal opinion was that one of the reasons that this bill was passed was to protect the United States’ “investments” in [read: theft of] General Motors and Chrysler. It is clear to all that Congress and the Administration intended for this program to stimulate the economy and help the environment. But I also believe that the government wanted to use this program to inflate the revenues at GM and Chrysler to make the American people less uneasy about the bailouts of those firms. Think about it. If you had just made a hugely unpopular move like taking over two iconic American automakers, you would do anything possible to convince the public that it was a good decision. This includes funneling money to those companies to make their revenues look good.
My guess is that this program will actually hurt GM and Chrysler as compared to their competitors, namely Ford. Why? Well for one, a new Rasmussen poll found that 66% of Americans have at least “a somewhat favorable opinion of Ford.” The same poll found that “General Motors is viewed favorably by 38%… and unfavorably by 56%” It also found that 34% have at least somewhat favorable opinion of Chrysler “while 55% see the company unfavorably.” The American people are angry at the other two companies for taking taxpayer funds, and Ford is now perceived as the only American automaker that isnt owned by the government.
They also make much better cars now than they used to. I love my 2007 Ford Fusion.
In another poll that was published on the same day, Rasmussen also found that 46%of Americans are more likely to buy a Ford because they did not take a government bailout (13% said they were less likely and 37% said it didnt make a difference). 41% OF Americans also believe that quality of GM’s cars will get worse now that the government owns the company, while only 19% think it will get better.
[Investors like me know this. For the sake of disclosure now that the FTC has announced that it is going after bloggers, I am a proud stockholder of Ford Motor Company and have seen the stock rise by about 18% in the last week. Still, I am 100% opposed to this program.]
Additionally, the government’s intention was to get people to purchase cars with much better fuel efficiency and the new Ford Fusion Hybrid gets 41 MPG and was rated higher than the Toyota Camry Hybrid, making it an attractive choice for anyone who decides to trade in their clunker.
If the intention was to increase the revenues at GM and Chrysler, this program will backfire, as do most government programs. My prediction is that the market shares of Ford, Toyota, Honda, Hyundai, and Kia will rise at the expense of GM and Chrysler.
This program also raises further questions about the competency of the government. Love or hate this program, it was administered poorly. No, this doesnt “prove that government cant run our health care system.” It should, however raise at least some concern about the capability of government to administer programs. It should also serve as a warning that when the government offers people a massive discount to use a service, people will take advantage of it (people respond to incentives). The government and taxpayers should at least use the example of this program to think about what the effects of what will be perceived by many to be free health care will have on an already strained system.
This program should remind us to be weary of government estimates. The $1,000,000,000 [$1 billion] allotted for this program was expected to last at least until the program’s anticipated end date of November 1st. Instead of lasting for 4 months as estimated, it lasted less than one month before it exhausted its funding. If the government was this wrong–way wrong–on estimates for its costs of giving out coupons for discounts on cars, can you imagine how far off could its estimates of the costs of administering a $1,000,000,000,000 [$1 trillion] “free” health care program be?
Its worth thinking about.
Americanly Yours,
Phred Barnet
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