Cash for Clunkers Repeats Mistakes

We have all witnessed the government's attempts to stimulate car sales through it's Cash for Clunkers program. The stated purpose of this program is to stimulate the economy and create more jobs. The intended purpose for this program is to reduce carbon emissions by replacing low efficiency older cars with modern cars which are certified to achieve a very high efficiency as measured in miles per gallon.

In reality, this program continues to contribute to the very factors that led to the economic melt-down last fall. Remember that the move to provide more and more credit to consumers did not really create new demand but simply moved demand forward in time. When the use of credit had maxed out, demand fell precipitously. How does this apply to the Cash for Clunkers program?

The current efforts to incentivize consumers into purchasing a new car is shifting demand in time. The cars that are being sold now would have been purchased in the future - you know that time when the automotive companies, emerging from bankruptcy have the hot new product lines for sale. What will happen to these corporations when the demand for the new cars has already been filled by the participants of the Cash for Clunkers program?

But consider the program from a completely different vantage. How would the program differ if it had been run from a free enterprise viewpoint as opposed to a government give-away? To start with, the free enterprise version would not target the new car sales, only. The current program requires buyers to either have the cash to make a purchase now, or to borrow the cash needed to take advantage of the incentive. These new cars are not cheap and will lose a significant percentage of their value the moment they are driven off the lot. The increased debt load on the buyers will effect their long-term security as well. The cars (clunkers) traded in must be processed so that the engine and drive train can not be reused.

In a free enterprise environment, the incentives placed on the new cars, would also generate an increase of used cars for resale. Increased inventory provides more choice and usually lowers prices. Citizens who could not afford a new car, or who chose to not take on additional debt at this time, could perhaps upgrade from even older (and even less efficient) cars by buying someone else's better clunker to replace their own clunker.

These used car purchases would provide an additional demand for jobs in sales, in maintenance and repair. The clunkers which were not re-sellable would be sent to junk yards with working parts (instead of having the engine and drive trains destroyed) which could be used to keep cars going during this recession at a reduced cost for all of those families whose finances are being challenged. Again, these maintenance jobs would continue to sustain employment. The benefits of the program would flow throughout all levels of our society and economy.

Another interesting aspect of the current cash for clunkers policy is the impact it could have on the dealerships' cash flow. I heard a radio interview with the owner of a Ford Dealership who was talking about the inability to get questions answered regarding the program. The phone numbers he was given was always busy or never answered. This dealership had almost $250,000 of their own money tied up in new cars on the road, waiting for government reimbursement. What would be the implications if someone decided to reimburse the GM and Chrysler dealers first and the stretch out the time to pay the other dealerships. This cash flow crisis could wipe out car dealerships that currently compete with the government owned automotive companies. Is the program being administered this way? I don't know if there is sufficient evidence either way. Could the program be administered this way, in a minute it could. This is the obvious problem of governmental ownership of businesses in the free market system!

So, once again we are taught the lesson that government can not incent the economy effectively. Instead, government always picks winners and losers. In the process, government adds layers of inefficiency and adds cost without benefit. And the taxpayers always lose!