“Cash For Clunkers” Is A “Junker”

“Get your share of the stimulus!” is a slogan that has typified the auto dealer advertising for the “Cash for Clunkers” program.

For many reasons, I think that the “Cash for Clunkers” program is highly flawed on an “all things considered” basis and should have never been legislated.

Without writing a “book” on the subject, here are a few of my thoughts….

First, as a stimulus program it carries all of the potential risks and unintended consequences of intervention programs, of which I have previously written.  These potential risks and unintended consequences should not be overlooked.

Second, the specifics of this “Cash for Clunkers” program carry an array of troubling aspects…

Like most stimulus programs, “Cash for Clunkers” has a thin “veneer” of seeming benefit – until one starts analyzing the program in totality.  In this case, the “veneer” is that the program appears to be a “win-win-win” situation – from an environmental perspective, older cars with relatively poor fuel efficiency (and concomitant emissions) are taken off the road; from a consumer perspective, the auto buyer is given “a break” in the form of the reduced purchase price; and from an automaker / GDP perspective car sales increase.  So far the government has allotted $1 Billion for the program and is contemplating an additional $2 Billion.

Here are some problems specific to the program, when one views it on an “all things considered” basis:

  • As some people have mentioned, car sales are being “borrowed” from the future.  This is a major issue.
  • Although automakers are making sales, they are doing so at a discount.  Discounting holds many risks from a business perspective; these risks should be known by automakers as it has been a serious industrywide problem in the past, especially for those automakers that have abused the practice.
  • Another troubling issue – first the U.S. government props up the auto industry – this can be viewed as the “supply” side.   Now, it is “encouraging” the “demand” side.  This dual aspect should be pondered significantly – but hasn’t been.
  • The purported “environmental” benefit should be questioned and examined.  Is the benefit worth the cost?  Is it scientifically valid?  Might there be better programs, from an environmental standpoint, that could be enacted?  

There are other issues, some very troubling, that exist as well.

Another tangential issue is whether the legislative “rush” to expand the program is appropriate.  Should the program’s popularity among auto dealers, automakers, and qualified car buyers hold inordinate sway given the larger problematic issues mentioned above?

While some may dismiss the questions presented above as relatively inconsequential given the program at this point is “only” potentially $3 billion, this isn’t how such legislation should be viewed.  Whether it is $3 million, $3 billion, or $3 trillion, the rigor of the policy process should be constant. 

In summary, Congress should “junk” the “Cash for Clunkers” program.  People will “get their share of the stimulus” in other ways – the only problem is that it won’t be something to look forward to…

SPX at 1001.65 as this post is written