Monday, August 03, 2009

Rattle, Rattle, Thunder, Clatter, BOOM-BOOM-BOOM

While many politicians are engaged in self-congratulatory back-patting over the "success" of the cash for clunkers program, the WSJ editorializes that the subsidy is crackpot economics:

Americans are streaming back into auto showrooms, and one reason is the "cash for clunkers" subsidy. Democrats are naturally claiming this is a great success, while Republicans are claiming that because the program has run out of clunker cash so quickly, this proves government can't run the health-care system. How do we elect these people? What the clunker policy really proves is that Americans aren't stupid and will let some other taxpayer buy them a free lunch if given the chance.

The buying spree is good for the car companies, if only for the short term and for certain car models. It's good, too, for folks who've been sitting on an older car or truck but weren't sure they had the cash to trade it in for something new. Now they get a taxpayer subsidy of up to $4,500, which on some models can be 25% of the purchase price. It's hardly surprising that Peter is willing to use a donation from his neighbor Paul, midwifed by Uncle Sugar, to class up his driveway.

On the other hand, this is crackpot economics. The subsidy won't add to net national wealth, since it merely transfers money to one taxpayer's pocket from someone else's, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

With the toll our kids have taken on our couch already, we'd be itching for such a sofa subsidy soon. And, although it might not be environmentally friendly, imagine the fun of taking a torch to the family furniture. Nothing brings a neighborhood together like a good old fashioned couch burning. National Night Out is just around the corner...

Jeremy Anwyl--CEO of has a piece in today's WSJ questioning the value of cash for clunkers:

Clearly, cash for clunkers was underfunded from the start. Consumers quickly figured that out and rushed to take advantage before funding ran out.

This sales frenzy was inevitable. We have crammed three to four months of normal activity into just a few days.

What everyone fails to realize is that once this backlog is met, interest in the program will fade.

This is the key argument against the program. Did it really generate new economic activity or merely bring forward spending that was going to happen anyway? As product companies well know, you can always increase your short term sales by pulling in your future backlog. The problem is refilling that backlog so you're not twiddling your thumbs when that future arrives. Not only is this "cash for clunkers" surge unsustainable, it's probably already cannibalizing sales of 2010 models which will arrive at dealers in a few months. Who's going to be buying cars then?

There's also this:

There is also an ironic unintended consequence. Car companies have cut the number of vehicles coming off their assembly lines in response to the recession, which is leading to spot shortages. This is particularly the case for fuel-efficient models the program was suppose to encourage consumers to buy. As prices for these autos rise, buyers will inevitably use their cash-for-clunker dollars to buy less-efficient models and thus crush one of the touted environmental benefits of the program.

In most of the cash for clunkers anecdotes that I've heard so far, it's a case of someone trading in one pickup truck or SUV for another. Yes, the newer vehicles are more energy efficient, but the differences aren't usually all that significant. The cash for clunkers vision of a newly enlightened, environmentally conscious citizen trading in his Hummer for a Prius is not the reality.

Despite the weight of these arguments, the Senate--never one to let the facts get in the way of a popular spending item--will likely approve additional funding for cash for clunkers this week.

Given the "success" of the program, Congress is also considering expanding it into other areas.

Cash for Punkers: Former punk rocks fans can turn in their punk CDs, black clothes, and spike collars for a government subsidy to be used toward the purchase of classical music.

Cash for Lunkers: Fisherman can turn in their trophy mounts and receive a government subsidy to be used toward catching even bigger fish at resorts and camps.

Cash for Spelunkers: Government subsidies will be available to purchase gear and travel to explore caves. Will be especially helpful in states that will be adversely impacted by Cap and Trade like Kentucky and West Virginia.

UPDATE-- Bob e-mails:

I write to let you know that, because of your latest post, you might be eligible for the Fed's latest "Cash-For" program. It's called "Cash For Debunkers," and offers up generous sums to anyone with enough economic savvy to thoroughly debunk the ridiculous "Cash For Clunkers" nonsense. The government's only condition is that you drink the "Cash-For" Kool-Aid and cease your debunking activities immediately.

My silence is most definitely for sale.

On a related note, plans were also unveiled for another program:

Cash For Chunkers: To help stem the rise in childhood obesity, parents who bring their overweight offspring to government-run fat camps will receive a generous subsidy. Their children will receive a reeducation in proper diet and exercise and three helpings of government issued gruel per day.

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