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Sunday, August 2, 2009

The Lessons of Cash For Clunkers

Introduction: Here's a quick summary of the program. Cash for clunkers is a government run program that allows consumers to trade in their old car for a new one that is more fuel efficient. By doing so, they receive a credit toward the purchase or lease of said new car of $3500-$4500. Then, the dealer crushes the old car and makes it unusable. Then, the dealer fills out mountains of paperwork and hopes to get that credit back from the government. The program was supposed to run for about four months but was out of money in four days. Now, Congress hopes to add another $2 billion to the program.

1) If you put money into people's pockets, that stimulates the economy.

If you want a real lesson, the lesson is that President Obama's entire mantra is non sense. The president has proclaimed that only government can solve this crisis. If you think about it, cash for clunkers is no different than a tax cut. Only in this case, it is very targeted to a very small group of folks. Cash for clunkers put the equivalent of up to $3000 into people's pockets. That's the difference between what they could sell their car for and what the government gave them as a credit. With all this money in their pockets, is anyone really surprised that the program was met with overwhelming demand?

Isn't the lesson here that the best stimulus is a tax cut? Why only give a tax cut to those that have a clunker? Why not give a tax cut to everyone? Neal Boortz favored a six month holiday from the payroll tax. That's a tax cut of as much as $3600 depending on your income. If the $3000 tax cut that cash for clunkers created stimulated this much demand, how much stimulus would an across the board tax cut of up to $3600 have done? What about a straight across the board 3% marginal tax cut? How much would that have stimulated demand? Better yet, people wouldn't have only gone out to buy a car but to buy everything.

The best part is that either of the last two ideas wouldn't have cost any more than the $787 billion that the stimulus has cost. Cash for clunkers actually proves that it isn't the government but the people that will drive the recovery. Cash for clunkers proves that the best stimulus is to put more money into the people's pockets. Yet, while the president has allocated $1 billion for clunker cars, he's also allocated about $13 weekly for tax cuts. Those aren't even permanent.

2) government bureaucracy is always burdensome, unproductive, and an unnecessary impediment to business

We have yet to face the really corrosive part of cash for clunkers yet. That's because most dealers have only just begun to try and get their tax credit from the government. The process involves 130 pages of paperwork. It involves hours of sitting on hold with the government. It often involves having to deal with a website that gets overloaded and crashes. Here's the experience of one dealer.

Latanya Morgan, 35, a contract administrator from Bolingbrook, and Jorgette Montilla, 30, an accounts payable specialist from Warrenville, were drafted to enter the deals via the government Web site. After Morgan scans 11 required forms into their computer system, Montilla begins the data entry process.

Unable to log on for most of the morning, the pair managed to complete only four submissions in five hours. A fifth is hung up, a mouse click from completion. "I can't get through to the next step," said Montilla, stealing a few bites of her lunch. "Everything is done, I just have to submit."Within moments, a red error message appeared on the screen, terminating the hourlong process. "I have to do it all over again," she said.

The dealership has successfully processed about a third of its 100 transactions, each yielding a confirmation form from the government. Final approval and payments have yet to materialize but Carr is hopeful they will ultimately get their money."We're just taking it on blind faith that they are going to pay us," he said. "Our main goal right now is to just make sure we're doing it right and that people are getting taken care of, as best we can."

Already bogged down, the government Web site may see additional traffic next week, as some dealers have yet to even begin the rebate application process. With about 85 clunker transactions through Saturday, Willowbrook Kia/Ford has been waiting for certification from a salvage yard that the vehicles have been junked -- a requirement of the program -- before joining the online quest for reimbursement.


Are we really to believe that bogging dealers down in hundreds of pages of paperwork and hours on the phone and the net is stimulative or productive? Keep in mind that while dealers may have made the sale unless they get that rebate from the government that sale will lose them money. So, we are still to see the corrosive effects as dealers begin in earnest to try and recover that money. Once dealers are forced to spend thousands of man hours just to get their money back, then we'll see just how corrosive the program is.

3)all government manipulation has unintended consequences

This program mandates that any car that is traded in is subsequently destroyed. That means it can't be resold. Its parts can't be used in any other car. Its metal can't be used for anything. So, all industries that deal in used cars, used parts, and used metals are hurt while the new car industry is helped. Is that a good thing is it merely the government picking winners and losers? All this does is give used car dealerships less of a supply to deal with. Millions of cars that could have been resold as used are now taken off the market. That makes the price of all used cars go up. In a struggling economy is it really a good idea to increase the market price of all used cars. Often, that's all a struggling family can afford. Meanwhile, junkyards have lost millions of cars. All those folks that want to buy used car parts will see those parts go up in price. How is that good for our economy?

4) government projections can't be trusted

The money for this program was supposed to last until November. Now, the government is telling dealers to continue to sell even if there is no money left. If the Republicans block this, you can bet that Democrats will demonize them as being anti small business. If the government failed so miserably in projecting the cost of this program, what does that say about their projections on health care reform? The reality is no one ever knows what a government program will cost. We only know what the government projects it to cost. Projections are right once in a blue moon. That's why economic data routinely beats or loses to estimates. How often have you heard of an economic number being dead on to their estimate? That rarely happens. So, when the government says that health care will cost $1 trillion over the next ten years, you can bet it will likely be a lot more than that. If the government so underestimated the cost of cash for clunkers, how far off will they be on health care? Do we really want to give the government full power of a one trillion dollar program given how miserably they failed to predict the costs of a one billion dollar program?

5 comments:

Gail said...

The purpose is not to stimulate the economy, it's purpose is to harm the economy and spread socialism covertly and make it look like an effort to help people.

Wait until the stats come out on how many of the people who are buying new cars after trading in their cluknkers default on the notes.

Is there a betting pool on this?

Best regards,
Gail S
http://backyardfence.wordpress.com

joe blowe said...

Is this not the broken window fallacy ?

Anonymous said...

The idea is that:

1. If you're buying a new car from the approved list, you probably didn't pay more than $4k in income taxes. Unless some of the entry level Mercedes and BMWs made the list, anyway.

2. When you give people money without strings attached, there is no guarantee it will be spent the way you want it spent. We gave Wall Street trillions and all they did was sit on it. An across the board tax cut would give most of the money to high income earners, who would either put the money in the stock market, or worse, use it to donate to Republican campaigns.

sophia said...

ting facts and figures.\

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