THE U.S. GOVERNMENT – LEADING BY EXAMPLE
The financial lunacy behind the latest government subsidized program is astounding. The cash for clunkers program is expected to add as much as 0.5% to GDP next quarter. While it is likely to contribute positively in the near-term the long-term ramifications aren’t quite as rosy. Bloomberg reports:
“Cash for clunkers came at a very, very good time to jump-start the economy,” Mike DiGiovanni, sales analyst at Detroit-based General Motors Co., said at a teleconference. The so-called Car Allowance Rebate System, which provides credits of as much as $4,500 for the purchase of a new car when an older vehicle to be scrapped is handed over, ran through most of its initial $1 billion of funding within a week.
“If the cash-for-clunkers program is extended by the additional $2 billion that passes the Senate, it could boost third-quarter GDP by 0.5 percentage points,” DiGiovanni said.
Recent ISM and GDP figures have proven that the so called “recovery” is almost entirely due to government stimulus and liquidity injections. We now learn that the latest government waste program is going to further boost the economy in artificial way.
The latest treasury projections are calling for $75B in auctions next week. So let me get this straight – the U.S. government is taking out loans to help U.S. consumers (who are already debt laden and cash poor) take out loans in order to purchase assets that they don’t really need? If that isn’t the most backwards kind of stimulus then I don’t know what is. This short term shot in the arm is exactly the wrong kind of long-term medicine this country and its consumers need. I am all for consumer stimulus (so long as it isn’t in the form of a blank check), but honestly, is a new car and a new loan what every American is looking for in this time of financial difficulty?
My favorite quote from a recent CNN article:
“The PT Cruiser is not my first, second or probably even 10th pick for a car, but it’s rated well and Chrysler matched the $4,500 federal rebate. I never could have afforded this without the rebate programs, nor would I have purchased a brand new car.”
Just brilliant. Go out and buy a car you don’t need, want or can really afford….But hey, it’ll be good for the Q3 GDP figure!
Source: Bloomberg
I think there are a lot of sides to this clunker program:
1) Stimulus – for the auto industry.
2) Fuel efficiency – climate AND energy.
3) Environmental – air quality. All these new cars will be significantly cleaner. This is actually potentially a big deal. A huge portion of pollution in our air comes from a very small percentage of old dirty cars.
From the admin’s point of view it seems to be a no brainer for them. What is interesting is that it appears to me that Obama’s push for renewable energy is slowing. I hear a whole lot more about efficiency these days. The clunker program is slated to remove $2B from the renewable energy grant program. Today, Obama is starting up a big battery initiative. This clunker program fits in nicely with his new “efficiency” plan that seems to have morphed from all the wind/solar/geothermal talk during the campaign. It now appears that Immelt and GE are worried about this trend as well.
As to the “backward stimulus”: makes sense to me. We just encouraged the Chinese to spend spend spend. And what about the decade(s) long push for Americans to buy homes via debt? The clunker program is in many ways similar to the new home buyer 8K incentive that was put out several months ago. Come to think about it, I havent heard much about that program recently.
We’ve now just directly paid for someone to buy a new home and a new car plus all the other stuff. Dont get me started on this. Responsibility gets penalized …
You know I agree. I am not so much concerned with the Democratic vs. Republican notions behind the program as I am with the pure financial ignorance of such a program. Not only should our government not be dishing out money they don’t have, but they shouldn’t be encouraging consumers to take out loans they don’t need or can afford.
As for the environmental issues and fuel efficiency – not only is this not the time for such concerns, but there are better ways to achieve such goals.
Some more on this subject and a comparison to the German program
http://curiouscapitalist.blogs.time.com/2009/08/05/life-on-the-other-side-of-cash-for-clunkers/
Rob,
Interesting link and story. Those are huge numbers cited in the article.
I am skeptical of the program for sure, but I do want to reiterate how important removing “old” cars from the fleet could potentially be with respect to air quality. It all depends on how old the cars are. New cars are tremendously cleaner compared to older cars. There are 2 issues with cars: fuel efficiency and tail pipe emissions. They are not the same. I know of one instance (locally) where it appears that 10% of the cars are putting out 90% of the pollution. Removing these kinds of cars could have a positive influence on air quality. I havent heard anyone touting this benefit of the program, but it could be significant depending on the details of what actually gets traded in.
Anyhow, the impact of air quality on the economy is indirect, but is and can be significant given the implications of federal regulations on economic growth in certain metro and rural regions.
I am still irritated with it given that our 2 cars wont qualify because we tried to be responsible with our purchase of reasonably fuel efficient vehicles.
Don’t be fooled by the thin veneer of environmental improvement associated with this B.S. program. It’s clearly just a ruse to get some more people on board with this blatant giveaway to the auto industry, and another way to goose the numbers in the short run in a ridiculously vain attempt to create a real recovery. All they’re really doing is more of the same old pulling demand forward. We’ve done so much of that in the last decade in autos and housing and look where it’s gotten us. So their answer? Do some more. UFB
I’m with you TPC. I could rant all day long about this kind of crap. We’re just digging the hole deeper and creating more misallocation of capital and resources. It’s nuts.
Oh, I agree, but I just wanted to point out that there is some merit to the idea from an environ perspective despite the fact that I dont like it the program and completely agree with the negative sentiment expressed here.
It’s meant to drive consumption by requiring substantial spending from the party using the rebate. For every dollar that the government kicks in for a car purchase, the consumer contributes at least another 3-4, and possibly more, dollars as part of the purchase price. Those dollars should feed the multiplier and create money velocity, including a chunk of change that goes right back to the states in the form of sales taxes and registration fees. In most states on a $20,000 car purchase, a good $1,000+ is going to end up in local coffers before the car even leaves the lot.
The issue is whether the benefit actually encourages consumption that would not have occurred otherwise, either directly or indirectly. My guess is that it will probably be reasonably effective, as it is targeting those who have vehicles with little to resale value, so it was quite likely that these drivers would have been stuck in these things otherwise. (There is also the environmental benefit, but that seems modest in comparison.)
I am all for consumer stimulus (so long as it isn’t in the form of a blank check), but honestly, is a new car and a new loan what every American is looking for in this time of financial difficulty?
Not many people will qualify for this, so there won’t be a flood of vehicles. It’s meant to push Q3 GDP a bit, and as investors and traders, we should figure out whether that will make a difference to us. (Personally, I think that whatever benefit may be here is already baked into the price of Ford, Toyota and Honda stock.)
During times like this, government should pick up the slack until consumers and business investment comes back into the economy. The alternative is further contraction, which is the last thing that we need at a time like this. I wouldn’t dismiss that growth as being worthless, but a necessary bandage on a gaping wound.
The issue for us to ponder is whether that wound is going to heal or become infected. My current theory is that it will heal but may leave a scar. But a blemish beats gangrene any day of the weak.
I have a 94′minivan that pass the smog test and still runs really well. It qualify for the program. But the very thought that the car has to be distroy bothers me. It would make me feels better if someone who can’t afford a new car can use it. So I opt out instead. I know quite a few people who participate in the program are planning to buy a new car anyway in a few years. So, perfectly good running cars get trashed into big pile of environmental hazardous metal and the dealership will be few more customers short the next few years. So all the program does is force future car sales into the present couple months and dislocate the used car market since those car are wracked. Insanity!
I have a 94′minivan that pass the smog test and still runs really well. It qualify for the program. But the very thought that the car has to be distroy bothers me. It would make me feels better if someone who can’t afford a new car can use it. So I opt out instead. I know quite a few people who participate in the program are planning to buy a new car anyway in a few years. So, perfectly good running cars get trashed into big pile of environmental hazardous metal and the dealership will be few more customers short the next few years. So all the program does is force future car sales into the present couple months and dislocate the used car market since those car are wracked. Insanity!
P.S. – Sorry, forgot to tell you great post!