Cash For Clunkers - Stimulus Or Boondoggle?

The media can't get enough of the Cash fortheir kids. Instead, those cars are being crushed
Clunkers program. Either can car buyers, judgingruining the hopes and dreams of many people.
from the overwhelming response in its first 10The auto salvage industry is being hurt as their
days. The program offers critical thinkers, andinventory is being crushed. These businesses
good business managers must be critical thinkers,employ thousands of workers at many different
a great opportunity to test their skills. The key toskill levels recycling billions of dollars of
this type of analysis is to look at the obvious,replacement parts keeping older vehicles on the
then look to the unintended consequences.road. Replacement engines, transmissions, seats,
Designed to stimulate new car purchases, thetrim pieces and body panels used by body shops
program is a success. So popular is the programand do-it-yourselfers are all being taken out of the
that it ran out of money in its first 10 days. Theeconomy costing thousands of jobs.
feds budgeted $1 billion dollars to give aboutAs the older cars needing more maintenance are
$4,000 to each consumer who traded in an oldereliminated, repair shops see their inventory of
vehicle getting less than 18 miles per gallon for afuture work eliminated as well. New cars need
new car getting more than 22 miles per gallon.less maintenance and for the first 5 years most
That was enough money for about 250,000 cars.repairs are covered by warranty. This leaves the
Congress extended the program by injecting anindependent repair shop owner and his employees
additional $2 billion dollars which President Obamawith less work and less income.
immediately signed. So upwards of 750,000A fundamental principle of economics says that
vehicles will be sold under this program.when there is less of something that people want,
There are several benefits to the program. First,the price increases. So taking 750,000 inexpensive
American consumers are buying new cars. Withused cars out of the economy will serve to
the economy in a prolonged recession dating backincrease the price on those vehicles that aren't
to December 2007, consumer confidence is downcrushed. While this might be good news for the
and the economy is anemic. A little good news ispeople selling the cars, it is devastating to those
necessary to get things moving again. The speedbuying them. The price increase affects the
with which the program went through its firstavailable cars and the recycled parts.
allotment of funds is testament to consumers'Another economic principle is opportunity cost -
readiness to re-enter the economy once theywhat could I do with the money I spend on the
have a good reason and sufficient confidence tocar if I used it instead for something else. Most of
do so.the cars being traded in are fully paid for; the
Auto dealers are selling cars. This is a great thingones being purchased require a loan. This means
for dealerships beleaguered by the recession, athat the average car buyer is now spending, say,
shortage of lending capacity, and daily bad news$200 per month on a car payment they didn't
coming out of Detroit. Sales reps are earninghave before. That's $200 that isn't being spent on
commissions, transport drivers are moving cars,a movie ticket, a sporting event, dinner, or new
and manufacturers are moving inventory andclothes. It's money that isn't being saved and
building replacement vehicles. At each step of themade available to invest in productive capacity.
process, wages and profits are being earnedLikewise, the additional money spent on used cars
which creates a multiplier effect throughout theand parts is not available for other purchases.
economy.Therefore, the government, by selecting winners
One of the primary goals of the program is toand losers, has given an advantage to the auto
remove gas guzzling cars from the roadways andindustry over all other industries.
replace them with more fuel efficient vehicles.Reports indicate that 6 out of the top 10 cars
This is good for the owner of the vehicle andbeing purchased are foreign-made cars. So the
certainly for the nation, helping to reduce ourgovernment is taking $3 billion from American
dependence on foreign oil. The program istaxpayers and subsidizing foreign automakers and
reported to have increased the average mileagetheir employees. That's another $3 billion dollars
of the cars purchased over the ones traded in bythat will come from every taxpayer in America
61%.to subsidize their neighbor's car purchase. Couldn't
Some good news is needed right now and therethe taxpayer use that money to buy groceries
is plenty of good news. At the risk of raining onfor their family?
the parade, we must look at the entire picture toThe Cash for Clunkers program may be
see where there might be some information thatstimulating the purchase of new cars, but it is far
is less positive. To make certain that the guzzlersfrom certain whether it is stimulating the
don't find their way back on to the roads, dealerseconomy. It is moving future car purchases to
are required to destroy the engines and thenthe present by pushing present purchases of
crush the cars. Teenagers and low-incomeother goods into the future. When will the
workers are seeing their cars disappear. TheAmerican taxpayer realize that we can't buy our
frugal person who prefers to buy a low cost usedway out of a recession by continuing to use the
car has fewer options.federal government's credit card? If the tech
Charitable organizations depend on these vehiclesbubble, the commodity bubble, and the housing
for much of their operating funds. Individualsbubble have taught us anything, it is that the day
donate these cars which are then sold to fundof reckoning always comes. The more we try to
their mission. The donations are used to providepush it away, the nastier it is when the bill finally
auto repair training to kids in need of a saleablecomes due.
skill. The cars are then given to single mothers in© Copyright 2009 Bill Gschwind, inPURSUIT
need of a vehicle to get to work and to transportConsulting, LLC.