By on July 31, 2009

If the CARS program has proved anything, it’s that America loves a deal. Big surprise there. In fairness, it also proves that giving away a billion bucks takes more than 30 days of preparation. And that good news is always welcome, even if it isn’t exactly good news. In the short term, the “success” of CARS is almost certain to bring about a re-up in funding; Cash for Clunkers will probably keep rolling along. In the longer term, there are two major issues to worry about. First, is the pull-forward effect. Redlining the market with federal stimulus will probably only delay a sustained and sustainable recovery in car demand. The second issue is that when the economy starts showing signs of sustainable, organic recovery, taxes are most likely going to be increased thanks to short-term stimuli like C4C. As the second most expensive purchase in a consumer’s lifetime, cars are likely to be especially vulnerable to reductions in take-home income. Doubly so if demand has already been pulled forward by said stimulus. With Cash for Clunkers, we are once again mortgaging long-term market stability and recovery for an orgy of feel-good consumption. Let’s try to enjoy the buzz while it lasts.

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18 Comments on “Daily Podcast: Clunker Nation...”


  • avatar
    AKM

    Very good write-up, sir. I applaud.

  • avatar
    Lokkii

    “…taxes are most likely going to be increased thanks to short-term stimuli like C4C.”

    Thanks for reminding me that, as someone who pays Federal taxes, not only have I bought part of a car company lately, I’m also buying cars for people too.

    At first I hoped that this kind of thing would make most Americans sick, but then I realized that the government would want me to pay for that problem too.

    Bah.

  • avatar
    carguy

    For those studying economics 101, an interesting practical demonstration of consumer indifference curves and price effects on demand, but for everyone else a waste of money and a market distortion.

    I’m sure this can’t be good for the residual values of used vehicles that didn’t benefit from the government pork.

  • avatar
    Robstar

    Well said Lokki!

    Prior to all this stimulus crap, my wife & I for several years have had combined state/federal/sales tax at around 50% of our income. This is really what prevented us from buying a house years ago — not able to save enough for a good down payment and refused to take an ARM. For our commutes from our apartment I bought a motorcycle, a fuel efficient beater, and a sporst car (for fun), ALL with at least 20% down payments or more.

    In the meanwhile, almost everyone feels they have a right to be able to afford a house (not “housing”) — some with no money down. On top of that, 50% of Americans pay no federal income tax!!

    Soon as I retire, I plan to get out of here with whatever money I have left, if any.

    And for anyone from the government/cars program reading: I am NOT willing to compete against my own tax dollars going to “CARS” people for a car.

  • avatar
    indi500fan

    Mostly I think you’re right.
    But as a Craigslist addict, I note that there are an awful lot of cars for sale with 150,000+ miles.
    I think the “fleet” is aging rapidly, eventually leading to either a lot more bus riders or new cars being bought.

  • avatar
    Mr. Sparky

    This really is nothing new. We subsidize home purchasing in this country with the mortgage interest duduction (yes, homeowners, renters are helping you buy your house).

    Governments routinely introduce less than fair policies to encourage one behavior over another. We like married couple (they tend to produce kids that are future tax payers, plus they’re more likely to vote), so we give them some tax and property distribution advantages that non-married couples don’t have. Government want people to stop driving their 1992 piece of crap Explorers, so we give them a rebate with CARS.

    CARS is a bit silly, but not any more egregious than the mortgage interest deduction.

  • avatar
    WildBill

    I understand the House has approved another $2B for the program. Game on! (again).

  • avatar
    tom

    One thing about the American C4C program is that it’s quite complicated…there’s way too much bureaucracy. In Germany it was rather simple: Your car has to be 10 years or older, you must have owned it for at least a year, you buy any new car and hand in your clunker, you get €2500.

    And yeah, the program in Germany was originally capped at €1.5 billion, but was then extended to €5 billion. And that was in Germany, a rather small car market compared to the US.

    In 2008, ~3.1 million cars were sold in Germany vs. ~13.2 million in the US.

  • avatar
    ohsnapback

    Don’t let this…

    http://www.youtube.com/watch?v=waj2KrKYTZo

    …ever happen again.

    This program is beyond idiotic.

  • avatar
    BDB

    CARS is a bit silly, but not any more egregious than the mortgage interest deduction.

    Or federal student loans, for that matter.

  • avatar
    Jeff Puthuff

    Don’t let this . . . …ever happen again.

    Um, it’s just an engine. Real-life cars don’t have souls, just the cartoon ones do.

  • avatar
    smedley

    I think the fundamental premise of Edward’s piece is spot on. What ails us is the dual effects of too much consumer debt coupled with a bankrupt government.

    CARS will only exacerbate both.

  • avatar
    bill301972

    At our dealership, these Cash for clunkers deals don’t seem to be pulling the market forward. The people that are coming in and qualifying have excellent credit, quite a few are paying cash or putting down a large down payment and so far in my experience, they are people that were going to purchase soon anyway.

    My last 2 deals were people that waited for cash for clunkers.

    I’d like to hear if this is the same experience as other dealers.

  • avatar
    50merc

    ohsnapback: “Don’t let this … [youtube clip] ever happen again.”

    Thank you for that link, disturbing as it is. I didn’t realize YouTube allowed snuff films. That Volvo sure was a nice looking “clunker.” It died hard, too. Hopefully, the government will soon find a Zyklon B variant to make the engine holocaust more efficient.

    Nevertheless, my heart swells with pride to think my taxes are helping that underprivileged Volvo owner acquire a new car.

  • avatar

    What a waste. I really don’t understand this program. Instead of throwing away perfectly good cars, more effort should be placed culling the true clunkers from the roads…..like the 1984 Chevy Celebrity that’s not only 83% rust, but spews more fumes and liquids than Bill O’Reilly on a three-martini bender.

  • avatar
    Greg Locock

    This meme that “a car is the second most expensive thing you’ll ever buy” is a crock.

    I’d guess that for most people at least one out of health insurance and college education for the kids and your retirement funding far dwarf what you spend on cars, if you do the maths.

    Certainly in my case my total spending on health (direct and indirect) and retirement, are both greater than my total expenditure on my car, even if I were to buy it rather than lease it.

  • avatar
    mtymsi

    throughout all the editorials lies the basic premise that pent up demand is being pulled ahead

    I completely disagree with that premise and base it on thirty years of experience selling cars

    the trades that qualify for the most part are not coming from traditional new vehicle buyers, the customers are used car buyers

    traditional new vehicle buyers overwhelmingly trade in late model vehicles, ask any dealer

  • avatar
    Justin Berkowitz

    smedley :

    What ails us is the dual effects of too much consumer debt coupled with a bankrupt government.

    Yes. These are enormous, and I think it’s great that you point them out. Consumer debt in particular has been shocking. There are trillions of dollars being deleveraged right now and it is going to make the economy (GDP + Growth in debt) look like it’s shrinking.


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