The “Unintended” Consequences of “Cash for Clunkers”
By William Shughart on Aug 7, 2009 in Bailouts, Economics, Nationalization, Property Rights, The State, Transportation
News reports suggest that the Obama administration’s “Cash for Clunkers” program has been an unalloyed success. Eligible for a rebate of up to $4,500 if they trade in their old (but not too old) gas-guzzlers, it is not surprising that the owners of qualifying vehicles have rushed to their local auto dealers to claim the subsidy.
Automobile manufacturers apparently are hard-pressed to fill the resulting increase in demand for newer, more fuel-efficient cars, which exhausted by the end of the program’s first week the $1 billion in taxpayer money appropriated initially to fund it. Congress now is on the verge of authorizing another $2 billion in public financing.
Let’s look at the consequences, which mimic eerily the causes and consequences of the subprime mortgage crisis: Car owners are being paid to trade in vehicles they already have paid for (or on which they can at present afford their remaining monthly loan balances) for taking on new debt that results in very modest improvements in fuel efficiency.
Gullible buyers who take advantage of the “cash for clunkers” program will see their insurance premiums rise and, in many states, also will be faced with higher fees for registering their new cars, buying license plates for them, or both. Depending on the time horizon over which they plan to own their new vehicles, those additional costs may well offset the $3,500 or $4,500 taxpayer-financed “rebate” to which they are entitled. And “cash for clunkers” predictably will reduce the supply of used cars (and also that of the parts for repairing them), thus raising their prices and harming anyone who is not fixated on fuel efficiency but rationally makes purchase decisions based on the overall cost per mile driven of “new” versus “old” transportation options.
“A sucker is born every minute”, as P. T. Barnum once said.
But economists, who, like me, are very useful people, see a silver lining in every black cloud: Within the coming year, many low-mileage previously owned (aka “used”) cars will be on the market at clearance prices because their owners realize that they cannot afford them. Wait to buy. You can then exploit the Obama administration’s failure to comprehend the lessons taught in Economics 101.
“Cash for Clunkers” is going to cause problems for the automakers as well. When it comes time to forecast sales, they’re not going to know how many buyers had already made the decision to purchase cars during the summer, how many decided to purchase cars six months earlier than expected, or how many people decided to purchase cars several years earlier than planned.
The last possibility could have an impact on the sale of new hybrids or other fuel efficient vehicles that companies plan to introduce in a couple of years. People who bought early are most likely not going to purchase again in 2011/12.
This is also going to affect the automakers’ ability to forecast sales, which is going to have an impact on manufacturing schedules, not only for the automakers, but for all their suppliers as well. And if you’re not sure how many cars to manufacture, then how can you possibly know how many employees you will need.
Finally, my guess is that investors will be pretty sure that the automakers will meet or exceed expectations for this quarter; but as to what will happen the following quarter will be anybody’s guess. The uncertainty in future quarters could have a negative affect on the price of auto stocks.
Kathleen | Aug 10, 2009 | Reply
The real question is how much of the clunker sales were extra and how many just changing timing of sales. Probably 80% just moved sales within the year. The program has been anticipated for over 6 months so people REDUCED purchases in the run up, hoarding clunkers and making things WORSE for auto-dealers. Now Obama looks like a hero, but then what does he do when the first $3 billion is gone and sales crash? Once you ride this tiger, it’s hard to get off.
Richard Carlson | Aug 11, 2009 | Reply