Monday, November 2, 2009

Cash for Clunkers: The Ugly Ending

by Jim Pettit

Cash for Clunkers, the Obama Administration’s summer feel-good program for the economy, artificially boosted GDP in the third quarter. Now the bill comes due –$3 billion for the program itself, interest on the debt it caused, back office expenses at the U.S. Department of Transportation, back office expenses at auto dealers, and a steep dive in auto sales expected for the fourth quarter.

Giving away one person’s money to allow other people to buy cars is not the way to a sustainable economic recovery. It’s a social engineering scheme designed to provide a short-term uptick on economic reports so the Administration can move on to larger social engineering experiments – energy and health care regulation among them and more to follow. Energy and health care regulation have less of a chance of getting through Congress unless the Administration can first claim to stabilize the economy. And the Administration had to do something to look like it was in control of the socialized GM and Chrysler operations. Clunkers is a means to an end.

A Russian family, who has lived in Maryland since the Soviet Union disintegrated in 1991, put it best when asked about the Clunkers program. “We’ve seen this movie from the middle until the end. You’re seeing it at the beginning.” In other words, it starts off nice and sounds nice – helping people buy cars. But somewhere in the middle of this movie, the plot turns and the ending is ugly. When an economy is not sustainable everyone eventually pays. Feel-good programs like Cash for Clunkers (C4C) ease the way down a slippery slope to oblivion, and that’s what the Russians are talking about. If that dire macroeconomic scenario isn’t enough, consider that C4C helped relatively few people, most of the new cars bought with C4C money were Toyotas and Hondas and it caused used car prices to go up.

Under C4C, consumers trading in relatively poor gas mileage vehicles received up to $4500 to purchase a new, fuel efficient one. C4C generated nearly 700,000 new car sales in a nation that counts 136 million registered automobiles. That means .5% of the vehicles in this country were replaced by new cars.

One consumer, interviewed on a local TV station, exclaimed that the “stars aligned” since she wanted to replace an aging Ford van with a new car anyway and along comes C4C. That’s about the extent of it. For the vast majority of our nation’s 300 million people, the stars do not align in qualifying for bureaucratic hand-outs. Another individual, not interviewed on TV, explained that an ’83 Chevy S-10 pick-up did not qualify for C4C. Why? The truck got 19 miles per gallon, according to the EPA, and the C4C requirement is 18 miles per gallon. No new car for them. For that matter, there was no new car for anyone who wasn’t able to afford to junk a vehicle and shell out thousands for a new one, so forget about helping low-income people with C4C. They didn’t get much time on TV either.

C4C accounts for a 5% to 10% rise in used car prices, especially for vehicles worth $4,500 or less, according to Kelley Blue Book. "It's going to drive prices up of some of the most affordable vehicles we have on the road," said an analyst for the used-car market firm to USA Today in August. Anyone in the market for a cheap used car paid more because the supply and demand dynamics were distorted with 700,000 vehicles suddenly taken out of the market. That’s a direct hit on low-income people trying to buy a vehicle.

The Obama Administration doesn’t want to hear any of that. It is telling when the Administration has the audacity to call out a well-respected industry leader in public. Edmunds, a privately held company providing auto sales data analysis since 1966, used computer forecast modeling to determine C4C’s real impact. According to Edmund’s only 125,000 net vehicle sales were attributed to C4C. The remaining 550,000-plus vehicles sold would have been purchased anyway, without C4C.

That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales according to the Edmunds analysis.

Here is what a political appointee in the Obama Administration had to say about Edmund’s conclusions, "It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program…,” said a U.S. DOT spokesman.

So in other words, it is “unfortunate” that an industry expert questions the Obama Administration’s social engineering and government-led automotive policy. In an extraordinary October 29 blog post, The White House itself got into the fray and in attempting to refute the Edmunds analysis devolves into a sarcastic rant. Here is a choice line: “In other words, all the other cars were being sold on Mars, while the rest of the country was caught up in the excitement of the Cash for Clunkers program.”

Here in the U.S., on Earth, consumer spending dropped 0.5% in September, the Commerce Department reported at the end of October. It's the largest decline in nine months. We’ll have to wait and see if the Administration still deems C4C wildly successful and how much excitement there will be when fourth quarter GDP numbers are out.

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