Cash for Clunkers - Good or Bad Idea?

Mr_Shiftright · August 2009

Real wages have not gone up since the mid 70s, but corporate profits sure have (from not having to pay higher wages). So what did the corporations do with all that profit?

You got it. Loaned it back to the employees, with interest, of course. Pretty slick, hah?

Unless of course you got reckless with giving loans, then the chickens came home to roost.

Bernie Madoff was merely a student of the US government. :P

fintail · August 2009

The only reason standards of living have pretty much kept up is because of dual income households, and of course all of the debt. It's not true prosperity.

Ol Bernie is just a symptom of the disease, and almost seems like a scapegoat to distract from the corporations. Not that I have any sympathy for him...but there's a lot more fish to be fried, and they seem to have now dipped below the radar, again.

I wonder what 3-4BN counts as relative to the total corporate welfare given by the Feds. I suspect it isn't much.

kyfdx · August 2009

We've been spending money and living on borrowed money like out of control drunks

I resent that... I am not out of control....

fezo · August 2009

I wasin college in the early 70s (well 69 - 73). The whole women's work issue was percolating. At the time I predicted that if the norm became women working that the corporations would manage to slide salaries down so that what had been one income money would become two income money. I wish I'd been further off the mark.

100chuck · August 2009

I believe you are off the mark the truth is most people spend too much money. How many people grew up sharing a room with a sibling ? Did your parents ever paid for you to play sports? or pay for child care ? cell phones for your kids? internet service? TV for each room?
exotic vacations, lawn service etc etc etc.

stephen987 · August 2009

Good points, 100chuck. But how many of those things were unnecessary when most households had a wage earner and a stay-at-home manager?

Mr_Shiftright · August 2009

Okay, you've been diligent, sober, thrifty, sensible, non-compulsive and a discriminating consumer.

This probably will cause you to be punished, is my guess. :P

100chuck · August 2009

I don't think it would make a difference, plus most people will not be willing to sacrifice the material things you can purchase with two incomes.

ccappa · August 2009

Again, government and business are one in the same. Congress wrote the words legalizing the appropriations that their constituents demanded. Obama signed off on the appropriations that his constituents demanded.

A small portion of their constituents demanded. Every opinion poll I've seen on the subject shows that the majority of the public is against this program.

And for good reason-they're getting worked over coming, and going:

http://www.edmunds.com/help/about/press/154606/article.html

Like I predicted. Not that it took anything beyond a very basic knowledge of economics.

kdhspyder · August 2009

That's simply supposition at this point. The only true measure is to assess the total annual sales from 7-1-09 to 7-1-10. According to all the statistics up until June 30th we were headed for about a 9.7 to 9.8 MM unit year. That would mean about 4.8 MM units in the 2nd half of the year and another 5 MM units in the first half of '10.

If sales in the 2nd half are 5.5 MM units or better and 5.5 MM units or better in the 1st half of 2010 then the program will have accomplished its purpose. It's far too early to tell after 3-5 weeks. Reassess in January.

nippononly · August 2009

appeared on the morning news today. I listened in wonderment as the manager at Honda of Fremont reported that they sold 153 cars in the first 7 days of C4C!!!!! They were down to their last 3 Civics or something, and this is a Honda dealership that is about 4 square MILES in size.

My local Honda dealer has been moving the natural gas Civics out to the front as the gas Civics have dwindled away.....I guess the CNG Civics just aren't very popular even with a program like this.

But 153 cars!! And they were looking forward eagerly to the renewed volume that the extra $2 billion should bring. They have some incentives from Honda that are good until Labor Day, so this will be the all-time king of bonanza sales periods for them.

kdhspyder · August 2009

A small portion of their influential constituents demanded. Every opinion poll I've seen on the subject shows that the majority of the public is against this program.

FYP

And for good reason-they're getting worked over coming, and going:

http://www.edmunds.com/help/about/press/154606/article.html

Like I predicted. Not that it took anything beyond a very basic knowledge of economics.

Thank you for the confirmation. This shows that the plan is working exactly as planned.

kdhspyder · August 2009

The only 'problem' is that this pace can't continue because none of the vehicle makers was ramped up enough to supply this voracious demand in such a short time. The pace has to slow simply because the new vehicles are disappearing and it takes a good 4 weeks to restock. It takes 8+ weeks to bump up production and shipments.

Most dealers will have to do without inventory for most of August so this will dampen the numbers.

stephen987 · August 2009

True--and then we may see another glut, as the program will be out of money again by the time those cars reach the showroom.

I think calendar year 2009 will prove to have been a very stressful one for those in the car business--feast or famine, on a weekly basis.

mattseds · August 2009

I think there's a fundamental point being missed here, and it centers around the very heart of our economy. One of the main principles of capitalism is that it is self-correcting. Businesses that operate unsustainable models fail, and they NEED to. The failure of a business is what drives the natural corrective forces within any industry. Too many cars being produced? Either adapt quickly to the changing demand, or fail. However, by NO means should the government create artificial demand under a false hope that a short-term gain somehow negates long-term incompetence. People are too afraid of the immediate pain that surrounds the accompanying loss of jobs that they prolong and deny the truth about these businesses. By doing so, we only make the larger issue worse.

The simple truth is that the American auto industry is an unsustainable behemoth, engineered for the excess we were living in, and not lean enough to survive a 30-40% drop in demand. Further, they're not even capable of adapting to it, so our solution? We pump money into them to prolong their deaths. Wonderful.

People that proclaim this as a success tout the jump in sales. What about non-subsidized sales? Have they gone up? No. Obviously the subsidies won't be around for long, and thus neither will the influx of cash currently headed toward the automakers. Even 10 billion in a SINGLE car company's pockets can only keep them afloat for ~6 months - that much was evident from last year's auto bailout money given directly to them.

At the end of all this, we're left with the same unsustainable behemoth, and we'll all sit around and bemoan the impending downfall of our beloved automakers. "But we did C4C?!?! Wasn't that enough?" Failed. Business. Model.

stephen987 · August 2009

Capitalism can be self-correcting, but it isn't automatically so. The cost of entry for any new company trying to break into a highly regulated, infrastructure-intensive industry such as automobile manufacturing is so high that there are huge delays in getting in. If a behemoth like GM collapses, it could be a decade before any new player, or any combination of existing players, is fully able to take up the slack.

What happens in that decade?

"The long run is a misleading guide to current affairs. In the long run, we're all dead."--John Maynard Keynes (Baron Tilton), A Tract on Monetary Reform (1923).

Mr_Shiftright · August 2009

The only poll publicized that I saw was Rasmussen, and it declined to release any information on who was called, how many were called, what they were asked, or what the +/- of error was.

Can you identify the rest of the polls you saw? Do they release their polling data?

stephen987 · August 2009

Hmm. Another phantom fact?

Mr_Shiftright · August 2009

Well I don't know. Opinion polls can, of course, give you any answer you want, depending on how you frame the question, and who you present the question to.

e.g. "Do you think hardworking, honest Americans should be given a helping hand in replacing their worn out, gas-guzzling cars, so that America can reduce reliance on Middle Eastern oil?"

e.g.2 "Do you think only certain select groups of Americans should be given taxpayer's money to buy new cars?"

You'll get opposing results from these two (admittedly exaggerated) examples, even if you ask the SAME people.

mattseds · August 2009

Very true, however, we're in a state of highly depreciated demand. Such a market dictates that one of them SHOULD fail. If a large player failed, the rest of the manufacturers might be able to collectively meet the current demand, thus surviving on their own merit.

I would further stress that additional (artificial) demand today only lowers demand over the coming years, and I don't see how today's automakers (assuming we don't let one fail) will fare any better with even lower demand.

To get back to your question - in the decade following a major collapse, unemployment rises higher,many thousands of people on pensions through the collapsed find themselves without an income stream, and things feel quite unpleasant for a while. This is my point as well, however. We're so afraid of that pain that we're not doing anything to avoid this scenario, we're merely delaying it.

The bottom line is that if a business is too large to adapt to the demand of it's own industry, then it MUST fail. Fail or be nationalized, at which point you can fail on a different schedule. I don't see where nationalizing a business to prevent it's collapse was ever one of the "functioning" principles of capitalism, however.

Mr_Shiftright · August 2009

Many companies in Europe have been nationalized, saved and privatized, even auto companies.

Capitalism is an economic system. It's not a good form of government whatsoever.

The purpose of government is to regulate, and to protect us from the predatory abuses which may occur in business--regardless of the economic system in place.

No economic system runs without a governor.

stephen987 · August 2009

I think you're conflating two separate things--the direct bailouts of GM and Chrysler on the one hand with the Cash for Clunkers program on the other. There are other fora in which to debate the merits of the former, which I agree are somewhat questionable.

The thing I like about Cash for Clunkers is that unline the direct bailouts it is fundamentally a measured, finite market-based response. It provides a little boost to customers, who then go out and choose from a wide array of products that meet certain socially desirable criteria. The money is trackable (if not quite as immediately trackable as NHTSA hoped), and the early results tell us that customers are (a) choosing more fuel-efficient cars, (b) buying from US companies at about the same rate as their current market share, and (c) financing those purchases either with cash, or with smaller-than-usual auto loans.

Is it a perfect response? Of course not. We might argue, as Sens. Collins & Feinstein did, over what "socially desirable criteria" to implement, and we might wish that NHTSA's registration and reimbursement processes had gone more smoothly. Some of us might have preferred a solution that gave preference to vehicles with a certain percentage of domestic content. Others might have preferred to see smaller rebates--to more customers--or some sort of pro rata scale that might have paid more for a 16 mpg improvement (my transaction) than for one that nets only a 10 mpg improvement. Fine--let's talk about those things, certainly before we attempt to implement another version of this program.

Should something like this become a permanent fixture in the US economy? I'd say not. But we inhabit a mixed economy, neither purely market-driven capitalism nor state-driven socialism, but containing elements of both. So this is a temporary example of the federal government intervening, for what some would regard as an acceptable tradeoff between short-term and long-term. As such, I'd say it's better than most: the spending is limited, the goals are relatively clear, there's a definite end point, and no one seems to expect that it will be renewed indefinitely. That makes it a far better use of stimulus funds than, say, purchasing GM stock.

In some respects the "capitalism" angle is a bit of a red herring. The US economy has nearly always been a managed one in some respects, as government subsidized the major railroad companies of the 19th century, began competing actively with private utilities in the 1930s, managed the growth of the commercial airline industry in the 1930s and 40s, and funded the massive expansion of the defense and aircraft industries in the 1950s and 60s--to cite but a few examples.
We have a poster here, by the name of kdhspyder, who is fond of saying that government and business in the US are essentially one and the same. I'd say that is a bit overblown, but to pretend that government and industry aren't cozy with each other (or haven't been for more than 150 years) would be naive.

Unbridled capitalism is anarchy. Unbridled socialism is the death of individualism. Somewhere in between lies what passes for prosperity, the greatest good for the greatest number, a utilitarian maximum.

mattseds · August 2009

I'm not going to argue that capitalism is a good form of government. Nor am I going to debate the role of government as outlined in your reply. What we're talking about doesn't fall under "protection" from "predatory abuses" though. This is just bad and inflexible business practices, finally come home to roost.

Let's take GM for example. We nationalize them, and immediately realize an ongoing cash drain, the same they themselves have felt. So we "restructure"them to create a viable business. The first thing we do is cut a majority of the long-running pensions, yes? I mean, that's a burden we didn't sign up for, at least not at the buying price for GM. So that's done. Now, we close a good portion of the dealerships, say another 50% or so, and a good chunk of the manufacturing. How many jobs have we cut so far? How many incomes? Neat-o. Then, if we've done things efficiently, which of course we're known for, we can some day hope that little old GM can be sold for roughly what we've paid, and the whole thing will have come off cleanly. Is that the vision?

If you can find me one European company that was as large and as upside down as GM that was subsequently nationalized, restructured, re-privatized and returned to it's functional glory, then I will tip my hat to you.

stephen987 · August 2009

If you can find me one European company that was as large and as upside down as GM that was subsequently nationalized, restructured, re-privatized and returned to it's functional glory, then I will tip my hat to you.

Renault. Stronger than ever, and now (thanks to its relationship with Nissan), the number four carmaker in the world in volume, according to Wikipedia. Of course, it only took fifty years.

But again, you're conflating C4C, a market-based demand-side stimulus program with direct corporate welfare in the form of GM and Chrysler bailouts.

mikemartin · August 2009

A Great Depression is on its way, and fools with perfectly fine cars are going deeper into debt.

Classic consumer mindset behavior.

These "new" cars won't be able to be given away soon.

http://www.nytimes.com/2009/08/11/opinion/11herbert.html?hp

mattseds · August 2009

Two very interesting points. Renault all but disappeared for a good portion of their restructure, yes? We're not talking about the preservation of a "brand" for nostalgia's sake, but the preservation of jobs. To restructure GM, a hundred thousand jobs or incomes would need be cut, easily. Yes, it's less painful than a collapse, and perhaps in the same 50 years we'd see a re-emergence of GM. I applaud your example, however, as it allows some interesting near-parallels to be drawn.

As far as C4C *not* equating to direct corporate welfare, I fail to see how. In my understanding of the program, the government's <= $4500 per sale ends up in the hands of whom? I'm sorry, perhaps indirect corporate welfare is a better title. Is it not also true that the majority of cars sold under this have less profit in them than the value of the rebate itself? If that's true, then the program is a one-time shot in the arm to the car companies, and nothing more. They can't sell cars at this rate on their own, and certainly not right after the most-likely-to-buy chunk of the population has gone and "got theirs".

It's a lovely, roundabout way to give money to the automakers. Here's a neat little anecdotal piece for you. At the nearby Chevrolet / Mazda dealer, the salesman said that in one weekend (8 days ago) they had sold 39 cars (a record for the last year). 28 of those cars were from C4C, and of those 28, 21 were Mazda's, and 7 were Chevy's. Ta-da! Mission accomplished.

fushigi · August 2009

In my understanding of the program, the government's $4500 per sale ends up in the hands of whom? (had to remove the less-than/equals; it was messing up the post)

The consumer who bought under the program. The cost of the vehicle did not go up by $3500-4500 so you cannot successfully argue that the money went to the automaker. That revenue was coming to the auto industry eventually; all C4C has done is sped up the timetable (possibly robbing the manufacturer of future revenue).

OK, not entirely the consumer. The auto dealer has seen average transaction prices rise so there's a little profit taking there. So the consumer is getting probably 70% of the benefit and the dealer the rest. But dealers are usually local businesses so that revenue is being pumped into the local economy in the form of commissions to the salesmen, etc.

Also, the firms who scrap and recycle the metal are seeing upticks in business. Again, the spike is temporary and may come at the price of future revenue.

As to long-term effect, consider this. Some people are in the market for a new vehicle but don't have a qualifying clunker. My car is worth < $4500 but gets 20MPG combined, for instance. As transaction prices have crept up I've stopped looking. After C4C is over and prices go back down some I'll re-enter the fray. Other smart shoppers w/out clunkers are probably doing the same. So post-C4C there should still be decent market activity.

ingvar · August 2009

After C4C is over and prices go back down some I'll re-enter the fray. Other smart shoppers w/out clunkers are probably doing the same.
Yes, sir. Guilty as charged

C4C has one huge advantage - it removes junk from the roads, roads became safer without rusted behemoths.

kdhspyder · August 2009

That's well-thought and well-stated.. kudo's.

kdhspyder · August 2009

In my understanding of the program, the government's $4500 per sale ends up in the hands of whom

Actually the money from the Feds ends up in the hands of the buyers only. The buyers take delivery of a vehicle that has a purchase value of $20000 for the amount of $15500. All the other ancillary benefits, those to the dealers, their suppliers, the intermediaries, the vehicle makers, their suppliers and the millions of workers employed by these companies all come from the pockets of those buyers.

Or another way of looking at this purchase would be to say that 25% of the expected improvement in the business level is government-driven and 75% is consumer-driven. If after all the consumers didn't take advantage of the incentive then there would be no improvement. They must go hand-in-hand.

stephen987 · August 2009

As far as C4C *not* equating to direct corporate welfare, I fail to see how

Seems pretty obvious to me. Nobody is forcing customers to spend the C4C money on a GM or Chrysler product. They have the freedom of choice. That's what's missing from the direct subsidies.

Mr_Shiftright · August 2009

Nothing inherently wrong with nationalization, stabilization and re-privatization but of course it is critical to evaluate both the health of the company in question and the effect of its survival or demise on national economic health.

Renault was nationalized in 1945 and is still a powerhouse in Europe. (to be fair to you, Renault was profitable when nationalized).

Rolls Royce Aero Division was nationalized in 1971 (I think that's the right date, or close) because it was deemed too vital to lose.

All American railroads were nationalized in 1917, then privatized again, and while not booming, are still vital to American interests and economy.

It has always been my contention that the D3 cannot ALL be allowed to fail simultaneously and suddenly.

If we nationalize the D3, and winnow them down to one profitable re-privatized enterprise---fine with me.

stever · August 2009

"Interest in the Cash for Clunkers program is slowing, and, if the current trend continues, vehicle sales could be back to pre-Cash for Clunkers levels by Aug. 20, Edmunds.com calculates."

Cash for Clunkers Interest Slowing; Could Run Out of Steam Next Week (AutoObserver)

GM disagrees:

GM Sees Cash for Clunker Momentum Continuing; May Increase Production

larsb · August 2009

Just shows that the number of people in the market for a car with a $4500 discount is finally drying up.

In this economy, not a surprise, really, is it?

Mr_Shiftright · August 2009

Gee I dunno. My friend's local dealership just about sold out his new car inventory (has 3 cars left). I think another round would produce similar results.

In terms of our local community, this is win/win. The dealer in question is a great community supporter of local events and charities, + he is going to forestall 2 layoffs + he runs a solid honest shop (always wins the "Best of ____" Awards from local newspaper polls).

I don't see any downside of C4C from this somewhat narrow point of view. I could only hope all my tax money would have produced such tangible local benefits.

stever · August 2009

I agree more with GM and Shifty than Edmunds too. Although a slowing would help me out since I'm in the market and there's no inventory, I think all the money is going to get used up and probably this month.

I called the smaller local Toyota dealer two days. They have one Scion left and less than 20 new cars in stock. Their website hadn't been updated when I called and it showed 34 new cars in stock.

gagrice · August 2009

I don't see any downside of C4C from this somewhat narrow point of view. I could only hope all my tax money would have produced such tangible local benefits.

I do see downsides. Though I agree that C4C has shown tangible benefits. Too bad the other $797 billion has done little to nothing as a stimulus to the economy. If it was even a fraction of the C4C program the economy would be robust. There are not going to be 30 million jobs for all those in need of employment. We are sinking into the abyss and C4C has helped a very small segment get through the summer.

Mr_Shiftright · August 2009

Well you know some of the smartest and most successful private venture capitalists blew it completely with Cerberus when they took over Chrysler. That was investors' money, that was a real loss -- but somehow they don't get pilloried for being reckless and wasteful. What makes the capitalist so sacred when they fail and the government so evil for trying to succeed where Cerberus failed?

kernick · August 2009

Cerberus when they took over Chrysler. That was investors' money, that was a real loss -- but somehow they don't get pilloried for being reckless and wasteful.

Has anyone followed the money? I mean could it be that Cerberus has significant investments in various media outlets? Or Cerberus's executives sit on other media corporation boards?

Personally I was all for the owners of Cerberus and all its businesses having to pay off the debts of Chrysler, BEFORE receiving 1 tax $. Cerberus mismanaged Chrysler ran them far into debt, screwed the workers and suppliers, and walked away from the table washing their hands of it. Though legal, it was about as ethical as Bernie Madoff.

Getting back to your overall question ... the government should not be involved in deciding which businesses or industries thrive. When that happens that then strenghtens the motivation to hire more lobbyists, and creating the quasi-legal influencing that is prevalent in DC. The problem many people have with the government is that IT IS FOR SALE, with the wealthy having more access to the politicians, and getting a "fairer" return.

We need to eliminate lobbying, and come up with laws that strictly separate business and government. There should be no such thing as Dan Quayle leaving politics, heading Cerberus, and then Cerberus getting large bailouts from his former political-cronies, while Cerberus's lobbyists are holding parties for Congress and their spouses at some resort.

Mr_Shiftright · August 2009

Well your government is based upon free-market capitalism and centrist politics, and it has been deemed politically unacceptable by the majority of your representatives to allow the entire D3 to suddenly collapse and for the American auto industry to be wiped off the face of the earth.

The government would not allow it in the 1980s, nor in the 90s, nor now. The policies to PREVENT it have changed, and the reasons for the auto industry's distress have changed, that is *true*, but the essential motive is the same as it's been for 30 years--the D3 are too big to fail--it would be a horrendous disaster for the country.

So really there is no sense for us to think otherwise or to become intoxicated by some anarchist delusion. In *time* the government may allow the evolution of the auto industry to something else, but there's too much at stake politically to allow a sudden collapse (which would have occurred, no doubt in my mind---all 3 of the D3, gone in 6 months tops, broken up, sold, dissolved, whatever).

kdhspyder · August 2009

Actually of that $797 Billion approriated only $150 Billion has actually been disbursed. Not a surprise then that for economists like Paul Krugman not enough is being done and for others like yourself tangible benefits haven't sprung up as you might have expected. Not even 20% of the funding is in play.

gagrice · August 2009

Did Cerberus fail? They still have controlling interest in GMAC the piece they wanted. Not only that Sam gave them a few billion to keep that going. Why would Cerberus throw good money after bad with Chrysler. Especially when they are too big to fail according to you and our lame Government. Capitalist are not sacred and should be allowed to fail. Otherwise it is not capitalism. It is Socialism.

kdhspyder · August 2009

Then we've been a socialist country for at the least the last 50 years if not longer. You were in fact born into the United Socialist States of America. You're just waking up to this fact after working your entire life?

gagrice · August 2009

I realize what has been put out. It is where it went that I am concerned about. It is not going into the infrastructure as promised. My road is still filled with potholes big enough to swallow a Prius.

It still does not change the facts. 90% of the stimulus allocated is going into NON job creating entities. Expansion of welfare. More unemployment for many that means no good reason to look for a job in earnest. I have a couple nephews in that mode. Making nearly as much on unemployment as they could at a job. $400 per week is good money when you are sponging off mom and dad. Driving new cars so they did not need C4C.

Mr_Shiftright · August 2009

The Goldman Sachs buyout of their stock purchase warrants under TARPS was a pretty good deal for taxpayers. About 26% annualized return on their money.

gagrice · August 2009

You're just waking up to this fact after working your entire life?

Not really. I have fought the madness since I was in High School. Campaigned for the other Barry, Goldwater my first opportunity to vote. I was raised in a very, very poor Republican family. We did not believe in welfare when the only food on the table came from people in our church. I think welfare is a big part of our problem in the USA. You don't work, you don't eat is a good way to live. I had no problem getting a job even during the years Carter nearly destroyed our country. When you are willing to go where the work is it is available. Sitting on a couch watching the stupid TV is not where you will find a job. So I do realize we are in the USSA. And we have FDR to thank for it.

Mr_Shiftright · August 2009

Every available form of welfare all bound up together and going to one family would equal about 75% of a minimum wage job for the main householder. GAO has reviewed over 100 studies on welfare over the course of many years, and concluded in published summary that welfare does not significantly diminish the desire to work.

myth (poof). :P

Mr_Shiftright · August 2009

Yeah Cerberus venture is pretty much a disaster as far as Chrysler goes. Here's the NY times article--interesting read, you might enjoy it. Does mention the GMAC deal, too.

Cerberus Chief Takes Stock

cruisin66 · August 2009

I agree that the benefits of Cash for Clunkers definitely outweigh any perceived shortcomings. Not sure if this article was posted or not but CNN commentator Jack D. Hidary makes some valid points about it saving jobs in the auto supply chain, connected jobs in real estate, finance, manufacturing and other industries, reducing oil consumption, and it promoting safer vehicles.

Why 'Cash for Clunkers' works

gagrice · August 2009

The article did not mention hiring Jim Press to try and salvage the auto maker. I would say that was a step in the right direction for Chrysler. Left Toyota flailing and now losing money. Is Press still running the show at Chrysler? I don't think you can fault Cerberus as much as Daimler for the demise of Chrysler. They also have one of the top sellers in the C4C program. So who knows.

Cash for Clunkers - Good or Bad Idea?

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