Scrap Cash for Clunkers

Don' get me wrong. If I were willing to part with my faithful old truck with 180,000+ miles on it, I'd love to take advantage of this government offer. I understand this program is wildly popular, however, this is not a sound financial policy. Congress just passed and the president just signed a 2 billion dollar extension for the program. This is reportedly enough to last through labor day and fund approximately 500,000 vehicles. This means with the initial 1 billion, this program will subsidize around 750,000 vehicles.

Supporters claim it's a boon to the auto manufacturers, their parts suppliers, and the dealerships. Also, because clunkers are exchanged for reportedly more efficient, greener vehicles, environmental advantages are claimed.

Here's the bottom line. This subsidy is unsustainable, the economic boost is temporary, and the environmental benefits are negligible.

I recently had a chance conversation with someone who is a long time Detroit resident and asked them how the town was responding to the the gov't cash infusion. I was told there were no visible benefits of the program. No wonder. Back in the day, the Big 3 could send millions of cars down the assembly line. Cash for clunkers will only cover 3/4 of 1 million cars.

Despite reports of dealer lots being emptied, I wonder how many of them merely liquidated their standing inventory - inventory that's been stagnant for the better part of a year. As for the environmental benefits, again, we're only talking about less than a million vehicles. We could have a bigger environmental impact just by keeping all the other cars on the road properly tuned and not driving like aggressive idiots.

What about the economic lift? This program has undoubtedly boosted car sales tremendously from last year's numbers. However, again, it's unsustainable. I have neither a degree in economics nor and MBA, but even I know it would be foolhardy to ramp up production to meet this temporary demand. What happens after labor day when the program is expected to end? Are you going to mothball factories and lay off workers again?

So what's the answer? I suggest using tax credits. This bypasses the pot holes of subsidizing a specific sector with finite funds. We could use tax credits to boost sales for other durable goods. For example, our dryer started making an awful racket during operation. The decision to repair or replace would be simplified if the gov't offered a sizable tax credit. Hmm. Perhaps the gov't should take over Maytag and Amana, too...

In the end, even tax credits won't fix the real problem. The real answer is to increase our manufacturing capacity across all sectors and decrease our trade deficit. Well, gee, how do we do that? Unfortunately, that's another post involving corporate policy, NAFTA, and the prevailing political winds. For now, I'll say I know we can't continue on this sugar high of the Clunkers program. When it wears off, that'll be one doozy of a crash.