Yesterday I got an email from Senator Debbie Stabenow detailing the "Cash for Clunkers" program that will help people buy new cars. This $1 billion of new money will hit the public soon. It's part of the Senate's supplemental spending bill. The idea is that people need incentive to buy more fuel efficient cars. You get a check for $3,500 to $4,500 if you trade in your less fuel efficient car for a new one that has more MPGs. You just need to do this before November 1, 2009.
I understand the motivation for my senator to support this bill. Michigan now reports unemployment of 14.1%, which is the highest in 28 years. General Motors and Chrysler are kept alive by tens of billions of dollars from taxpayers. Yet this bill does not directly benefit these automakers to the exclusion of their competitors.
This new car bubble, like all economic bubbles, is based on artificial, short-term demand or a forced reduction in supply. Without the government's assistance, consumers may decide to delay purchasing a new vehicle until they have a little more cash saved up. Yet by making available this fresh money, dealers will have incentive to raise prices. Worse yet, dealers and manufactures may misinterpret this stimulus as a signal that happy days are here again, and may make permament malinvestment based on this illusion of natural demand.
Under this program, the used car is purchased, and then it is scrapped, instead of sold back into the market. This is the other half of the bubble. By reducing supply through force, consumers will have to pay more as well. Poor people will have fewer cheap cars to choose from.
The good news for those who have an extra used car and don’t participate in the program, you will eventually have slightly less competition when you do sell. But it probably won't be me.
In my case…
My used car might be more valuable as a trading piece to another buyer than its market worth. My 2002 Mercury Sable has a big dent in the back and registers about 120,000 miles. It runs fine. The Kelly Blue Book price is about $2,000. Someone might leverage it to get the $4,500 rebate.
I've gotten used to the Sable and would like a newer version of it, if I could afford it. According to the government's website, www.fueleconomy.gov, it gets about 18 MPG. However, a 2009 Sable gets about 21 MPG. With our winters, I'm more confident in a 3.0 liter V-6 engine than a more fuel efficient four-banger. Since a new Sable doesn't get the minimum 22 MPG required for the Cash for Clunkers program, maybe I should instead take a look at a 4-cylinder Mazda 6 that gets 24 MPG? Mazda already makes many parts for Ford cars. Maybe I can't tell the difference? I now have incentive to look around.
And that's one unintended consequence of this program. There is no requirement that the check must be spent on American-produced cars. It simply stimulates new car production world-wide. In effect, U.S. Taxpayers have gotten the bill to help workers all over the world to make new cars, with the goal of reducing global warming. By buying the Mazda, my carbon footprint will be reduced to 7.7 tons annually from my current 9.2, saving me about $300 per year in fuel costs, by buying a Japanese-made car.
Let me say it a little slower. This $1 billion is spent outside of the normal fiscal budget process, which adds onto record budget deficits and national debt. It creates another permanent debt, with negligible long-term benefits, and certainly not for the people who will have to pay it back. It is not targeted to help American workers. It may actually hurt poor people.
I know. It's just a billion dollars. It was another billion I didn't have.
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