Thursday, August 20, 2009

How Cash-for-Clunkers Should Have Worked

We tax all the others and pass the revenue on to you

The Cash-for-Clunkers program, scheduled to run until Nov. 1, will end for the second time on August 24. The administration spins it as wildly successful, more objective observers, not so much. It was a simple concept. If your trade-in qualified, you got a government subsidy of $3,500-$4,500 on the purchase of a qualifying new car.

Why did this program exist? You can download the bill, 13 USC 1301 et seq, HERE. It's all about getting you out of a low-mpg car into a higher-mpg car, thereby taking a major step in freeing us from dependence on foreign oil. That's it, that's what C-f-C was for. That's all it was for.

What about less pollution, safer cars and stimulating the auto industry or the economy in general? Nope, not a thing. At best those are intended ancillary benefits. Guesstimated reductions in greenhouse gases are supposed to be included in a wind-up report. Good luck with that SWAG. It's a sop to the greens, nothing more.

Most people would agree that better mpg is a desirable goal. So is less pollution and we're told the economy badly needs stimulation. The logical fallacy lies in tying those goals to the mandatory purchase of a new car. For instance, wouldn't we be less reliant on foreign oil if, after you handed over your clunker, you didn't replace it at all? The same for reducing pollution. As for the economy, stay with me. There was a better way.

What if, all requirements remaining the same, you brought your clunker in to your local dealer and he paid you a reimbursable $4,000 that you could keep and do with as you please? The gummint pays the dealer $500 more for doing the paperwork, disabling the clunker and towing it to the scrap yard. The scrap metal guy gets the clunker for free or maybe he gets $100 but he has to destroy it and not vulture the parts.

What would change? First, you get $4k to spend any way you want. The car dealer gets first crack at you, though, because you have to deal with him to get the payment. If he can sell you a car then more power to him and I hope you enjoy your future clunker. The gummint achieves its stated goal of better mileage from the car you drive.

What if you don't buy a new car at all? From the standpoint of achieving the gummint's goals, that's even better. Using zero gallons of gas is better than 12 mpg, right? The gummint over-achieves its stated goals and you start taking alternate transportation. Win-win. Sure, a few people might buy down, picking up an older-than-25-years vehicle, but not many. Really, how badly do you want to put your family in a $500 '74 Pinto or Caddy or Datsun, even if you get to pocket a cool $3,500? And if you do, why would we object to that? The car was too old to qualify and it changed hands. So what? There might be a little leakage here, but not much.

If you don't buy a replacement vehicle then the entire economy is yours to choose from to spend your $4k. Pay your debts, stimulate the credit and retail industries and improve your cash flow. Put it into a down payment on a house, stimulate the housing industry. Buy some securities for your retirement, stimulate the investment industry. Save it for the next rainy day, stimulate the banking and S&L industry. The list is endless.

What about the auto industry? Remember, they get first crack at you. Marketing geniuses that they are, if they can't convince you to buy a new car with a leg up like that, then maybe you really don't need that new car. At the very worst they have a new high-margin revenue stream of processing clunkers. If the auto industry isn't stimulated by your $4k then other industries surely will be. Christmas sales, right around the corner now, might pick up far beyond the current dismal expectations, resulting in more jobs and the retail multiplier effect.

How can we be sure this will work the way I say it will? Because we have an example to guide us. Remember the stimulus plan from earlier this year, the one that gave you $400 for nothing? We were told it was a magnificent success at stimulating the entire economy. Let's believe that.

If $400 for nothing was good then how can $4,000 for something very real and beneficial not be better? Consider the removal of low-mpg, high-pollution vehicles from our roads and all of a suddenly there's no downside. There's the cost, of course, but that money was already allocated. The question then was how best to spend it. What did you get from C-f-C? Nothing, I bet, unless you bought a qualifying new car. That was just one of the drawbacks of C-f-C. There wasn't something for everyone.

There's only one scenario in which this idea doesn't make sense and it is this: The purpose of C-f-C was never the purpose that was written into law. It was only to funnel $3 bil more into the auto industry in the guise of an energy bill. It was never meant to substantially reduce mpg -- and our aging auto fleet will do that for us anyway, without any incentives -- and its ancillary benefits are merely fortuitous. In this hypothetical scenario C-f-C was a sham, borrowing near-term future car sales and shifting a portion of the economic crisis from the industries that created it to non-critical-thinking buyers who will be burdened by greatly increased consumer debt with little of lasting value to show for it.

I leave it to you. Was there a better way to run C-f-C and still achieve its stated and ancillary goals and more? I think there was. I even think that Congress might have stumbled on it if the "emergency" measures which are being forced on us had been calmly debated in Congressional hearings. After all, that's their job, not just to vote according to orders from their leadership.

You remember Congressional hearings, don't you? Where individual congress members had to debate and defend proposed legislation? In those days, town hall meetings actually mattered. Our reps could hear our voices and vote accordingly. Congressional hearings have been replaced by repeated cries of "Fire! Fire!" and we're told to grab any bucket or new law and throw it on the flames, and do it now.

No, now is the time for reflection and debate. Take the time to find better ways.

Suppose you were an idiot; and suppose you were a member of Congress. But I repeat myself. -- Mark Twain

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