Thursday, April 26 , 2018, 8:24 am | Fog/Mist 54º

 
 
 

The Daily Capitalist: Cash for Clunkers = Cash for Unions

Who really benefits from this lemon of a program? Hint: It's not you

U.S. auto sales in July climbed to their highest pace in 11 months, as customers rushed to showrooms amid uncertainty about the future of the federal government’s “Cash for Clunkers” incentive program. (According to Edmunds, all auto industry sales for July were down 12 percent from a year ago.)

Now, car makers, the Obama administration and the Senate face tough decisions about how to respond to the clunker program’s apparent success. The administration Monday stepped up a campaign to persuade senators to approve $2 billion more in funding before Congress goes on vacation at the end of the week. The House of Representatives on Friday approved a $2 billion funding extension.

Administration officials have warned the program could be forced to end. But some key senators in both parties are balking.

Meanwhile, some auto makers signaled they plan to raise production to restock showrooms emptied by months of production cuts and the government-fueled sales surge. But the increases appear measured, as car makers also want to use the unusually short supply of popular models to lift transaction prices. Auto makers also will look for evidence that the sales rebound can outlast the end of the subsidies. Discount-driven sales rushes often lead to sales slumps once the deals are gone.

Cash for Clunkers is one of the dumbest ideas I’ve heard of coming out of Washington. Yet the public and most commentators are trumpeting it as being a great success. I listened to dear old Charlie Gibson on ABC on Monday night say this very thing. He’s not alone.

Credit Suisse economists call cash for clunkers a “dramatic success” and say the response suggests the personal saving rate will “drop sharply” in the coming months even if the longer-run trend moves higher.”

Think about it for a minute. If I print up some dollars and give them to you to buy a new car, have we created a real economic activity? No. If that were true then all governments would have to do is print dollars, Euros, pesos or Yuan and distribute them to their citizens and have unending prosperity. It just doesn’t work that way, but that is exactly what the experts are all saying.

Can’t people think? None of these economic commentators (I was going to use the word “idiots” but thought that would detract from the dignity of this blog) have a clue what Keynes wrote (he is the philosophical godfather of this concept), much less any basic understanding of economics. Yet they see fit to comment on this program.

Let me make it simple: (1) someone has to pay for this and (2) the government can’t create wealth, it can only spend it.

Guess who is going to pay for it? Yes, you, dear reader. You, your employers, your children, your grandchildren, and many future generations.

And, getting to point No. 2, this is a fake economic event: once the government money stops, the economic activity will stop. Yes, there will be a rippling through the economy of the $3 billion we spend on this program, but it doesn’t create wealth. Let me ask you a question if you doubt this statement: how much have you invested in Ford, GM or Chrysler stock? Nothing? And for damned good reason because we all know they aren’t good long-term ventures. So why is our government doing it? If government could create wealth then why doesn’t it just control the economy and dictate the desired result? Why not? Because it doesn’t work. Never has, never will.

Let me give you a few hints about the “success” of this program. According to Jeremy Anwyl, CEO of Edmunds.com:

First, it’s not clear that cash for clunkers actually increased sales. Edmunds.com noted recently that more than 100,000 buyers put their purchases on hold waiting for the program to launch. Once consumers could start cashing in on July 24, showrooms were flooded and government servers were overwhelmed as the backlog of buyers finalized their purchases.

Second, on July 27, Edmunds.com published an analysis showing that in any given month 60,000 to 70,000 “clunker-like” deals happen with no government program in place. The 200,000-plus deals the government was originally prepared to fund through the program’s Nov. 1 end date were about the “natural” clunker trade-in rate.

According to Douglas Lee of the consulting firm Economics from Washington:

Aas many have noted, the program also leads to speeding up many sales that would’ve happened anyway in late 2009 or early 2010. After adding $50 billion to third-quarter consumption, Lee says, you can subtract about $25 billion in the third quarter. The end result under his forecast: third-quarter growth of 2.5 percent to 3.5 percent, followed by a fourth-quarter decline of 1.5 percent to 2 percent. In other words, more fodder for talk about a double-dip recession.

In light of this, why do you think the Obama administration likes this program? All the Republicans can say is that it’s “an expensive salve to auto dealers and the car industry that ignores other needy areas of the economy.” Bless their souls. Our politicians — left, right and center — wish to buy our votes and, since the Democrats now have the power, they are directing their largess to their voters, who in this case are the members of the UAW. The Obama administration gets good media attention, the unions are happy — for a while at least — and the lucky few who hit the jackpot with this giveaway are pleased.

For the economy, for the taxpayers, and for free markets it’s just a lose-lose situation.

— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.

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