Monday, August 10, 2009

More on the STUPID ( but popular!) Clunkers program.

http://tinyurl.com/l5dr88Cash From Lunkheads
http://tinyurl.com/nz4xsk
Cash for Clunkers and the Broken Window Fallacy The Consumer Assistance to Recycle and Save (CARS) Act (a.k.a. Cash for Clunkers) was passed and signed into law...pays people up to $4,500 for buying a new car if they trade in an old car which gets 18mpg or less. ...a pretty dumb and pretty obvious government handout to the auto industry....nice if the government could just be honest and hand out cash to their favored industries and lobbyists?...some in Congress have actually convinced themselves (or at least their constituents) that the purpose of the CARS Act is to reduce fuel consumption and carbon dioxide emissions by getting cars with poor gas mileage off the road. Therefore, the old trade-ins must be destroyed....the NHTSA's rules... Orwellian:
...disable the engine of the trade-in vehicle while in the dealer’s possession. Removing the engine oil from the crankcase, replacing it with a 40 percent solution of sodium silicate...running the engine for a short period of time at low speeds renders the engine inoperable....the time involved should not substantially exceed that of a typical oil change. ...the crushing or shredding of the engine block...I'm surprised that they don't require the cars to be buried and then the ground above sown with salt.
...except for war, vengeance, and spite, no good could possibly come from destroying something of economic value. There is something called the broken window fallacy, introduced by Frederic Bastiat in 1850,...the CARS program is essentially a program to break windows. It encourages society to destroy all eligible clunkers with market values up to $4,500....clunkers in fact have an important role to play...move people and stuff from place to place at reasonably high speeds, and to the extent that a significant majority of people in this country can't actually afford to buy a new car, or even a slightly used one, clunkers allow those people to enjoy the fruits of a technology that has been around for the last hundred years...
http://tinyurl.com/mzzmb2
More Cash for ClunkersAugust 5, 2009
...see web video interviews with happy car buyers who just traded in their 15 year-old pickup truck to buy a hybrid SUV. I see Wall Street research papers about the positive effect on GDP -- upwards of 0.40% boost this quarter,...administration flacks talking up how good the program is for the economy and the environment. Most people believe that this government program is a smashing success (no pun intended).
...gratified...to see Jonah Goldberg's article today. Jonah gets to the nub of the issue, which is Frederic Bastiat's main theme in his 1850 essay That Which is Seen and That Which is Unseen....the government is managing to juice GDP this quarter by encouraging new car sales, but it will come at the expense of GDP in future quarters...government was essentially giving them several thousand dollars off... the dealer price. Those who were planning to buy a new car anyway have done so earlier than they were planning but won't need another for quite a while. Those who weren't planning on buying a new car now have a lot less spending power to use for a new refrigerator or a new computer or for remodeling a bathroom. That is an unseen loss to GDP....the (so far) unseen effect of removing cheap cars from the market. Perhaps a landscaper was getting ready to start a business,...only afford to purchase a clunker pickup for $3,000 to get started. Alas, they are not available anymore. The lowest price he can pay now is $5,000 because of the diminished supply.....The government is paying people to destroy something of economic value. That something could have been used for recreation, or it could have been used to contribute to GDP. To make matters worse, resources were used to destroy those things (the car demolition and towing operators' resources), and even more resources (the car manufacturers' resources) were used to create expensive replacements for the things that were destroyed....with respect to the (admittedly stupid) CAFE standards, the government at least gets the math correct for CAFE by calculating the arithmetic average of the gallons per mile that cars get rather than miles per gallon. The reason is that all other things being equal, a 10mpg car uses twice as much gas as a 20mpg car, but a 20mpg car only uses 50% more gas than a 30mpg car.CARS only looks to the arithmetic improvement (in the case of a new SUV/minivan/pickup truck, 2mpg-4mpg for the $3,500 rebate and 5+mpg for the $4,500 rebate). The improvement is 50% when you go from a 10 mpg SUV to a 15mpg SUV, but it is half as much in going from an 18mpg SUV to a 23mpg SUV. True to form, the government has a floor mpg on new SUVs of 18mpg, thereby ensuring that you are in the un-sweet part of the non-linear gas mileage improvement curve...The theory behind laws based on gas mileage (like CAFE and CARS) is that gas mileage is a good measure of how efficient a vehicle is. But it really isn't because gas mileage scales inversely with the weight and size of a car. Extra size and weight usually means extra passenger safety and extra carrying capacity. I have seen plenty of discussion about the tradeoff between passenger safety and higher CAFE standards, but I haven't seen much about the tradeoff between carrying capacity and higher CAFE standards...it exempts larger trucks and buses from the CAFE standards, but I wonder why it doesn't distinguish between an 8-passenger minivan and a 4-passenger Ford Focus. A family with 3 kids in car seats isn't going to fit into most sedans, yet it fits comfortably into any minivan, with plenty of room for storage. Would the government rather the family drive two "fuel efficient" cars to its holiday destination or one gas-guzzling minivan?
Sunday, August 9, 2009
Cash for Clunkers -- The Final Phase
...perhaps the most obviously and perfectly stupid government program I have ever seen...only a few billion dollars...of government waste and distortion in a $13T economy, but it does serve as a reminder that government can enact incredibly bad policy in a very short time. The forces of rationality and prudence take time to gather and gain critical mass, but by then it is often too late. Something to ponder as the Democrats try to ram health care reform through Congress without meaningful analysis and debate....by the end of the year, you will see stories appear in the media which are highly critical of the results of the Cash for Clunkers program.
E.g...1) the boost in GDP for the 3rd quarter was temporary -- this will be exacerbated by the way GDP is calculated; inventory drawdowns count towards GDP, but inventory builds do not;2) the boost to the auto industry was temporary; although domestic car sales had until recently been running at an unsustainably low level (9MM/yr, although there are over 200MM cars in the US), the Cash for Clunkers boost is unsustainable as well and has cannibalized future sales; in addition, Cash for Clunkers has induced many people to buy new cars who probably shouldn't have bought them, and those people will either be dumping them soon or going a good long time before buying another new car; 3) a detailed analysis shows the environmental/energy savings of the program (in terms of carbon emission or imported oil -- both questionable metrics in any case) was nil or negative because the mileage improvement
was offset by the energy used to make new cars and destroy old ones, and the old cars weren't driven nearly as much on average as the new cars; 4) used car market prices rose making it harder for poor people to afford a car; 5) engine parts for older cars became scarce making it difficult for owners of clunkers to keep them running at an affordable price; 6) the lion's share of the government largesse actually went to car dealers rather than clunker owners because dealers raised prices on eligible new cars in the face of very high demand;7) many clunker trade-in buyers ended up with buyer's remorse as they realized they traded in a $2,000 car for a $4,500 rebate but actually paid $2,500 more for a new car than they would have had to if the government hadn't distorted the market;8) many clunker trade-in buyers were tricked into spending more than they could afford for a new car that they didn't really need or want;9) new car buyers who didn't have a clunker to trade in had to pay far more than they would have had to just a couple of months before;10) Cash for Clunkers was effectively a huge subsidy for car dealers as the program provided them with free cash, free advertising, and a huge distortion in customer preferences towards consuming new cars. Keep in mind points (7) and (9) above as you read stories about auto inventories becoming depleted in the face of huge Cash for Clunkers demand. I suspect that clunker owners are getting no advantage out of the program at this point relative to the deals that existed in June. And yet they will keep buying anyway because human beings are susceptible to marketing schemes that make it look like a special deal is to be had. On top of that, they will be buying "eligible" new cars from depleted inventory, which means that they probably won't even be buying their first choice car (e.g. model, options, color.Clunker trade-in buyers, regular car buyers, and taxpayers have become dupes of the auto industry.
How much is that clunker in the window?
Shattering the perceptions behind a government program that ostensibly helps the economy by pushing people buy new cars. Jonah Goldberg August 4, 2009
Ce qu'on voit et ce qu'on ne voit pas. That may exhaust my French phrase quota for the year, but it's worth it. The saying is the title of an essay by the 19th century French economist Frederic Bastiat and means "that which is seen, and that which is not seen." Bastiat's essay is most famous for the "parable of the broken window," in which a young boy shatters a shopkeeper's window and, after some initial outrage, the villagers conclude that the rascal helped the local economy. Why? Because if no one broke windows, then the window makers would be out of business, and if the window makers were out of business, they wouldn't buy any more bread or shoes, hurting the bakers and the cobblers. So the six francs the shopkeeper must shell out for a new window is really a boon to the community. The problem with this argument can be gleaned from the title of Bastiat's essay. By counting the money the shopkeeper spends to replace a perfectly good window (that which is seen), we ignore the money he might have spent on something else (that which is unseen). The shopkeeper might have instead dropped six francs on new shoes or a book or on a bonus for his assistant. Those who celebrate the broken window as a generator of growth take "no account of that which is not seen."...the parable of the broken window is worth keeping in mind, perhaps even updating, to the parable of the crushed clunker...the upshot is that Uncle Sam pays people to destroy their own cars as long as they use the money to buy a new, more expensive car....The old cars, still roadworthy, are then destroyed just like the shopkeeper's window.The thinking behind the program is that the car companies need a boost, Michigan needs a boost, the environment needs a boost (through lower emissions) and Americans need help too....the authors of the government's mammoth stimulus plan need some proof that something is being stimulated.So this scheme is win-win-win-win. Within days, the $1 billion...was used up as consumers, most of whom had been waiting to trade in their old cars anyway, took advantage of the free-money program. Indeed, Washington is agog with its own success, stunned to discover that Americans like getting free money.
...Like the drunk who only looks for his car keys where the light is good, Washington can only see the economic activity it has created, not the activity it has destroyed.
For starters, who says the smartest thing for people with working cars is to buy new ones? Indeed, because personal debt is supposed to be a problem, why not look at this as bribing consumers into taking out car loans they don't need? ...not all of these customers are going to be paying cash ...So they'll be swapping serviceable-but-paid-for cars for nicer cars that are owned by the banks...some people would be smarter to buy a savings bond or max-out their kid's college fund or -- here's a crazy thought -- buy health insurance. But instead they've been seduced into spending...on a car they don't really need. But, you might say, some buyers surely do need a new car. True enough. But if they need a new car, they'd get one anyway, eventually. Indeed, they might already have gotten it, but rationally opted to wait for the program to kick in. Or they might have needed to wait until next year or to buy a more affordable car because the normal trade-in for their clunker might not be as generous as Uncle Sam's $4,500. They might even have opted for a cheap used car, which will now become more difficult for poor people to find because we are taking all these cheap cars off the market....at least, under these scenarios, they'd be spending their own money. Under the government's program, my tax dollars are being diverted to people with cheap cars so they can buy expensive ones. That's just really inefficient wealth distribution, not wealth creation. But government can see it, and that's all that counts.
CASH FOR CLUNKERS: TRADE IN AMERICAN; BUY FOREIGN By DICK MORRIS & EILEEN MCGANN
The only part of the stimulus program that is working, the cash-for-clunkers program is, in reality, a subsidy to foreign car companies, proving that Barack Obama is the best president Japan ever had.
The Department of Transportation reports that the ten leading trade-ins are all American branded cars while six of the top ten new cars purchased - and four of the top five - are foreign. So the United States Senate is about to pass additional funds to subsidize the trade-in of American cars and the purchase of foreign cars. DOT reports that the following are the ten top trade-ins, all American:
Ten Top Trade-Ins Under Cash for Clunkers1. Ford Explorer2. Ford F150 Pickup 2WD
3. Jeep Grand Cherokee 4 WD4. Jeep Cherokee 4 WD5. Dodge Caravan/Grand Caravan
6. Chevrolet Blazer 4 WD 7. Ford Explorer 2 WD 8. Ford F150 Pickup 4 WD
9. Chevrolet C1500 Pickup 2 WD
10. Ford Windstar FWD Van
And the top ten new car purchases, subsidized by the American taxpayer, are mainly foreign vehicles:Top Ten New Car Purchases: Cash for Clunkers
1. Toyota Corolla 2. Ford Focus FWD 3. Honda Civic 4. Toyota Prius 5. Toyota Camry 6. Ford Escape FWD 7. Hyndai Elantra 8. Dodge Caliber 9. Honda Fit
10. Chevrolet Cobalt//It is a violation of the World Trade Organization rules to enact a public subsidy program and skew it toward only domestically produced products, so the Congress has no choice but to extend the program to all comers. No choice, that is, but to not spend the money in the first place.Cash for Clunkers will do wonders for the Japanese economy, but its impact on the US job situation is problematic. This unintended consequence is a great illustration of what happens when the blunt tool of government subsidy is applied to the fine tuning of a free market economy. Government planners keep getting it wrong. That's why socialism is such a bad idea.So Obama can boast of a great success in taking American cars off the road and replacing them with foreign cars. Great going!//
****Already evidence of the distortion in the market and the erosion of any benefit to clunker owners ( but keeping the advantage to dealers and the apparent benefit to the UAW -- replenishing inventory might be a fool's errand for the car companies.)****
http://tinyurl.com/m4fuac

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