Wednesday, June 17, 2009

Cash For Clunkers

Yet another ridiculously dumb piece of legislation has passed The House and is en route to the Senate, where hopefully (though not likely) some quotient of intelligence will prevail upon them and they will nix it. Here is the essence of the bill (from Bloomberg):
Consumers would get $4,500 vouchers if the new car they are buying gets 10 miles-a-gallon better gas mileage than the model they are trading in. For light trucks, the improvement must be 5 mpg better than the older model.

For a $3,500 voucher, the improvement for cars must be 4 mpg or better, and for light trucks, 2 mpg. The trade-in vehicle must be no older than a 1984 model and get 18 mpg or less in combined city/highway fuel economy.

New passenger cars purchased with the vouchers must get at least 22 mpg in city/highway fuel economy, and light trucks must get at least 18 mpg. Domestic as well as foreign models sold in the U.S. qualify.
Sadly, all of us fools that responsibly purchased fuel efficient cars in the past will be punished for our transgressions as we will not be eligible for this giveaway and we will pay our neighbor for having been wise enough to own a fuel inefficient car.


How many times will We The People pass legislation that rewards the behavior the government is seeking to "correct"?

Of course, on top of the ridiculousness of this subsidy that we have already described, it will not end up having much long-term benefit for the auto industry. Instead, its impact will primarily be to pull demand forward from the future rather than to create much sustainable new demand, thus hurting the auto companies next year and beyond when - shocker - demand that would have existed naturally is not there (it was brought forward to 2009).

Further, one aspect of the "that which is not seen" portion of this sort of legislation is the demand destruction it will cause to other industries as consumers respond to unnatural forces and redirect their increasingly scarce resources toward new cars of all things and away from everything else causing a negative impact in those industries that consumers would have spent money on had their demand not been manipulated by the government. That negative impact elsewhere, which will go unseen by virtually all of society (including those soon to be damaged companies as they won't be able to grasp what happened to them), will offset whatever short-term positive the auto industry receives.

Cash for Clunkers is a massively misguided piece of legislation on so many fronts.

At least, we presume, the government will take ownership of these "clunkers" and destroy them in order to prevent them from spewing forth their foul pollution ever again.

"No," say you?

You say they'll sit effectively as subsidized inventory on dealer lots or be chopped for parts to extend the lives of other similar clunkers? You mean these clunkers will provide cheap competition to new unsubsidized cars in the future?

Strange times, we say.

Or, as a friend of TILB said with more than a hint of sarcasm:

They will not sit on lots. Nor will they be recycled (as if they were really concerned about the environment), b/c that would further F the steel makers [note from TILB: recycled steel being a competitor to integrated steel manufacturers]. And as we know, the steelmakers are a union bunch. Therefore, trade in the clunkers, create new demand for new cars, destroy the clunkers, create new demand for steel!! It's brilliant.
Now we're cooking with fire! He's done a fantastic job of thinking like an elected official. Let's put on our Congressman Cap and extend this line of thinking.

Perhaps next, in order to solve the scourge of global climate change and to stimulate steel demand (and the whole steel and aggregates value chain!) as well as embrace the jobs provided by the strategic construction industry, we will let people and firms trade in their clunker houses and buildings. We The People will pay 50% over the market value then destroy buildings and rebuild them to LEED standards - just imagine how productive we'll be, plus we'll solve the mortgage default crisis, AND we'll save the Earth from human contamination at the same time. A trifecta of epic proportions!

Awesome plan!

Now that we think of it, this works for every industry - sorry boys, but TILB will be out of pocket for a bit. We are off to Washington to share the good news. TILB has got this "economy" problem licked!