I am a bit unsettled on the whole global warming thing, unsure of the facts, and unclear of mans impact on the whole thing. I don't like big government, the bailouts, or Government intervention in free markets (except in case of safety and defense). So, when Government decided to bailout GM etc, I thought a cash for clunkers type program might be the best of a bad situation. Seeing what had worked in Germany in stabilizing their auto industry with a government rebate program, it struck me that if the political will was "Help GM" and "CO2 matters", then with that crap hand, the best play was subsidize demand directly (cash for clunkers) instead of a direct subsidy to supply (i.e. bailout GM). I was wrong.
Here is what I think I have learned:
- The Government exhibited limited skill in forecasting demand for the program. This is more unsettling given the government's parallel assertion that they know how to make health-care more efficient. They can screw up a $1B clunkers program, US Postal Service, VA hospitals, and Amtrak, but they will get health care right for sure.
- People have cash that they are willing to spend, given the right motivation. This suggests that the uncertainty of taxes, cap-trade, health care, economy, etc is halting demand, not lack of resources or productivity.
- The high demand for the program may have been a function of the uncertainty over the programs lifespan, i.e. just until November and no more than $1B. Plus the need to clear lots for 2010 inventory.
- It appears the $4500 may have gone in part to inflating the market rate for cars. Buyers have a hard time in this kind of market flux differentiating a good or bad deal. Price information asymmetry favors sellers over buyers (in Katrina this was called price gouging, apparently legal with Government as investor). Potential inflation on car prices makes sense as exhibited in the solar PV market. In solar PV, the government has offered a 1/3 tax break on investment. Shortly thereafter the wholesale cost of solar arrays went up. This is explained in part by price elasticity of demand (via government subsidy) and constrained supply (Charge more than normal clearing price).
- The sub-prime car market is being hurt. This market is comprised of these that can't afford a new car. They need a car to go to work, etc. If they are unemployed, the car lets them search over a larger radius for work. Since all the "Clunkers" are being destroyed, some 220K (perhaps in the end as many as 700K) cars are being removed from the second hand market. Supply/demand says the cost of used cars should therefore go up.
- The spare parts market is being constrained (Supply down). Since the engine is destroyed in the clunkers program, the practice of conservation (Trying to reuse good parts) is disrupted. Under the program, the engines need to be melted down and re-forged. Perhaps a big energy waste. With fewer second hand parts, again the lower tier buyer in the market will see prices go up having to buy new rather than used parts.
- The program is temporarily disruptive. For new car dealers, there is a surge in demand leading to partial bumps in employment, but no long term persistence of jobs. The supply chain of used and spare parts is temporarily harmed. This kind of demand flux makes the life of small business more difficult as they try to balance uncertain demand with labor and cash flow challenges. Why should a small business invest in an uncertain economic future?
- The claims of the program are uncertain. Edmund's (car market experts) claimed the top sellers were SUV Cross overs and pickup trucks. The government (not car market experts) claimed the best sellers were small sedans. Someone is cooking the books (transparency anyone?), and its unclear why. It may not serve the government's interest to suggest SUVs and pickup trucks are being bought, because those have less than perfect mileage. Demand for SUVs and trucks makes sense in that people in more rural areas, with no other form of public transportation and in need of more robust vehicles, would be participants in the clunkers program. The difference in Edmund's vs. Government numbers might be explained in defining car models. Pickups and SUVs are defined in part by a wider range of engine models, so a F150 truck appears as 5-10 different vehicle variants. A Honda accord appears as 1 or 2 variants.
- The biggest question is why do cars get a special subsidy and nothing else, maybe we all should have been given our $4,500 back and used it the way we saw best.
What should have been done
- I will state the obvious, the government should not have bailed out GM and there shouldn't have been a clunker program. But, I will leave this option out because its not how the current government works.
- If the government were truly worried about CO2, they should have put the program in place indefinitely. Or until a certain amount of CO2 savings were achieved. By having an indefinite end point, we would not have had a disruptive perturbation (or a wonderful photo op). The economy would have worked things out in a more natural manner and there would have been more price transparency.
- The amount of the subsidy probably should have been increased to bring more people into the market. The balance of the money should have been taken away from promises to GM and Chrysler.
- Cars should have been disassembled rather than destroyed
- To get the best price, buyers should otherwise wait until the program is over and car dealers are once again hungry
