PhilMur's thoughts on biz/tech/money/life

Well, I must say it is with great relief that I learned about the end of the Cash for Clunkers program, as reported yesterday and today in practically every major news organization, including this simple article on the topic in the San Jose Business Journal.

Rather than writing out a detailed explanation of my thoughts on the program, I will say in short that I REALLY didn’t like it.  You may find it interesting to read a recent transcript of a conversation I had with a few people on a Facebook comment thread recently, that pretty much summarizes my thoughts on the issue.  Note that the names have been changed to protect the innocent (or guilty!) except for my own; also, no grammar or spelling errors were corrected.  I’ve pasted the conversation below– enjoy!

Darren cash for clunkers bad bad idea.

August 11 at 9:43am

Phil Murray

have you been reading my posts??

August 11 at 9:57am • Delete

Jon

Couldn’t disagree more.

August 11 at 10:02am

Ike

curious to why you feel it is a bad idea?

August 11 at 10:19am

Phil Murray

Jon/Ike, guess you haven’t read these articles yet – http://online.barrons.com/article/SB124931671451601915.html and http://seekingalpha.com/article/152909-cash-for-clunkers-may-cost-up-to-45-354-per-vehicle

August 11 at 10:29am • Delete

Phil Murray

DESTROYING perfectly good vehicles (that could, for example be donated to someone in need) while rewarding people financially for their past vehicle purchasing mistakes and rewarding them for, in most cases, going in debt through the purchase of a new vehicle. What about that sounds good?

August 11 at 10:31am • Delete

Darren

why I think it is a bad idea- or maybe bad implementation- the standards are too low. People aren’t turning in “clunkers” per se, but just cars with bad gas milegae (eg, CNN editorial about writer who traded in their 2000 SUV for a new VW). That’s not a car with terrible emissions, its was just a bad decision 9 years ago. So the gov’t is shelling out 4.5k to help purchase a 26k new car? Furthermore, with the current state of the economy, people are being encouraged to take on more debt. If people can’t pay their car notes in 2 years, then the banks will be jacked up again, and the cycle continues. I know the car industry is huting, but this is just a bandaid for a bullet wound.

August 11 at 10:34am

Darren

story I’m referring to http://money.cnn.com/galleries/2009/autos/0908/gallery.cash_for_clunker_trade_in/index.html

August 11 at 10:36am

Brett

Not only are we junking cars that could be used by someone else, but we’re setting up a mini “market crash” similar to what happened in the housing market where folks will buy more car than they can afford and end up in hopeless debt a year or two from now. If you want to buy a new car, wait a year or so…you’ll get a much better deal on a nearly new car than you would get using the clunkers program right now.

August 11 at 10:38am

Ike

Unfortunately Phil, I don’t agree with the concept of giving it to someone “who needs’ it, to justify a stance against the program. The program is designed to get the economy flowing.More people will be in need, then the ones that should be “given a hand out”, if the economy is not jumpstarted..the views your sharing seem to be a limited mindset and internal justifications of what is right and wrong , and not aligned with a global mindset. Capitalism in its truest form is designed to keep poor people in debt. Who is poor? If your cashflow cannot regenerate itself, without you going to work, you are poor and in debt. The system is designed 4 that.
Darren, I can see your point, about the standards being too low, and it does seem like a temporary fix, to a deeper problem. However, what would you do differently, if you could share with the administration, a different way to do it?internal justifications of what is right and wrong , and not aligned with a global mindset. Capitalism in its truest form is designed to keep poor people in debt. Who is poor? If your cashflow cannot regenerate itself, without you going to work, you are poor and in debt. The system is designed 4 that.

Darren , I can see your point, about the standards being too low, and it does seem like a temporary fix, to a Darrenper problem. However, what would you do differently, if you could share with the administration, a different way to do it?

August 11 at 10:52am

Carrie

Totally agree – thinking about running out and buying some Lincolns and cashing them in so that I can make some money! Kidding – but seriously – we have a credit crunch so why wouldn’t we encourage people to go out and buy cars they don’t need and can’t afford and just junk the rest. Actually read an article that said it was one of Obama’s best ideas – seriously!?

August 11 at 10:56am

Phil Murray

Yeah, that quote from the people trading in the old Lincoln is crazy – “I mourned a bit for the old cars that might have some useful life left. But we would’ve never been able to sell the Town Car for as much as the trade-in. It had already cost us $500 in maintenance for this year.” Who doesn’t spend $500 a year in maintenance, or close, on a newer or older car? Besides, he’ll burn through $500 in a couple of months of car payments on his new vehicle. Why don’t more people believe www.daveramsey.com ?

August 11 at 11:00am • Delete

Carrie

I have actually donated old cars to charity so that someone can use them to get to a job – now THAT makes sense and is a win for everyone.

August 11 at 11:01am

Darren

I’m a sociologist, we critique, not solve Let’s see, some of what I would do differently would be more strictly defining the term, “clunker,” to include age of car, overall safety, emissions, cost for repair, etc. Secondly, I would regulate against price gauging. There is a lot of speculation out there that car companies are double-dipping by jacking up the price of the car AND receiving the gov’t rebate. If true, I believe that should be a criminal offense. Lastly, I think that with all of these bailouts, more money should be invested in family debt (like forgiving college debt or something). Part of the big problem for families is that they are suffering under debt, and instead of getting relief, more debt is being encouraged! OK, I’m getting way off topic here.

August 11 at 11:10am

Darren

For the record, Carrie, that car you used to drive in Germany was definitely a clunker. When you see the road passing under your feet at the floorboard, it should qualify for change!

August 11 at 11:12am

Carrie

Ha – that is funny. I thought it was a clunker b/c I had to climb in through the Driver Side Window – the hole in the floor didn’t really bother me! Great car for learning how to use a stick shift and teaching people to drive!!

August 11 at 11:24am

Phil Murray

Sorry I can’t join in the fun re: the old car in Germany.. but I will say, Darren, your comments were not off topic. It’s all about debt – the US govt increasing their international debt through these programs, and in the meantime encouraging more debt. Ike, I agree that the capitalist system does allow debt and unfortunately many people are taken advantage of in the process. But personal debt at the levels we see now is a relatively new phenomenon that would be unbelievable to people 50 years ago. I believe one reason for the public uprising and clamoring for the govt to do more for them is because the privileged in this country (and by that I mean probably everyone of us in this comment thread) aren’t doing enough ourselves. Robert Reich, who ideologically I disagree with on pretty much everything, nonetheless wrote a good book a few years ago called Supercapitalism that explores this in more detail.

August 11 at 12:58pm • Delete

Phil Murray

My concern is that investment of tax and internationally-borrowed dollars into a program like this does not help stimulate innovation that would lead to long-term economic improvement in this country. It’s a band-aid to the US auto mess that relies on US residents to go buy new cars, and in most cases, incur new debts along with those new cars.

August 11 at 12:59pm • Delete

Brad

I know this whole debate is over, but I was wondering why, if it’s good that car dealers and manufacturers are selling cars, and they’re selling them because of this “free” money from the government (meaning, because there’s $4500 off the price of the car), couldn’t the car dealers and manufacturers simply either A) offered a discount themselves to move more product, or B) lowered the prices of their cars in the first place. When most businesses start losing money because demand drops they try to generate more business by lowering prices. It’s basic economics. Or, do the manufacturers know they don’t need to do that since they can get a nice fat bailout whenever they need one?

August 12 at 9:10am

Phil Murray

Brad, first of all, I do agree there is always more than one solution to just about any problem. As far as the higher volume/lower cost strategy goes, however, the automakers are in a Catch 22 (and one of their own making) – the fixed costs are their big problem– note that the bankruptcies took a lot of them away. But automobile manufacturing is inherently capital-intensive and so these issues will always be a threat as sales volume fluctuates. The only way for the automakers to deal with it is to scale their business to a size that assume slighly lower sales volume than they would expect. This helps them ensure their fixed costs will be covered even in a downturn. Not dissimilar to an individual putting money in savings in the event of a personal financial crisis.. more in my next post.

August 12 at 11:31am • Delete

Phil Murray

As a simple example of the fixed cost issue automakers and other capital-intensive businesses face:

A company has $10million of fixed costs monthly (overhead, salaries, benefits, facility costs, etc.), and their variable cost to manufacture a unit is $7,000 per unit (var. costs would be things like assembly line labor and parts/materials used in vehicles).

If they sell 1,000 units in the month @ $20k each, that’s $20 million in revenue. After they pay their $10mil in fixed costs and $7mil in variable costs (1,000 units x $7k each) they are left with a $3 million profit.

But if all of the sudden demand drops for whatever reason and their sales revenue drops to 700 units, or $14mil, ten they incur $10mil in fixed costs, and $4.9mil in variable costs to manufacture those 700 vehicles.. so they make $14mil but spend $14.9mil… uh-oh, they say, well let’s lower prices so we can sell more.

(cont’d on next post)

August 12 at 11:38am • Delete

Phil Murray

If they have to lower prices to $15k per vehicle to get back up to their 1,000 unit per month volume, then they incur $10mil in fixed costs and $7mil in variable costs, so they are now losing even more money. So dropping prices is a slippery slope when you can’t simultaneously cut fixed costs– which is why the Chrysler & GM bankruptcies were necessary and what they were designed to do. My point is this: the balancing of capacity, price levels, predicting demand, etc. is harder than most assume it would be. Going forward, shareholders need to hold the companies accountable to conservative business plans that keep fixed (and variable!) costs under control and business plans that assume the worst. Also, they have to keep what should be variable costs (i.e. assembly labor) from becoming fixed cost obligations in terms of high-cost layoff costs and high-cost benefit plans.

August 12 at 11:40am • Delete

Brad

Phil- I am not quite the economist you are. Thanks for the detail. And three posts shows that, you are dedicated! I still don’t like the idea of the government selling cars, though.

August 12 at 3:15pm

Phil Murray

Yep- and please hear me loud and clear- I do NOT want the govt involved either. Automakers as private businesses may have to suffer at times due to poor decision-making and economic changes – whether expected or unexpected. And when those companies suffer, that obviously means a lot of people will suffer – shareholders, vendors, employees, etc. So that’s the hard pill about all of this.

August 12 at 3:31pm • Delete