More evidence of the disaster that was Cash-for-Clunkers
An interesting article today in Seeking Alpha reported that the Cash for Clunkers program successfully contributed to a further decline in the American savings rate. I quote below from the article. Read the entire article here.
Purchases of Autos, in response to the “Cash for Clunkers” program, accounted for most of the August increase in purchases of durable goods, and more than accounted for the July increase.
If incomes are flat or rising slowly and spending jumps, it means that people are either drawing down on savings or going into debt. As far as these statistics are concerned, it doesn’t matter which.
The Cash for Clunkers program “succeeded” in getting the savings rate to come back down. In the short term, that is a good thing and has helped breath some new life into the economy. It was certainly good for Ford (F), CarMax (KMX) and Auto Nation (AN).
In the long term, however, this is a disaster. In August, personal savings (DPI minus PCE) was 324.1 billion or a rate of just 3.0%, down from $436.0 billion or 4.0% in July.
Our low savings rate and excessive dependence on consumer spending to power the economy is one of the key reasons the economy is in the mess it is in….
….A declining savings rate helps boost the economy, but a very low savings rate is unsustainable and eats away at the very core of its structure. It is sort of like eating your seed corn — you enjoy it while you are feasting, but the next year you have a much smaller harvest. This country has been progressively eating more and more of its seed corn over the past 30 years or so.
More C4C fallout
Hate to keep beating up on Cash-for-Clunkers, but I couldn’t resist pointing out these articles to people…
http://autos.yahoo.com/articles/autos_content_landing_pages/1053/cash-for-clunkers-success-limited-by-program-flaws/
http://autos.yahoo.com/articles/autos_content_landing_pages/1063/clunkers-aid-ford-toyota-sales-gm-chrysler-fall/
The WiiStimulus
Many of you read the iStimulus plan I had proposed the other day– and after getting some feedback, I’ve realized that the plan was a bit, er, selfish, as the irony in the name iStimulus (as in “I”) was pointed out to me.
So instead, I have crafted a new stimulus proposal that I feel certain will be better received. The iStimulus‘ benefit was limited because, let’s face it, iPhones and most other Apple products only benefit individuals… so I now propose something that helps a broader swath of people — the WiiStimulus plan.
As it sounds and as it is spelled, the WiiStimulus is designed to help families and groups of friends purchase Nintendo Wii(TM) systems and other home video game systems. This stimulus shuns the individual and instead favors the group approach. In fact, the only way to receive your $100 tax credit on participating video game products will be to also provide, with your tax return, proof of purchase of at least one video game requiring two or more players. I know, such game titles may be hard to find, but I am done with rewarding individuals!
Anything that will bring a family or groups of friends to gather around the LCD in their living room glowing the colors of Guitar Hero or Mario Kart Wii is a good thing! Blogging? So self-promoting. Facebook? So selfish and self-pitying (unless you are messaging friends or family members on the other side of the room). Twitter? Just noisy and distracting. Playing games on your iPhone? — it’s just Windows Solitaire with a prettier face. Family video game playing represents a PURE use of technology that brings people together.
So, rush out today and buy a new video game system (only new systems qualify for the stimulus) and get your family off of their laptops and iPhones and get them gathered around the television once again, using entertainment tools they don’t need and may not be able to afford. Because after all, it will be $100 less now!
Many believe that even though i don’t need or want a stimulus, but that Wii, collectively, do… but is there a difference?
The iStimulus
According to this article in the NY Times yesterday, some “experts worry that the recovery may be weak, stymied by consumers’ reluctance to spend.” Oh no! We’ve got to go spend our money!
Some of the reasons why consumers are slowing their spending from the irrational highs of recent years is described in the article by Moodys.com chief economist Mark Zandi:
“Lower-income households can’t borrow, and higher-income households no longer feel wealthy,” Mr. Zandi added. “There’s still a lot of debt out there. It throws a pall over the potential for a strong recovery. The economy is going to struggle.”
Mark Zandi is describing a return to rationality among American consumers–and I couldn’t be happier. In fact, if the lower-income don’t borrow–because they can’t–and save their money instead, and if higher-income households don’t spend all they make (and save their money instead), I believe this will lead to a more stable economy over the long-run. This may not appease everyone–Cash for Clunkers, for example, was designed to stimulate spending quickly in the short-run, as some economists are convinced that is the greater need.
So, to appease those with a short-run mentality, and to excite the technology lovers out there such as myself who have not yet taken the “plunge” into the world of Apple technology bliss, I propose the first-ever iStimulus. The government will give a purchaser a $100 tax credit for every Apple device they buy – an iPod, iTouch, and yes– especially the iPhone.
This stimulus will do several things for the economy:
1) It will push me over the edge and let me whip out my debit card for the new iPhone activation fee, knowing that $100 of it isn’t all my money – it’s from the government, and so society will gladly share in the cost of my new technology purchase in the form of taxes to cover the iStimulus program.
2) As a result, I can feel good about buying something I don’t completely need. Yes, I literally do have the cash to go buy one and yes, I may or may not really need it, but the government wants me to spend–and it wants me to be a good American citizen–so it has given me an incentive to do so now.
3) It will give Apple more reasons to boast of their strong recent success. It doesn’t matter that they recently sold their 40 millionth iPod/iTouch device; this will get them closer to that 100 million mark! Yes, we may indeed create a mini-technology bubble that will eventually burst, but we can worry about that later…
In all seriousness, the one positive thing about such a stimulus is that at least for once we would be investing money into a company with a future!! And granted, there is nothing wrong with buying “wants”. But, in my opinion, when you lie to yourself and call it a need, or when you finance those wants through personal credit and the backs of society in the form of government incentives, we will find ourselves creating yet another spending bubble that we and our children will be paying for in the form of higher taxes and slower economic growth in the future.
I have personally experienced no benefit from any of the recent stimulus programs; so I say launch an iStimulus program so that more of us can feel good about this devastating economic path that the current administration and the conventional economic wisdom of the day is leading us down.
…
UPDATE: You may wish to read the related posting about a proposed “WiiStimulus” by clicking here.
Has Dave Ramsey been reading my blog?
Just received Ramsey’s monthly newsletter over email this morning– his take on Cash for Clunkers is of no surprise, but worth reading for those who are still unsure of the program’s overall ‘performance’….
Click here to read his article.
The Cash for Clunkers “bubble”
As an update to my post a couple of days ago….
Despite an overall positive tone spun in this AP article today about the Cash for Clunkers program, note the comments about it from an analyst within the industry (emphasis mine):
Jeremy Anwyl, CEO of the auto Web site Edmunds.com, said dealers and automakers clearly gained from the big boost in sales. But while the incentives helped consumers, average prices for vehicles went up as buyers less concerned about prices rushed to take advantage of the rebates.
Inventory shortages from the popular program could keep prices high and drive down new vehicle sales. “We have created a sales bubble and now that bubble has burst,” Anwyl said.
So, it’s clear that buyers didn’t get such great deals after all, given their lessened concern about sticker prices in light of the rebates… and the bubble created by the program will now burst!
Also, you will also note commentary in the article that indicates dealerships are having difficulty trying to claim the rebate. No big surprise there- it’s a government program! 
Cash for Clunkers breaks down for good
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
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