“Cash for Clunkers” is in the news again. The program has been so “successful” that congress has appropriated additional $2 Billion dollars to keep it going. It is certainly true that the government has achieved their two stated objectives; (1) spurring new car sales and (2) removing older less fuel efficient cars from the roads. Unfortunately government programs often come with unintended consequences, and creating this much artificial demand will certainly have some negative long term economic impact.
As we predicted the majority of the new cars being purchased are built by foreign car manufacturers. Only 47% of the new cars sold are coming from the three US automakers. The majority of those cars are built by Ford, leaving the two firms which need the most help, getting the least.
Further, while we have not seen any statistics to back this up, it seems reasonable to assume that the majority of the clunkers being traded in are paid off and that a significant portion of the buyers are using the government money as their down payment and borrowing the remainder from the banks.
So, the government is borrowing money, presumably from China, to subsidize the purchase of new cars from Japan and Korea and American consumers are re-leveraging themselves so that we do not miss a good deal. Last I checked excessive leverage is what got us into this recession in the first place.
