Cash for Clunkers: Are you Paying any Attention?

There is no doubt that if you have been watching TV or even reviewing RSS articles on Clunkers you have found out that the media is overwhelmingly of the opinion that “cash for clunkers” has worked well and will benefit the economy.   I’ve never really expected an objective observation or evaluation from the Whitehouse, but that’s another matter.  

Why are TV and media so blind and non-objective anymore?  That’s probably because so many reporters fail to heed the journalistic rules that have been a foundation of our press, and that is to note the unseen as well as the seen—to consider all the effects of a policy on society as a whole, not just the immediately obvious benefits for a select group. I’ve not really seen anything published or on TV that has put any type of high level of questioning of the program before us and tried to explain what the unseen consequences of the ‘Clunkers’ program might be.  That’s why I ask if anyone is paying attention.

The first benefit of this revised clunkers program, which was approved last night by the senate and is off to the President today, is to increase the sales price of the car.  What this $3 billion subsidy is doing is boosting sales prices and lowering trade-in payments.  It’s not as if dealers simply charge $4,500 less than they would have and pass the entire subsidy onto the buyer — dealers still charge as much as they can for a new car and pay as little for a trade-in as their customers will allow. The subsidy is split between dealers and customers.  No one has ever come out and said that.

And who are the customers? Not poor people, or the needy — they don’t shell out five figures for new cars. No, this is a middle-class to upper-middle-class subsidy, which is probably why politicians love it so much.  I continue to hear that the average FICO score of the buyers within the ‘Clunkers’ program has a 720 score.  That’s clearly not the poor but I doubt if that kind of information ever comes available to the public or gets reported.

The real benefit to business — and harm to the economy — comes after the car sale is concluded. The law requires the dealers destroy the “clunker” engine (which, to be eligible, was drivable upon trade-in), scrap the car and shred almost all its parts. This government-required waste reduces the supply of used cars on the road.  All those poor and needy, who would have benefited from having access to these autos, will be completely denied.  Reduce the supply of drivable used cars, and you drive up the price of all cars.

This supply reduction is the real stimulus for automakers and new-car dealers, and it comes at the expense of every consumer who didn’t take advantage of Cash for Clunkers — especially those who can’t afford a new car. This $3B program taxes used-car buyers to subsidize new-car buyers.  Have we all just gone nuts in the country?  So tell me, how’s that “cash for clunkers” program working out for you?

 I’d love to hear your comments.