The federal "cash for clunkers" program, aimed at reviving auto sales while helping the environment, looks on the surface like a sweet deal for American consumers, the ozone layer and struggling U.S. vehicle makers.
But the most important impacts of this cynical middle-class bailout might be on the broad economy, Japanese automakers and Obama allies' political fortunes. That's because of the clever timing of the flow of taxpayer money proposed in the legislation, the program's fiscal financing and the types of vehicles eligible to be purchased.
The program, which Congress approved Thursday, would provide vouchers of $3,500 to $4,500 to Americans willing to trade in their old gas-guzzling vehicles as part of transactions for new vehicles that consume gasoline at slightly less fearsome rates.
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Automakers that saw sales fall by a third this spring are honking their horns in support of the program as a way to get buyers into their dealerships, as are Michigan legislators.
If you think about it, though, all that is really happening is that the federal government, which now owns a big chunk of the automakers' debt and equity, would be creating a rebate program that differed in one key way from the programs manufacturers have financed themselves for years: Instead of shareholders and debt holders being on the hook for the advertising gimmick, taxpayers would be asked to finance their own deals.
Socialized car buying
It's sort of like a store advertising a 15%-off sale, then billing the customer for the cost of the discount at the cash register. It sounds like a great deal until you realize the money doesn't come from outer space. It comes from taxes. It's like socialized medicine, but with mudflaps.The bill is called the Consumer Assistance to Recycle and Save Act -- CARS, get it? -- yet the main thing to be recycled would be taxpayers' money. It's a Pinto painted to look like a Ferrari.
The real winners wouldn't be just the government-owned automakers but politicians in charge of boosting gross domestic product numbers they could crow about in upcoming elections, companies that turn junk cars into scrap metal and Honda Motor (HMC, news, msgs), which makes the largest number of cars and light trucks that are sufficiently fuel-efficient to qualify for purchase under the terms of the proposal. Take a closer look at the data to understand why.
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Experts debate the 'cash for clunkers' billTwo critics explain their objections -- for very different reasons -- to the program to offer cash incentives to trade in old gas guzzlers.
A serious economic boost
Similar programs launched in Germany, France, Brazil and China earlier this year boosted vehicle sales by 39%, 26%, 76% and 59%, respectively, according to ISI Group data. The proposed U.S. program would boost sales at rates on the low end of this scale. New automobiles were sold in the U.S. at an annual rate of 9.9 million units in May. The rate last year at this time was 14.2 million, and even that was down sharply from the 16.8 million rate averaged from 1998 to 2007.A Barclays Capital study has determined that if the clunker transactions happened at expected rates, which are fairly modest because of restrictions on the type of clunkers that would qualify, they would add to quarterly sales at an annualized rate of up to 1.5 million vehicles.
ISI Group ran the numbers and discovered that the last time vehicle production jumped by anything close to that amount, real GDP surged 11.6% in a single three-month span. That was the first quarter of 1971, after an autoworkers strike.
Autos make up a smaller share of GDP today, to be sure, but you can see that the scale could be impressive. Adjusting the data, ISI economists believe the cash-for-clunkers program could cause automakers to boost production enough this summer to generate positive GDP growth of 2% and 3% in the second and third quarters.
If accurate, those would amount to gigantic swings off the negative-5% GDP growth of the first and second quarters and create a lot of political capital for Democratic lawmakers going into the 2010 re-election season. Perhaps we should rename the program "clunkers for Congress."
Continued: The devil's in the details
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