Monday, August 3, 2009

Dr. Feelgood: My Take on the Cash for Clunkers Program

While the news media is celebrating the “success” of the Cash for Clunkers program and leading the cheer for additional funding, and it is hard not to argue that this buying spree is good for the car companies and on the surface a good deal for the car buyers, a deeper look at the program is required. I find it to be another shining example of short term gain for long term pain, the kind of stuff that politicians of all parties specialize in.

What on earth am I talking about, you ask? Your representatives in the government have decided that it is a good idea to borrow money in your name and against your future earnings to gift your neighbor as much 25% of the price of a new car and help the car companies companies, at least momentarily, rise from the ashes of the current recession. Whether you call it another bailout for the car companies or a subtle redistribution of wealth, the impact is the same: the government increases the national debt; purchasers are encourage to take on more personal debt; and car companies get a temporary lift in sales and postpone the painful, but necessary, decisions to streamline their businesses. All at a time when both the government and the citizens need to deleverage their balance sheets. In addition, viable, productive assets that are paid for are being taken off of the road in exchange for more debt. Isn't this the kind of artificial stimulus that got us into economic trouble in the first place? Where does it all stop and why are the auto dealers and manufacturers more deserving than home-builders, appliance companies furniture companies, technology companies, etc.?

The Senate may seem like they are waffling on extending the plan at the moment, but don't kid yourself: they will approve it, even if economic good sense says it should be rejected. This is actually one of the few stimulus programs that Congress has enacted that seems to be having the desired result of stimulating at least part of the economy. Think of how much money the taxpayers could have saved if the original stimulus bill had been better focused on actually stimulating something other than government.

Personally, I have no plans to buy any cars right now since mine are paid for and are still productive assets with many miles in front of them. I refuse to take on any new debt. I think the Cash for Clunkers program achieved its purpose of temporary political gain, but this bubble will pop like all bubbles pop and auto sales will fall back to levels dictated by market demand.

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