Surely you've heard something about the government's "Cash for Clunkers" program that this week ran out of money. Here's an interesting take on the whole program from a reader in Lexington, Kentucky:
http://www.kentucky.com/595/story/876313.html
This reader's analysis is both simple and right on. What the program does is to essentially raise the market value of used cars -- why sell a clunker for $1000 when you can get $4500 from the government (provided, of course, that you are trading in to get a new car)?
So the supply of clunkers in the used car market is going to become seriously restricted, raising prices. Who buys really crappy old cars? Poor people, young people, etc.. In other words, people who can't afford better cars. For many of these folks, the ability to drive is crucial in finding and keeping employment.
So what this program does is to make it more difficult for poor people to purchase vehicles. Like the minimum wage, it is a racist law and unfairly targets young people. Do not let yourself be fooled. It is not out of benevolence or a desire to help the poor that lawmakers pass laws. In this case it's a handout to the auto companies. In the case of the minimum wage it's a handout to the unions (who want to restrict the supply of competing labor). In both cases average Joe and Jane lose.
The BPE . . . Out.
I agree with the analysis. It is hard for me to believe that the government's intention of this program is to make fuel efficient cars more affordable for Americans, as they have stated publically. It is clear that the government is attempting to help restore inventory levels of the car companies that received TARP funds. The government obviously has an economic interest in the well being of these companies after giving a little over 17 billion to GM and Chrysler. Inventory levels of these car companies are supposed to be around 50 'selling days' on average, however, inventory levels reached around 125 'selling days' which led to a halt in production and collapse of the industry. It is said now after the cash for clunkers program that inventory levels are around 40 days and so the car companies will begin producing again as the government intended. The question we now must ask is what will happen when the cash for clunkers program loses funding and incentives for new car purchases disappears. We will then see whether the restructuring effort of these companies was effective at sustaining growth or if the effect was a temporary fix of inventory levels and now an overpriced used car market as the blog post states.
ReplyDeleteOn a final note, ever since I took my first economics class I have always wondered how car companies sustained growth, coming out with countless new models each year and always being so profitable. I grew up in a relatively affluent area both in Houston and San Antonio and I believe my family has only purchased 2 brand new cars since I have been alive. If anyone else has ever thought about this same issue, this statistic put it into perspective for me. GM makes $14,000-$15,000 profit off every SUV sold. PROFIT!
The whole industry is broken and disgraceful like many others. For example, My mom and I had a great idea for father's day to buy my dad an outdoor chair because he enjoys sitting outside by his pond and watching the deer eat. The chair was $375 at Home Depot. $375 for a piece of metal and a cotton cushion that wasn't even that comfortable. When less fortunate people than myself have to finance a chair in order to enjoy the outdoors, we have problems. As we do when there is a $15,000 markup on SUV's. Hopefully the restructuring efforts prove to be sustainable.