Tuesday, 1 September 2009

Robb's Post

Cash for clunkers and housing tax rebates: the good, bad, and ugly. This won't be filled with a bunch of facts and figures. Never let the facts get in the way of a good story, right?

Cash for Clunkers, Good:
1. Some modicum of increase in mpg of the national fleet
2. Provided sales and cash flow to the automakers at a desperate time
3. Probably allowed some people who screwed up to start rebuilding credit
4. A lot of people got a good deal on a car

Cash for Clunkers, Bad:
1. Pulled sales forward, creating artificial demand and clouding formulation of realistic sales demand projections
2. Can we please pile on some more public debt?
3. Increase in mpg not that significant
4. Mechanic and classic car lobbies (yes, Virginia, there is a classic car lobby) prevented the real old clunkers with no catalytic converters and hellacious emissions from being eligible (program cut off at pre-1984 cars)
5. Big picture - it's more green to keep a car on the road a while longer than to crumple it up, throw it out, and build and operate a new one
6. Depending on who you listen to, we are on the cusp of seeing a bunch of new uber efficient diesel, hybrid, electric and even plain old gas cars. Good thing we just pulled the rug out from under the market for the next few years

Home Tax Rebates, Good:
1. Made homes more affordable for some first time buyers
2. Got transaction momentum started in the housing market

Home Tax Rebates, Bad:
1. Wasn't making homes more affordable what caused the whole shitshow we've been living through lately?
2. Can we please pile on some more public debt?
3. Housing prices in many markets are still too high in light of many metrics. Look at owner equivalent rent in a bunch of markets - home prices are too high.
4. In light of 3 above, if indeed we are encouraging a bunch of people to buy houses now, and home prices are too high now, aren't we going to create another echelon of homeowners who are upside down in their mortgages? That's a bad, bad thing.

Generally, I'm anti any program like this that's going to tweak demand. I've lived through it on a micro scale, managing a business unit at a very seasonal company where the sales people ALWAYS wanted some program - they were always dying for programs - to pull sales forward. Unsustainable.

I'm far from the smartest monkey in the jungle, anyone might have a different idea about these things, but when all is said and done I believe they are political initiatives designed to engender loyalty to legislators among special interests. If you simply look at either deal through the lens of "what's good for the system," then neither of these address the system's needs.


Robb said...

i'm honored. i'm interested in hearing about the long term vs. short term effects on the economy on a micro and macro level in regards to the cash for clunkers. sure, it boosts sales and is good for the auto industry, but it's also giving me a new car payment and makes me reconsider buying a new suit next month or a pair of air force 1s. thanks for the info. in reality, this might be BAD for economic stimulus in a way. just sayin.

Chuck Wagon said...

I think the long term effects are pretty simple to define. It boils down mostly to opportunity cost, right? The government, through this program, has chosen to encourage people to buy cars. Those dollars could have gone into anything from Air Force 1s to savings, at opposite ends of the spectrum (although a pair of nice Forces is like money in the bank). The money that was spent on cars as a result of this encouragement can now not be spent in other ways. It won't be spent on solar panels, it won't be spent on more efficient windows, it won't be invested in wind energy companies, etc. The government has pretty strongly endorsed car ownership.

Macro wise, you have the follow-on effects of the decisions to buy those cars and thus not buy other stuff. The solar panels won't get sold so the solar panel company loses, the wind energy company won't sell as much stock so won't have as much to invest in R&D and production, etc.

Government wise, assuming that the government's ability to saddle us with debt is finite (a questionable at best assumption), this takes money away from other programs like light rail, helath care subsidies, paying down debt (a novel idea) etc.

I heard a sound bite from the President yesterday, from a speech in which he was announcing some massive investment in rail. "Imagine being steps away from mass transit, flying through towns at 100mph." Well, if that's thr future, sir, why are we spending all of this debt to encourage people to buy the past?

Mostly it's opportunity cost, and yes I think it is a bad program.