Cash for Free

Politicos have had mostly plaudits for Cash for Clunkers - the magnanimous government subsidy plan that pays $4500 for your trade-in when you decide you want something newer and sitting-forever-in-inventorier. Car dealers were far more enthusiastic, taking orders and making sales on the plan well before it was fully implemented. Now, having racked up thousands of sales and fronted rebates in the millions, they are wondering why the government can't process their claims fast enough. Seems to me that the government reasonably expected a conveyor belt of claims and instead got an upturned dump truck. I sympathize with Uncle Sam to this point.

But Uncle Sam and I parted ways on this program from its inception. While this stimulus clearly stimulates buying, the sheer number of people to take advantage of it indicates to me not that it is wildly successful, but rather that it is too generous. If I gave out one dollar bills in Washington Square Park in NY at lunch, I might have maybe 10,000 show up from a few square blocks. But if I gave out $100, you can expect that many times that would show up. Same thing here. Clearly Americans needed a kick in the pants to show up and buy, but I think we may have kicked too hard. I think it is a good thing that dealer inventories are finally shrinking, but this is a blip. It doesn't mean that car sales next year or the year after will return from the current 6M/year level to the prior 10M/year level. It means that, for the next few weeks, there is a fire sale on cars.

What is a Congress to do? This is populism at its best - giving the people bread and circus in the same bite. Having fed the masses and been lauded for it, Congress can't stop now. They can't lower the incentive or risk cries of "unfair!" On the other hand, they can't give away money forever. Representatives took one look at this and 2010 election and voted "Yea" for $2B more. Senators with a little breathing room are doing just that and asking, if they can't lower the amount, whether perhaps they tack on a few riders. $4500 requires a certain improvement in fuel efficiency. Under the plan, people are already trading down in fuel consumption by themselves - prompting Sen. Schumer to quip, "If it ain't broke..." But I say it is broke and we can't fix it because the backlash will be too great. Instead, let's tweak it to get what we can for our money. Let's restrict the rebate to cars achieving over a certain MPG and those with ULEV ratings (ultra low emission vehicles). That's your small cars, small SUVs, cross-overs and most Hybrids (I am looking at you Escalade). Perhaps we can salvage something from this program after all.