Obama’s Car Allowance Rebate System (CARS)—better known as CASH FOR CLUNKERS—is another in a long string of wasteful government programs. Under CARS, you can get a $3500 or $4500 government cash voucher when you trade in your car for a new one that gets better mileage. The program is supposed to get inefficient polluters off the road and “jumpstart the economy,” but there is more to the story.
First, only those who happen to own a vehicle worth less than the $3500/$4500 voucher amount would benefit from the program. Those worth more can be sold or traded anyway. By providing an inflated trade-in value of $3500 or $4500, low income consumers are being encouraged to purchase a new car. Dealers and banks are eager to provide financing because the vouchers provide a sufficient down payment. But what happens if consumers can’t afford the payments down the road? The last time I remember the federal government “helping” consumers buy something they couldn’t afford was in the housing market, and we all know how that turned out.
Second, what about the poor consumer who drives a “clunker” but does NOT wish to incur debt to finance a new car as part of the program? He’s out of luck because older vehicles with values in the “clunker” range are now worth much more because they can be exchanged for government vouchers. As more Americans participate in the program, the supply of “cheap cars” will decline, thereby raising their market value. In other words, this kind of government intervention can make cheap cars driven primarily by the poor more expensive. The truly poor must either incur debt by purchasing a new car through the program or risk paying an artificially inflated price for their next old one.
As we can see, poor consumers who drive “clunkers” can either (1) incur debt to purchase or lease a new car, or (2) refuse to participate while the supply of old cars dwindles—and prices rise—as a result of the program. Any environmental benefit will be minuscule and only symbolic, especially when one considers the number of vehicles added to the roads everyday in countries like China and India. It’s hard to see any long term benefit here.
So what’s the motivation for the program? In my view, it kills two liberal birds with one stone. First, it subsidizes the auto industry, namely GM. This type of policy was easily predictable (see my earlier blog posts on the bailout) and always occurs when government entities try to “compete” in the free market. One way or another GM will be profitable again, even if taxpayers have to lose money to make it happen.
Second, the CARS program redistributes wealth. It’s likely that a high percentage of those eligible for this taxpayer-funded program are part of this 40% of Americans who do not pay federal income taxes in the first place. This taxpayer-funded program will transfer $1 billion of wealth down the economic ladder.
The CARS program is another Obama scheme designed to “correct” market inefficiencies. But government intervention that seeks to circumvent market realities usually fails in the long run. What’s my solution? Return GM to private ownership, let buyers make their own choices, and let the market resolve its own problems. Government meddling may be politically expedient, but is costly and usually delays the inevitable.