Keynes on Clunkers: “I Hate It”
I went to see friend who runs a local car dealer. It went like this:
Q: How’s business?
A: Best in two years.
Q: All clunker related?
A: All clunker.
Q: What’s your average vehicle sale price?
A: $28,000.
Q: What is the average rebate?
A: $4,000.
Q: How many of the sales are financed?
A: All of them.
Q: What is the average foreign content in the cars you’re selling?
A: Half.
Assume
that this information is representative of what is going on at car
dealers across the country. I believe it is. Some implications:
If
the average rebate is $4,000 and the money behind it is $3 billion it
means that a total of 750,000 cars will be sold as a result of the
clunker program.
The $28,000 average price per car translates into a total sale value of $21 billion. Of that amount $3b will be
borrowed by Treasury, the balance of $18b will be financed by the new
owners.
A month from now the new payments will hit both
households and Treasury. For Treasury the cost is $90 million a year.
Just $7.5mm per month. Think of it as $7.5mm a month forever. For the
households who are driving nice new cars the numbers are much worse.
If
buyers finance their purchase with 8% money and a five-year payback the
monthly nut for these cars is $375 million. Nearly $5b a year. The
owners will have a fully paid asset at the end of the five years, but
they have to pay for it in full. It comes to $500 per person each month
on a fully loaded basis.
Maynard Keynes was an advocate of
government intervention in the economy. He believed that it was the job
of the public sector to provide stimulus when necessary. He legitimized
the concept of deficit financing as an economic tool to increase total
demand. He believed that stimulus/deficit financing should be used to
offset a shortage of demand (recession) in the public sector. He
maintained that if these steps were not taken the propensity of an
economy to fall would accelerate.
Virtually every step that
has been taken in the past 18 months has been done in the name of
Maynard Keynes and his theories. Mr. Keynes is rolling in his grave
over the Clunker program. He would never have advocated this approach.
This stimulus works. But it is being paid for by the private sector.
The end result of this will be that 750,000 households will have $500
per month less to spend for many years to come This very short term
stimulus will quickly turn into an economic drag. A stimulus plan that
depends on the private sector for financing and payment is not a
stimulus. It is just a reallocation of income within the private
sector. The plus today will be a negative tomorrow, the net is zero.
Over
indebted consumers nearly killed us last year. CC’s, crazy mortgages,
store cards, car loans you name it. We are not out of trouble yet from
our debt binge. For the government to be crafting ‘solutions’ that just
put another $18 billion of debt onto consumers is bad policy.
The
Fed announced details of a TALF transaction this past week. This is the
Term Asset Loan Facility where the Fed provides 2.5%
non-recourse debt to finance a pool of newly issued consumer
receivables. The amount of auto loans that were financed on August 6th
was $550mm. That number will surely rise in the coming months as the
Fed finances the ‘clunker’ auto loans. If it were not for this cheap
funding (and a lot of arm twisting) the private lenders would not have
made the car loans. It would seem that very little is being
accomplished by all of this. We are still buying cars we can’t afford.
We are still living beyond our means in both the private and public
sector. Every step that is taken piles on more debt.
It
is as if we are in a race to reflate. The long-term cost of the effort
to return to ‘trend line’ growth could overwhelm us. More debt in the
private sector is a bad trade off for short-term results. There are a
lot of people in Washington who understand Keynesian economics. It
would appear that they are more interested in selling cars than solving
problems.
Lord Maynard Keynes would not be dancing if he knew his theories on economics would result in the Clunker program.
(16 votes)
on Sun, 08/09/2009 - 20:49
#31248
The question is how many cars will be repoed within a year or two. The gov made the down payment but payments still have to be made. No moral hazard means people take the car and walk on payments. Why Not? Its the new american way. I want it all but if I can't afford it, too bad.....for my creditor.
on Sun, 08/09/2009 - 22:05
#31282
Cash 4 clunkers. What a con. Go trade in your paid off vehicle for a brand new one with a $25K loan. More debt on the balance sheet of the consumer and the government. Where did most of the new cars come from...you guessed it...the Asians. I know, some of those cars built in the US. But nonetheless, there still Asian. Just a little more wealth transfer out of this country, additional debt burden and a reverse stimulus. What a joke and a con for the unsuspecting sheeple who fell for this trap under the pretense that you will save gas, etc, etc! The new bubble is be green by spending green.
on Mon, 08/10/2009 - 10:53
#31503
What happened to the 'Green'. Scrap working machines because they are not shiny enough, and contribute a whole heap more to green house gases. Melt down that metal, reform, repaint, add some debt, repeat.
on Sun, 08/09/2009 - 22:10
#31289
Government doesn;t care about anything but paying off for votes to their UAW sops. But HAHAHA most of the clunker cash is going to foreign manufacturers with non-union shops. Go Ford and Toyota. Keep away from gummint $
on Sun, 08/09/2009 - 22:26
#31304
Yes. Reflation. That is the point.
This writing on "Jaguar Inflation" http://mises.org/story/3329 makes a fun read in regards to Cash for Clunkers.
on Mon, 08/10/2009 - 07:59
#31407
Nice link - we need more Austrian School economic theory in the public eye.
on Sun, 08/09/2009 - 22:31
#31308
I just traded in my 2001 Porsche 911 Turbo (http://www.fueleconomy.gov/feg/CarsResult1.jsp?column=1&id=16486) for a Ford Flex by using the CARS program.
Wendy said that we needed more room to haul around the grandkids. I have to say, as an everyday US Consumer, it feels good to get that rebate. It almost makes me feel like a Democrat. In fact, without the CARS program, there is no way I would have traded in my Porsche 911 for a Ford Flex!
I like the Flex because it's big and stylish. However, it's union made and also made in Ontario so it's not a perfect vehicle. Those damn Canadians are nothing but leaches off our economy. The also practice socialist medicine, so if any killer diseases are to come into being, Canada is a likely place for its origin.
As an economist, what do I think about the CARS program? I think it's a program for whiners. Even so, it seems to be helping cure our mental recession, so I am for it.
-- Phil
on Sun, 08/09/2009 - 23:05
#31333
may we never forget you Phil. if we could only get Cheney, Palin, Rumsfeld and Newt to register. we need to be continually reminded or we'll forget.
keep up the good work.
on Sun, 08/09/2009 - 23:55
#31358
Reminded of what? I assume you mean the good old days before things started going to hell after the Democrats won control of the House. People often seem to overlook the fact that a year after Pelosi took over that is when things spiraled out of control. It was no coincidence.
You guys need to watch Fox News now and then. Maybe then you will understand how the world really works...
-- Phil
on Mon, 08/10/2009 - 01:28
#31376
I'd watch FOX news, but , having been unemployed for eight months, we no longer have cable service.
Any other suggestions?
on Mon, 08/10/2009 - 05:11
#31388
A repeat post I feel strongly about. FORGET DEMOCRATS vs. REPUBS, it's a distraction. There may be a few good apples ( Grayson, Paul, Cucinich ) but by and large they all suck, they are all bought and paid for. By picking a "team" it becomes somehow OK if one on the "team" is exposed for graft, corruption, incompetence, adultery or all the above.
"well, he's and asshole, but he's our asshole."
If we do not re-take our country back from the elite plutocracy, we may end up like the book 1984 ( George Orwell- a must read or re-read ). There is an on-going coup d’etat from within. We have to ignore labels like Democrat and Republican, and some leader needs to come up with a voter manifesto:
- No one in Congress is exempt from any laws they pass, they need to have the exact same health care plan as everyone else; their pensions have to be scrutinized, no advantages, etc. They must be subject to the laws they write. Their children should not be allowed in private schools, etc. They need to live in the country they create. Same for Executive branch.
- All “Czars” must be eliminated, now and forever. These czars have been given super-ordinary control, with no oversite- their creation is outside the Constitution.
- All bills must be posted on a federally created web-site 30 days ahead of any vote; an interactive map of each state should allow people easy access to contact each representative with feedback, once per registered voter.
- All bills going forward will not have “riders”, one topic if you please. Eliminating riders eliminates most pork barrel spending.
- Representatives must balance the budget, period. We cannot afford to increase the national debt. This will entail extraordinary painful, huge cuts to scores of things we now take for granted. Tough. Do it now; no more kicking the can down the road.
- We want on that same website where every bailout penny has gone; what the rationale was for each handout, per recipient; current status of the money; expectations of return, with timeline;etc. We want to monitor our trillions if you please.
- Every Congressperson needs to be audited by the IRS, every year. It’s just part of the job.
- The Fed must be audited, in order to get the information need on the bailout website.
- Serious consideration be given of eliminating the Fed ( which is NOT a government entity ). Why do these bankers have so much power? How can we allow TRILLIONS to be unaudited?
- Any other ideas?
We the citizens can take back this country tomorrow, if people become educated, non-apathetic, and let elected officials know they WILL lose their jobs starting in 2010 ( irrespective of party ) unless they follow the basic precepts of the Manifesto.
Yes, I am really pissed off.
on Mon, 08/10/2009 - 12:23
#31614
bravo
bravo
BRAVO!
on Mon, 08/10/2009 - 09:58
#31459
Phil, could you get Wendy up here to give us a regulator's perspective? i'm sure everyone would appreciate it.
thanks.
on Sun, 08/09/2009 - 22:58
#31325
To be accurate, you need to subtract monthly savings in gasoline.
Top trade-ins were 1998/1997 Ford Explorer (15mpg),
Top purchases were Ford Focus (24mpg)/Honda Civic (21mpg)
FHWA estimates passenger cars @ 980 miles/month.
--> Fuel savings @ $2.5/gal = $50/month, @ $4/gal = $80/month
(You may also factor in less maintainance, but higher insurance)
My points are that:
on Mon, 08/10/2009 - 01:22
#31373
Cash for Clunkers is a loser on most environmental scorecards... Here is a transcript from a show on NPR last week:
The "cash for clunkers" program was designed to move new cars off the lots, and so far it's working. But it was also supposed to help the environment by replacing gas guzzlers with more fuel-efficient vehicles. Whether that's working is another story.
Robert Hemsley was one of the first customers to take advantage of the deals offered at Sheehy Auto Stores in Annapolis, Md. Hemsley says he wasn't thinking about the environment when he went to the showroom — it was finances: "Just saving money, stayin' alive, making a buck, paying my bills."
Hemsley traded a 12-year-old Chevy van that got 14 miles a gallon for a Nissan Cube that gets 30 mpg on the highway. He says he'll cut his gas costs by almost two-thirds.
But even before Hemsley drove out of the lot, his new car had actually added carbon dioxide to the atmosphere. That's because it takes electricity to make a new car, and fuel to ship it.
"The estimates vary, but somewhere between 3 and, say, 12 tons of CO2 are produced for every car you make," says William Chameides, dean of the Nicholas School of the Environment at Duke University.
Chameides calculates that if you trade in an 18 mpg clunker for a 22 mpg new car (22 miles per gallon is the minimum mileage allowed for a new car under the program), it would take five and a half years of typical driving to offset the new car's carbon footprint. With trucks, it might take eight or nine years, he says.
Of course, the bigger the mileage improvement from your old car to the new one, the more gas you save and the faster you work off the new car's carbon footprint. If you trade in a 20 mpg car for a Prius that gets about 48 mpg, it saves so much gas that you can offset the Prius' footprint in about a year and a half. (But a 20 mpg car doesn't qualify as a clunker, so there's no government voucher).
And people with big cars tend to buy new cars that are still pretty large, according to Brand Fowler, vice president of Sheehy Auto. He says more customers are opting for modest trade-ups, close to the four mile-per-gallon minimum improvement that's required for cars. Auto analysts say they're seeing plenty of deals for new cars that get 10 miles a gallon more. So far, though, there's not much data to indicate where the final average will end up.
But either way, it's not enough, says Dan Becker of the Safe Climate Campaign. "The problem is the auto industry hijacked this law so it doesn't get the better ones on the road," he says. "All it does is replace old clunkers with new clunkers."
Becker says the "cash for clunkers" program isn't creating a market for the most fuel-efficient cars. He notes that the original legislation had tougher mileage requirements and says the government would have done better by subsidizing people who buy cars that are 25 percent more fuel-efficient than the kind they're driving now. Even SUVs would qualify.
Environmental analysts point out that only two years from now, new cars are supposed to get, on average, 27 miles per gallon. That's five more than required by the cash for clunkers program.
http://www.npr.org/templates/story/story.php?storyId=111511131
on Mon, 08/10/2009 - 17:02
#32137
I'm curious to hear Icarus' thoughts on what you've posted.
I made this same point of yours to people around me but I didn't have any numbers. The understanding I have comes from a familiarity with ultrapure silicon manufacture for the photovoltaic industry; people have no understanding of the stupefying amount of petro-economy (and resultant emissions) that go into producing the 0.9999 pure monocrystalline silicon for solar panel manufacture.
It's as if people think that these new cars (or solar panels) grow on trees and need only to be plucked and served.
on Mon, 08/10/2009 - 07:49
#31405
the other part of the Clunkers program that no one is talking about is its part in the Administration's confidence scheme - this will juice the Q3 numbers, and insure that the recession officially ends, in terms of strict numbers.. - Kid Dynamite
on Mon, 08/10/2009 - 09:55
#31457
Well at least the Gubmint is pouring another $2billion in. That should fix it!
on Mon, 08/10/2009 - 10:34
#31486
most people in the country that can afford a new car have bought one. we are once again getting people to buy something they can't pay for. great idea. when the crash comes, it's going to be a big one.
on Mon, 08/10/2009 - 12:07
#31590
But Milton Friedman wanted everything in the private sector. I would think that you would be overcome with ecstacy that the private sector is picking up the financing for the clunkers. Did you complain as thoroughly when the banks received 23.8 trillion. Maybe they should have financed their own problems. Over course, stealing from the public is the entitlement defined by Chicago school economics. Is it not?
on Mon, 08/10/2009 - 16:41
#32109
Friends of mine in FL say many dealers are matching the govt rebate, so nearly 1/3 off 28k
on Mon, 08/10/2009 - 18:31
#32253
It's just another way to push us into more BS debt.
News flash: IT WAS MASSIVE CONSUMER DEBT WITH EVER-SHRINKING REAL INCOMES THAT CAUSED THIS CRISIS IN THE FIRST PLACE!!! CREATING MORE OF THE SAME THING WILL ONLY WORSEN THE PROBLEM!!!
Max Keiser is right: the Guillotine is not out of the question at this point.
on Tue, 08/11/2009 - 13:24
#33060
and there is an ad at the top of the page promoting Cash For Clunkers by Ford.
Tyler and team, some discretion on the ad display would be appropriate.
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