CASH-FOR-CLUNKERS: COUNTERPRODUCTIVE

Nearly everyone is over-the-moon about Cash-for-Clunkers. Car buyers love the inflated trade-in value for their clunker as an excuse to buy a new car. The car industry loves the business. Unions love the jobs preserved in building new cars. The Obama administration and Congress love the appearance of having breathed some life into the economy. The environmentalists love the reduction in pollution, however minimal, achieved by trading old gas-guzzlers in for new fuel-efficient cars. Hope-addicted investors love the prospects of improved corporate earnings. What’s not to like?

Understandably, the Automotive Aftermarket Industry Association and automotive engine rebuilders don’t like the program because it eats into their business of maintaining clunkers; so their opposition is suspect. However, the main opposition comes from grouchy, opportunistically born-again Republican fiscal conservatives, protesting what they perceive as an unwelcome addition to intolerable deficits.

Strangely, the Republicans got it right for a change, though not for the right reason. Sure, an extra three billion added to the deficit will add to our children’s burden; and that’s unfortunate. But with this year’s deficit projected at about $1,800 billion, and trillions more to come, what’s an additional $3 billion among friends? The deficits are a necessary temporary expedient to fill in the demand gap left by shell-shocked consumers and businesses until they regain their financial footing. Moreover, applying such deficits to fund long-lived assets, like infrastructure and children’s education, is not only constructive, providing jobs and contributing to the nation’s productivity and future growth, but also equitable in the sense of providing value to the children who will eventually have to service and/or repay the national debt.

I submit that Cash-for-Clunkers is counterproductive for altogether different reasons. Follow me through on this. The U.S. is in trouble because consumers took on too much debt, much of it supplied from the huge trade surpluses built up by Asia and OPEC over the past decade. The obvious solution to America’s economic malaise is for consumers to spend less and apply the resulting savings to the repayment of debt – i.e. deleverage. Moreover, since much of our debt is owed to foreigners, the most promising way of repaying them is by exporting more, importing less, and applying the resulting trade surpluses to debt repayment. (See various previous postings below.)

Cash-for-Clunkers accomplishes just the opposite. By trading in old debt-free clunkers for financed new cars, consumers are piling on more debt rather than deleveraging. This delays the day when American consumers can sustain economic vitality by spending within their means. Worse yet, about half the new cars sold under Cash-for-Clunkers are foreign-made. So American taxpayers are underwriting foreign rather than domestic jobs, and in the process adversely affecting the U.S. balance of payments, thereby delaying the process of reducing our foreign debt. Consequently, Cash-for-Clunkers is inimical to the process of deleveraging essential for sustainable recovery.

Bottom line: Cash-for-Clunkers is the equivalent of providing a drug abuser with another ‘fix’ – it feels good for a while, but provides no lasting relief and prolongs the misery.