Friday, 21 August 2009

Cash for clunkers - a bad idea

Germany started this and other countries picked it. The US had its “cash for clunkers” programme this month and is closing it on Aug 24 after “a wild success”.

Cash for clunkers, is a dole the US government gives Americans for trading in their old car and buying a new one. The subsidy that Uncle Sam is willing to give could be as much as $4500 per car. The US government has just spent $1.9 bn on it.

In Germany, it was “successful” in that auto sales went up by some 20% or so. It is estimated that it cost Germany some $ 3.5 bn and it is claimed that it saved “thousands of auto jobs”.

The moral justification under which politicians have sold this idea is that carbon spewing clunkers will be replaced by fuel efficient cars and that this is helping the environment. Balderdash. They are doing this because its wildly popular as everybody loves a subsidy, if its given to them. And in car crazy countries like Germany and the US, that's pretty much everybody.

I can’t fathom the economic rationale for throwing money like this. Why is the auto industry so special ? Why not cash for clunkers for TVs, washing machines, dishwashers, or for that matter, kidney machines (Readers of Yes Minister will understand this allusion) which are all suffering similar declines of demand themselves. And how will this help ? A three month increase in demand is going to save “thousands of jobs”? Really ? And what do you think will be the demand in the next three months, pray ?

The problem with tinkering with an ecosystem is that you can hardly predict what the effects would be. Even in the auto industry, car repair shops have been severly hit by this programme. In Germany, general retailers have complained of falling demand - while people bought cars, they scrimped on buying groceries. So, is it the government's role to ensure that the car manufacturer benefits and Helmut Schmidt who runs the neghbourhood garage closes down ?

Governments spending money by investing , in say infrastructure, during times of recession is understandable. Governments lending money to prevent bank collapse (these moneys have to be repaid you know) is also understandable. But just doling money out to help “scared cow industries” ? When massive deficits are being run ? Taxpayers’ money is not meant to be spent like there’s no tomorrow, you know.

I’ve heard the argument that governments cannot sit idly by and let the recession ride. Sure it cannot fiddle while Rome burns. But equally, following the “politicians’ logic” (from that masterpiece Yes Minister), is downright foolhardy. Sir Humphrey, explains the politicians’ syllogism as follows – Something must be done. This is something. Therefore this should be done !! Cash for clunkers seems to be a scheme Jim Hacker would be proud of.


Anonymous said...

While the car crazy US folks (I think they don't have any other choice seeing the lack of public transportation) are hopping with joy, I can not but think of how the whole financial mess started with the interest rates being lowered to save the economy from backlash after the 9/11.

The quick fixes will create problems when/where we least expect it - so it would be good for the govt to proceed with caution.

Good one, Ramesh. You are so upto date on all happenings that now your blog has become a newspaper of sorts to me! :-)

Preeti Shenoy said...

Not surprisingly, there was a discussion on this topic in BBC radio 2. The one who were being interviewed said that economy would groaw because of it and it helped beat recession. At that point I changed the station and tuned into one that was playing Van Morrsion's moondance :)

A good post.


mahesh said...

Hi Ramesh,

Thanks for giving interesting topics to read on a daily basis. Life in India is actually quiet (pun intended) good and enjoying some time at home not having to worry about having to eat my own cooking.

Looks like the US government is doing things to show people "we are trying". In terms of why not the other consumer durables the only thing I could think of was that these are manufactured outside as compared to cars which are primarily manufactured in America.

Whatever said and done it did prompt sales of half a million cars in a month [GM sells 8.35 million cars a year in 140 countries- so i presume that is some sale in a month] (presumably most to already broke Americans) who rack up atleast another +/- 5.5 B of debt assuming a car costs USD 15k. Thats a lot of money for the banks to write off at a later date or for people to pay monthly to the bank.

Only flip side is that some of the cars are vintage cars and are now selling for more than 4500 USD... some one missed a trick some where... Also wonder whether the rest of the cars will land up in either Iraq or Afghanistan or some war torn country in Africa??? and if it does happen the fuel guzzling cars are back on the road ... like you said Balderdash



Ramesh said...

@thoughtful train - Yeah quick fixes usually are neither quick nor a fix. Thanks for those Oh so sweet words

@Preeti - Van Morrison better anyday than boring businss !!

@Mahesh - Now that's a thought. Export the clunkers to Africa. Brilliant. Shall we team up together and start the business ??

Ajay said...

The scheme worked well for the Germans I think as SAP is already on its way doling out bonuses and benefits to its employees as the German economy has officially recovered (my flatmate wors for SAP). It might be a bit premature is what I think about it though.
I am fan of Ji Mantri Ji too. :) Haven't seen Yes Minister.

Ramesh said...

@Ajay - That's just an excuse for folks in SAP to reward themselves. What has Germany got to do with SAP's success, other than that they are headquartered there ? Most of their business is elsewhere anyway. And Germany out of the recession. Not yet, not yet.

And at last, I can make one TV/movie recommendation to you. Watch Yes Minister. Its superb. Better still, read the book.

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