Monday, August 10, 2009

The Meaning and Impact of Cash for Clunkers

With an additional $2 billion being poured into the Cash for Clunkers program, it is easy to define the program as a success. Never mind the fact that there was no foresight into the extent of the demand that depleted the the program's funds in ten days. Even if the program is, on its face, a success, there are plenty of questions about its effect and just what the success might signify.

To me, the number of people who were willing, despite questionable economic times and mounting job losses, to purchase a new car implies a large amount of pent-up demand. People have been holding off purchases because of economic conditions, because of fear, and not necessarily because they can't afford the purchase. Indeed, they are only waiting for signs of stabilization and some strong incentives. Certainly the incentives help, but if there is this much pent-up demand for some thing as expensive as cars, then the demand for other goods is likely to be pretty high. This is a sign to me that recovery could be swift.

Some have said that all the program has done is to pull in sales that would have normally occurred in the next couple of months. And, sure, there is some of that. I think it's more likely that these are sales that should have happened over the last several months. We'll not get back to the normal pace of auto sales for some time, but there are obviously people out there who want to buy cars. With the right incentives, including lower prices, people may again start buying cars and other things like computers or appliances.

Auto dealers have reasons to be happy and sad about cash for clunkers. Without a doubt it is a good thing to have people thinking about buying cars again, even if they don't do it now. Anything that puts buyers on the lot is a good for business. Low inventories because of producer plant shut downs and bankruptcies, may cause some difficulties but it is better than having the opposite problem. It's the back lot at the dealers' that may be the issue. But even if they have the responsibility to disable and scrap these clunkers, it only makes the other used cars on their lots more valuable. They'll find reasons to complain, but the auto dealers (despite the many difficulties of the last several months) have reasons to be happy.

Auto mechanics are also complaining about the program, because people have begun trading in their cars instead of taking them in for repair. I think, though, that taking 200,000 old cars off the road is not likely to have a great impact on the total number of cars rolling into the garage.

What bothers me, as a car guy at heart, is all of the car parts that won't be reused. I've been that guy scouring scrap yards looking for a replacement alternator, radiator, or taillight. I've also known enough people who restore cars and have spent a great deal of energy searching for that elusive part. Now, I doubt that in another twenty years there will be many people looking for a particular piece of chrome on a 1992 F150 or Grand Cherokee, but for every clunker we happily remove from the road a car-ful of useful parts is wasted.

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