Wednesday, August 19, 2009

Cash for Clunkers

By all accounts, the Cash for Clunker's program, in which the U.S. government will pay up to $4,600 to scrap a car in favor of a new, more fuel efficient car, is working as it should. GM has recalled more than a thousand workers on furlough and is running extra shifts to ramp up production to meet demand. All well and good.

Less known is a report in the New York Times that more than 200 auto dealers in New York have pulled out of the program, citing delays in reimbursements. Other potential problems with the program? It shifts demand from later periods to the current period, distorting the business cycle for automakers attempting to forecast demand to manage production and inventory levels. So it is conceivable that the rehiring of furloughed workers will only end with layoffs when the current round of subsidies end and the economy does not fundamentally recover from its current downturn.

For those more protectionist in their predelictions, Cash for Clunkers shifts market share from domestic to foreign carmakers. According to the government's own data, of the top 5 cars bought in the program, only one, a Ford, is a domestic nameplate whereas of the top 5 trade-ins, all are domestic.

Bottom line: If this scheme, according Larry Kudlow, is the least objectionable in the suite of recovery programs offer by the government, then we are in for a drawn out recovery, lengthened by the heavy hand of the government's clumsy interventions.

No comments:

Post a Comment