Cash for Clunkers Stimulates Foreign Car Sales

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Macroeconomics

Politicians aren’t ones to let reality cloud their view. We said back in the spring, when the cash for clunkers program was proposed, that it would stimulate stimulate sales of the transplant automakers, not provide core support for the domestic big three, and that is exactly what has happened. Politicians are lauding the rapid uptake of the initial $1bn as an example of how successful the program has been and justification for allocation of a further $2bn. But figures released show that although a rise in fuel efficiency has resulted in the new vehicles averaging 25.4 miles per gallon, compared with an average of 15.8 mpg for the trade-ins, most of the sales have gone to Asian producers. Although the top-selling new car is the Ford Focus (sedans are made in the US but hatchbacks are made in Mexico), the next four are all Japanese – the Toyota Corolla, Honda Civic, Toyota Prius and Toyota Camry according to the Washington Post.
This is exactly the same as the experience in Germany where their version of the scheme known locally as the Abwrackprämie, or “wreck rebate,” is said to have sucked in imports of foreign made cars such as Skoda’s, Hyundai’s and Renaults. The other experience is that as soon as the rebate ends so do the sales. Rather than providing a lasting stimulus, factories gear up for higher production only to see them fall back if subsidies do not continue. Other consumer goods suppliers complain that such car stimulus packages merely divert what meager spending may have gone into a new washing machine or item of furniture towards a car further depressing consumer sales.
Still, on balance it is probably a more effective way of supporting the whole automotive industry than direct subsidies, but it has to be considered a medium term program. As a short fix, it almost does more harm than good.

–Stuart Burns

Comment (1)

  1. James says:

    Uncle Sam pays people to destroy their own cars as long as they use the money to buy a new, more expensive car.

    Convoluted thinking to say the least, but typical of Government intervention policies. Reminds me of the 19th century French economist Frederic Bastiat’s essay “that which is seen, and that which is not seen.” in is the famous parable of the broken widow (Obamanomics)

    Who says the smartest thing for people with working cars is to buy new ones?

    Because personal debt is supposed to be a problem, why not look at this as bribing consumers into taking out car loans they don’t need?

    Even with the $4,500 subsidy, not all of these customers are going to be paying cash upfront for their new cars. So they’ll be swapping serviceable-but-paid-for cars for nicer cars that are owned by the banks.

    BTW my poor old Mother (76) who was conned into buying a new van she did not need, was not eligible for this program, because she only could afford to buy a used car ?

    So much is not seen !

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