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Benefits, pitfalls of 'Cash for Clunkers'
Economics editor Chris Farrell
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TEXT OF INTERVIEW
Steve Chiotakis: A U.S. Senate vote is likely later today to add $2 billion to Cash for Clunkers.
That's the program that gives cash incentives to consumers for trading up to more fuel-efficient cars. Now almost all of the initial money -- a billion dollars -- has been spent and the program could be out of cash by Friday. The added funds would probably drive it through Labor Day.
Economics correspondent Chris Farrell joins us now to gauge what Cash for Clunkers is doing for this recession. He joins us right now to talk about -- from a consumer level -- it's effect on the economy. Good morning Chris.
Chris Farrell: Good morning.
Chiotakis: So this program's been pretty popular we know. What are its pitfalls?
Farrell: Well there are several pitfalls. Here's what does concern me: The consumer is taking on debt in order to do this transfer. So you drive your clunker up there, and you take it into the dealership and you get your $3,500 or your $4,500 and you get to buy a new car. Now, most of us don't have the money to pay cash for that new car. So you're taking on some consumer debt. That to me is one of the pitfalls out of this program.
Chiotakis: What kind of timing was this, Chris? Should the government have put forward this program sooner, maybe saving the auto industry from this terrific car slump?
Farrell: Yes if it hit earlier it would probably be good. But you could argue it a different way, Steve. The economy is bottoming out. Now the economy is getting a kick that gives a little boost of confidence, and that gives an extra boost to the economy.
Chiotakis: Speaking of boosts, who else gets a boost from this Cash for Clunkers campaign?
Farrell: Well I think there's a couple things. You know, it's really not that much money. Right? I mean in this huge economy that we're in. So manufacturers are going to get a little but of bump cause the manufacturing sector has been so decimated. I expect that's where we're going to see the real rebound and some hiring and some activity. Just because they've cut so far that even this program is really helping out. At least the auto industry is going to clear out the 2009 cars, set up the season for the 2010 cars. So that part of the economy is going to get a little bit of a boost.
Chiotakis: All right, Marketplace economics correspond Chris Farrell joining us. We're going to hear you on Marketplace Money too, right?
Farrell: Yes you are, and we'll be talking about our personal finances.
Chiotakis: All right, Chris Farrell, thanks.
Farrell: Thanks.
As and ex car dealer, the problem with the government doing this program, is that the government is pulling forward demand.
The car manufacturers are well aware of the problem. Nissan used to go through a quarterly cycle of rebates for a month and then none for a while. This caused peaks and valleys for demand.
Maybe as opposed to the government trying to manage the economy which is far too complex for them to do so. It should analyze their programs and try to eliminate those which either do not work or are causing unintended problems.
Take grain support, this has created High Fruitcose corn syrup which the body can not absorb and so goes directly to fat. This in turn has helped to create our obesity and diabetes problems.
Why do we still think that the government can accomplish anything. Take the federal reserves desire to manage the economy through monetary policy and the bubbles and problems we have seen and are seeing as a result.
Maybe reverting to a simplistic model for government. The USDA not allowing Creekstone farms to test for Mad Cow Disease and yet wants to institute a tracking system in order to mitigate any related problems. Maybe private industry would come up with better solutions.
How many extra cars were sold as a result of the above problem. I would guess that we are well over $20,000/extra car sold. That is a heck of a return.
