IF ANY PROOF THAT the cash-for-clunkers scheme was one of the dumbest ideas ever to come along, consider some of the geniuses that took up the federal government on its offer of up $4500 to junk their rides.
Among the clunkers going into the crusher included a 1997 Bentley, a 1997 Aston Martin, a 1999 Mercedes C43 AMG and 37 models that were less than a year old, the Detroit News reported. All those exotic older cars and the new ones had to be worth more than the $3500-$4500 their owners got to trade them in for new gas-sippers, but apparently they made the irrational choice of a junking their not-so-clunky car instead of selling or trading it in.
Why such dumb choices? An old joke holds a possible clue: A chap sees a classified ad for a two-year-old Corvette for just $1,000. Why so cheap? He asks the woman who answers the phone. "My husband ran away to Tahiti with his secretary and he e-mailed me to sell his 'Vette for whatever I could get for it and send him the proceeds."
Other than such revenge served deliciously cold, one commenter at the Detroit News Web site also observed that a clunker could have been "a Caddy that took a swim during Katrina." But excepting such instances, a rational recipient of clunker cash got more than the trade-in was worth and likely was going to buy a new car anyway. Or, perhaps, the clunker deal swayed the buyer from a late-model used car.
While there were undeniable benefits -- 22 Peugeots went into the crusher, may they rest in one solid, irreducible piece -- the costs were vastly greater. According to an estimate by two University of Delaware economists cited by the Detroit News, the costs of the $3 billion cash-for-clunkers program exceeded the benefits by $1.4 billion.
Still, auto sales surged to a boom-time 14 million annual rate in August as car buyers went ga-ga for clunker cash, bringing joy to them and dealers -- especially dealers. Now comes payback time.
"On closer inspection, we do not see lasting, tangible benefits for the economy," Citigroup economists write about cash for clunkers in this weeks Comments on Credit. "The sales spike probably borrowed from future months and will fall off sharply now that the program has ended.
"We believe that the program did not help that the program did not help auto makers much because the rise in sales was temporary, and gave car buyers only a small cost savings. The biggest beneficiaries of this program were the auto dealers themselves, who essentially received a huge transfer from the U.S. Treasury," they add.
Because Uncle Sam sent the voucher directly to the dealers, they gained tremendous flexibility in negotiating prices. Added to the mix of variables dealers can manipulate -- base prices, incentives or rebates, and the concessions they deign to grant -- comes the clunkers program. Since depressed sales already had them giving deep discounts, the government vouchers essentially replace dealer discounts and incentives, Citigroup explains.
The Bureau of Economic Analysis figures the average expenditure per car is $22,000. If the average clunker check of $4,000 were split evenly between the dealer and the buyer, the cost would be reduced by 9%. Given half the autos purchased in August involved clunker cash, the consumer price index for new vehicles would have fallen by about 4.5%. Based on the actual number, Citigroup reckons consumers got only about 15% of the benefit of the program.
So, the folks who traded in Bentleys and Aston-Martins for clunker cash weren't the only ones who were deluded. It seems most of the car buyers who rushed to get in on the deal also were fooled.
"The most notable effect from the cash for clunkers program was to distort the path of consumer spending in the third and fourth quarters," the Citi economists add. "As a result of the surge in vehicle sales in August, real consumption is likely to have grown at a 2% annual rte in the third quarter, which would be the biggest gain in 2 ½ years.
"Half of that growth was due to the rise in motor vehicle sales. Now that the program is over, we estimate that vehicle sales plummeted back toward the 9 million unit range in September and will remain low through autumn. As a result, we expect real consumer spending to fall back noticeably in the fourth quarter." the Citi economists write. Neither gives a true picture of the trend in consumer spending, which they see improving in 2010.
But John Williams of Shadow Government Statistics contends the expiration of one-shot schemes will give way to new downlegs.
"The broad economic data remain deep in recession territory, even with the cash-for-clunkers program and the first-time homebuyers tax credit running their courses. The clunkers programs has expired, and given the closing period on home sales, so, too, has the bulk of the tax credit," he writes.
(The first-time homebuyers' $8000 tax credit applies to purchases that close by Nov. 1, though Congress could extend the deadline. If not, a house likely would have to be under contract to close by Nov. 1, and that could be pushing it given the likely last-minute rush.)
"With consensus estimates having created irrationally optimistic expectations for a near-term economic recovery, economic reports in the months ahead increasingly should disappoint expectations," Williams concludes.
Various series are "bottom bouncing" along what SGS defines depression-level peak-to-trough declines of 25%. And improvements in year-over-declines represent the easier comparisons versus depressed year-ago readings, he adds.
For instance, durable-goods orders are down 28.6% from their peak and have been bouncing around the January 2009 seasonally adjusted monthly level of $160 billion into August, even with cash-for-clunker upticks for motor vehicles in July and August.
Similarly, housing starts in August were down 29.6% from a year earlier; at a 598,000 annual rate, the month's starts were within the range of normal volatility relative to the trend of 550,000 units, Williams writes.
Now that the feel-good programs -- cash for clunkers and the first-time homebuyers tax credit -- have expired or are about to, it's not clear what can take their place with consumers facing falling employment and incomes, diminished wealth and still-tight credit. But they were fun while they lasted, even if the improvements were illusory.
Comments: randall.forsyth@barrons.com
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