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Cash for Clunkers Comes Crashing Down

Posted By Nicolas Loris On October 2, 2009 @ 2:39 pm In Economics | Comments Disabled

What goes up must fall just as hard. Case in point: cash for clunkers [1]:

The dramatic decline in sales reported Thursday by the Big Three automakers suggested the extent to which the stimulus act has propped up the economy. The government’s wildly popular “Cash for Clunkers” program drove consumer spending to its highest level in eight years in August. But after it ended, so did the growth in auto sales.

General Motors’ sales plunged 36 percent in September compared with August. Ford plummeted 37 percent. Chrysler dove 33 percent.

Cash for clunkers “was a one-time boost of sales followed by a crater,” said Ben Herzon, an economist at Macroeconomic Advisers. The firm forecast that the program was likely to have no effect as a stimulant for national economic output.”

“It was disappointing. I expected the month to be a bit stronger, but it just wasn’t,” said [2]Mark LaNeve, G.M.’s vice president of United States sales.

Politicians initially lauded cash for clunkers as a successful program that stimulated the economy, particularly the ailing auto industry, and the program also inspired consumers to buy more fuel efficient vehicles at the expense of completely destroying their old ones. Nancy Gibbs sums it up well [3]in Time:

“What does it tell us about our national character when the most popular government program in years is an economically dubious, environmentally negligible, politically lazy handout from 99% of the population to the other 1%, all aimed at reviving the economy from its vegetative state?”

If you subsidize anything enough, people will buy it. Industry incentives are increasing [4]but nowhere near the level of the $3,500-$4,500 taxpayer-funded “incentives.” Worse, cash for clunkers could have serious adverse consequences for consumers’ behavior when it comes to purchasing goods. If consumers come to expect a handout from the government, they may hold off on buying a new product.

It’s difficult to say when the cash for clunkers hangover will subside, but head of Chrysler’s sales organization Peter Fong thinks that [2]“the remainder of 2009 will continue to be a challenge for the U.S. automotive market.”

So much for that talk of a successful government program.


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URL to article: http://blog.heritage.org/2009/10/02/cash-for-clunkers-comes-crashing-down/

URLs in this post:

[1] cash for clunkers: http://www.washingtonpost.com/wp-dyn/content/article/2009/10/01/AR2009100103098.html?hpid=topnews

[2] said : http://www.nytimes.com/2009/10/02/business/02auto.html

[3] sums it up well : http://www.time.com/time/magazine/article/0,9171,1919149,00.html

[4] are increasing : http://www.kansascity.com/business/story/1483847.html

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