August 5, 2009

Law Of Unintended Consequences: Cash For Clunkers

Recently, I wrote about the Law of Unintended Consequences (here, and here), and also the Counter-Alinsky angle on the "cash for clunkers" (here). But there's an interesting Law of Unintended Consequences angle on this cash for clunkers program too.

From the perspective of liberal Democrats the cash for clunkers program was supposed to present a trifecta of wins. The program was designed to give a boost to the economy (it won't), and more importantly provide a more green environment (it won't, really) and even more important still, reward liberal voters for voting in Obama and more Democrats (it could, if conservatives don't try to foil it). These were the objectives - the intended consequences. Despite brisk consumer enrolment it doesn't seem to successful from a desired outcome perspective.

The solution to that objective must have seemed brilliant on paper - give voters a big rebate on new cars, destroy the clunkers to make the planet greener and stimulate auto sales and therefore the economy by artificially boosting consumer demand.

But then there are the unintended consequences. As noted in the links above, there are some obvious unintended consequences;

(i) Many people waited for the rebate to buy their new cars therefore moving demand to a different point in time, therefore not creating net new demand but shifting in time some demand

(ii) People with new cars are likely to drive them more than their traded in clunkers, which means that the incremental savings may be reduced, or even reversed.

(iii) Many people continued to buy bigger cars, diminishing the net mpg gains

(iv) It costs a great deal of CO2 to produce a car, offsetting much of the gains

(v) The old cars will be destroyed, requiring more CO2 emissions to accomplish

(vi) Destroying older cars is actually destroying value of some resalable cars, thereby reducing GNP. Not everyone can afford a new car, some people have to buy used - this makes their lives that much more difficult. As the supply of older cars is reduced, the cost goes up - it's supply and demand.

(vii) This is taking money out of other possible government spending on say - national defence (as an example).

Where else could this lead us? Unintended consequences are hard to foresee but consider;

-what is the impact on dealers in this program?
-what impact does it have on consumer appetite for new cars in the future - will they expect a rebate in order to buy in the future? How long will the program have to run for?
-what impact does it have on the ability of some buyers to meet payments? In other words has it enticed unqualified buyers into the car market and therefore created a green car bubble? Then what happens to GM when the cars get repossessed and the revenue streams go dry?
-who pays for the destruction of the cars? The government would mean more national debt, the dealers would mean squeezed profits and therefore possible layoffs or other cost cutting to compensate.

Just some fuel for thought.

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