Syntactical corrections for government mandated bailouts are usually required
because such programs usually say one thing and deliver something quite the
opposite. That notion is true for the "Cash for Clunkers" program in the US
government, which has had the effect instead of delivering Clunkers for Cash.
The difference in the syntax is of course to suggest that what started as a
move to get old cars off the road has instead turned out to be a case of
putting good money after bad. Another nail in the Keynesian coffin from where I
stand, but that’s getting ahead of ourselves.
Late on Thursday, the US Congress decided to extend its Cash for Clunkers
program by adding to it a further US$2 billion. The
idea of turning old cars ("clunkers" in the American vernacular) to get cash
that can be used to fund new car purchases has clearly caught on; and nowhere
more so than in the case of General Motors (GM), the car company that is now
majority owned by the US government and trade unions.
As of the beginning of August, 18.7% of the clunkers were GM vehicles
essentially flattering the company's car sales; while Toyota came to second
position at 17.9% and Ford a distant third. Despite the help provided to
American carmakers, 47% of all clunker deals went to these companies, which
also includes Chrysler; Japanese companies benefited but not as significantly.
Looking at the government-mandated-program itself, there were a total of over
184,000 clunker deals, costing the taxpayer $775 million in all. That works out
to $4,200 per clunker - an amount that is likely far in excess of the actual
value of these cars; used car sellers would have been happy to get rid of quite
a few of them at $1,500 for example. In effect, the program counts as yet
another subsidy being provided by the US government, but perhaps without much
regard for the consequences.
Sure, the US isn't the only country to have suggested or implemented such a
program. Many others, including Japan, South Korea, Germany, the United
Kingdom, Spain and France have versions of the same program, albeit with
different details, including the "nationality" of the car company in some
cases. The American program is fairly straightforward in that it doesn't
overtly target for assistance American carmakers, but that isn't necessarily by
design (or intent) either.
What are some of the other consequences of the program, besides the obvious
fiscal hole that is being dug at great cost to the American taxpayer?
1. Higher prices for "lemons": The extension of the program
suggests that the US government has driven into yet another temporary
arrangement that quickly turns into long-term policy. If the public expect the
program to continue indefinitely, the net effect will be to increase the price
of old cars that are frequently inefficient and unreliable (an old rule of
thumb has it that cars lose about 2%-5% fuel efficiency every year). In turn,
this means that the decision to buy a new car becomes more difficult if one has
a three-year-old car that isn't eligible for the program but is otherwise
useless.
Overall, it is quite possible that the pace of new car sales will reduce in
America as a direct consequence of this program: an unintended consequence if
there was one. Secondly, the government program will be scrapped if ever a Ron
Paul-type figure (that is, a sensible, Austrian economist-minded person) enters
the White House and when it is, the entire "assumed value" of cars in the US
will be proved incorrect.
2. Penalizing higher-quality car makers: The average American car
has poor reliability compared with the average Japanese or Korean car, leave
alone the hordes of more expensive European cars. I know people who have had
their Toyota Land Cruisers for the better part of the past 25 years (although
why anyone would drive a Toyota is beyond the imagination of a car snob like
me). None of these people would want to exchange their cars, especially after
paying more as compared with an equivalent American car in the first place. The
net effect of all this is that higher-quality manufacturing actually could
suffer a setback as a result of this program and particularly if carmakers
start working towards a seven-year lifespan.
3. Financial trap persists: The idea of getting debt-addled
Americans to visit showrooms and exchange their clunkers for cash and perhaps
leave with a new car that usually carries a new debt burden is singularly
irresponsible. Instead of encouraging Americans to cut their overall debt load,
the government appears to be encouraging a new round of binge borrowing on the
back of what are essentially false assurances of future values (as above).
4. Raft of unintended consequences. There are many other
unintended consequences of the program, ranging from the prices of scrap steel
to the use of old parts from clunkers (other than the engine units which are
rendered unusable by the injection of sodium silicate, prices for which have
jumped significantly since the program began). So the next time your garage
replaces your shock absorbers, the question cannot be far from the mind - "is
that from one of those clunkers"?
Bailout parallels
The notion that governments can influence the course of consumer purchases is
of course erroneous in the long run and that is precisely why bailouts do not
work. One of the more persistent discussions by lackeys of governments in
Britain, France, Germany and the United States of late has been the apparent
"return to profitability" of institutions that were bailed out by government.
Be it the banks in Britain, industrial companies in France or automotive
companies in the US, bureaucrats are going blue in their faces explaining the
financial recovery of the firms in the first half of the year.
In my previous article this week (see
Faith-based Investing, Asia Times Online, August 5, 2009), I covered
the point about erroneous analysis and valuations of stocks and earnings.
Keeping those comments in mind, there are a few other observations that are
pertinent here:
1. Robbing Peter to pay Paul: In most cases of government
bailouts, we have seen a radical shifting of previously well-held principles.
For example, the US government rescue of GM led to the destruction of
creditors' rights as well as the closure of a number of auto dealerships
outside their contractual terms. The positive effect of these moves helped or
will help to flatter earnings going forward for such companies; optically
providing profits in the case of GM but not so when the losses of creditors and
auto dealers are also accounted for.
2. Continued capacity: Whether it is the useless industrial
companies of France or the banks in the United Kingdom, disallowing the
diminution of capacity that is an essential pre-condition to the return of
sensible margins only helps to perpetuate the unstable equilibrium that existed
in the first place. That in turn disallows the more important technological and
structural reforms that are required in many of these economies.
3. Higher prices: Overall, the profits of bailed-out companies
come from their ability to charge prices that are otherwise unlikely. British
banks for example have expanded their loan-deposit interest margin since they
were bailed out, an ability that they previously lacked because retail
depositors had been more choosy (but have consolidated after the government
takeovers and guarantees).
On the other side, the banks have been choosy about lending funds, and charged
vastly more for their transactions because private-sector players were more
conservative. To some extent, this falls back in the "rob Peter to pay Paul"
angle above, but also highlights the data dissonance (for example, higher
prices of certain items) that will seep through, in turn providing more
confusion on macroeconomic data.
4.Core problems unfixed: The government bailouts haven't fixed
the core problems of the entities. British banks still don't seem to know how
to lend money, racking up significant loan losses in the first half of the
year; GM car sales were down 19% in July as another example. If such entities -
banks that don't know how to lend profitably, and carmakers who can't sell cars
except with special deals - survive, long-term economic efficiency reductions
in turn have implications for broader growth considerations.
Those who can, pay
By far the worst implication of the existence of these bailed-out companies is
that companies and individuals who behaved responsibly effectively have to lose
by the following additional costs:
1. Higher taxes - most countries that have bailed out parts of
their economy are now embarking on higher tax rates (Ireland, the United
Kingdom, France and so on), which hurts the people with the highest disposable
incomes the most.
2. Lower choices for various products as programs such as Cash
for Clunkers eat into consumer choice and perpetuate sub-optimal products.
3. Higher prices for various products and services as the true
cost of government bailouts usually translate into lower production and service
efficiency in the long term
4. Lower income from banks (as interest rates were cut to zero)
means a greater need to speculate than is strictly warranted at this stage of
the recession.
Damps the holiday spirits, doesn't it?
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
