Cash for Clunkers is a Cluster****

[Drake Tungsten]

This is what happens when you let the government plan things.

The White House and Congress may be giving the “cash for clunkers” program a reprieve, but one can’t help wondering how many dealers and customers will have the confidence to go forward at this point. Things sound like a total mess in the showrooms.

“There is absolute frustration across the board,” Alex Kurkin, a lawyer based in Miami who represents several car dealerships, tells The Lede today. “As of this morning, they’re not really confident about any deals, and no one can give them advice about what they should be telling their customers.”

One thing still not clear is how many older cars have actually been sold and scrapped with the original $1 billion, and how many more the new $2 billion will be able to cover. Mr. Kurkin tells us that the government Web site where dealers are supposed to register their deals has been crashing, and the dealers haven’t been able to plug in their information.

We spent a couple of days earlier this week following the whole complex program, from dealer to scrap heap, and found twists and turns in it that are making it a nightmare now for everyone involved.

The program requires that the clunkers be put out of service for good, so dealers must destroy the engines on cars that are traded in. We watched this process yesterday at the DCH Paramus Honda in Paramus, N.J. It is quite laborious and potentially dangerous. And it certainly is final.

Nick Clites, who is in charge of used cars for the dealership, was prepping a 1988 BMW 535IS, with 214,000 miles on the odometer, for its death. He drained the oil, then donned a silky blue protective suit, goggles and gloves and poured a sodium silicate solution into the engine. He revved the car, and within a few seconds, the solution hardened into a glass-like substance, the engine seized up and the car was dead.

So here is one question: With the program now on shaky ground, even with a new infusion of money, what consumer and what dealer will risk rendering an engine irretrievably unusable?
Well, as it turns out, a lot of them are doing so, because unless the dealers can prove to the government that they have killed the engines and scrapped the cars, the government will not reimburse them for the $3,500 or $4,500 discount that they have given the customer on a new, more efficient vehicle.

Barry Magnus, the general manager of DCH Paramus Honda, told us he was owed more than $80,000, and he wondered if he would ever see it. The government has said it would take 10 days to reimburse the dealers, but that was before the program apparently ran out of money and devolved into chaos Thursday night.

Today, dealers are frantically trying to move the old trade-ins to the scrap heap so that they can get reimbursement before the money tap shuts off. Until they can certify that the car has been decommissioned, they cannot submit their paperwork to be repaid.

“Oh my God, what a mess today,” Sally Ann Maggio, who co-owns Hackensack Auto Wreckers, also in New Jersey, said on Friday. We visited her car-crushing business on Thursday. She didn’t think much of the program to begin with.

Ms. Maggio said she generally makes her profit by reselling the engines, the most valuable parts of the cars she takes, but that’s not posible with the cars coming to her because of the cash for clunkers program, because they have been rendered unusable. That cuts down the salvage value of the cars — and the incentive for salvage yards and wreckers to take them — to almost nothing, considering the time and energy they must spend in going to the dealer, towing back the dead cars, removing the engines, crushing the bodies and shipping them to a metal scrap shredder and recycler.

And, of course, the process reduces the supply of used engines for people who can’t afford to buy a new car and come to the salvage yard looking to fix up old ones.

In any case, Ms. Maggio said, dealers are “hitting the panic button” today.

“We have been overwhelmed with phone calls from the dealerships,” she said. They have already killed the engines, and want her to pick up the heaps.

And on hearing the news that the government might be pumping more money into the program, she said, they are stepping up the process. “They’re worried that the new money might last only two days,” Ms. Maggio said. “But until it’s scrapped and the paperwork is done, it’s not a done deal,” she said. “They’re driving me crazy.”

Mr. Kurkin, the lawyer in Miami, said that many dealers are attaching clauses to their sales agreements, saying that if the government money does not come through, the customer will have to make up the difference.

“If a dealer doesn’t have a separate document addressing this possibility, the dealer will likely have to eat it,” Mr. Kurkin said. “I certainly see a lot of litigation over this.”

http://thelede.blogs.nytimes.com/200...unkers-crushed

Thank god I got my new car before the entire program devolved into chaos.

[MrFun]

* MrFun pours some sodium silicate solution into Drake's beer.

[Drake Tungsten]

The Economist's take...

Congress just buying people cars now

CASH FOR CLUNKERS has proven to be a roaring success. The programme—designed to encourage drivers of old and inefficient automobiles to trade them in for newer and cleaner ones—was included in a funding bill passed by Congress not long ago. Legislators allotted $1 billion for the purpose, which would be used to provide $3,500 and $4,500 vouchers to those taking advantage of the deal, an amount which is now entirely gone after just one week. The funding was meant to last through October.

Cash for Clunkers was supposed to provide large environmental benefits, but it mostly won't. Brad Plumer writes:

Now, as we've noted before, the actual environmental benefits of this program may well prove modest. The efficiency requirements for the new car were fairly lax: You could in theory trade in a Hummer that got 16 mpg and get $3,500 toward a brand new 18 mpg SUV. That's still an upgrade (and, in fact, that trade would actually save more gas than upgrading a 30 mpg sedan to a 35 mpg vehicle), but it's a meager one. And any energy savings from a marginal upgrade like that could be dwarfed by the energy required to manufacture the new vehicles (particularly since dealers have to junk the "clunkers" that get traded in—many of which are perfectly good, albeit inefficient, cars).

So essentially, the bill was about subsidising vehicle purchases. The plan worked like gangbusters, and why not—automobile sales plummeted during the recession, resulting in an enormous amount of pent-up demand. With the economy on the mend, buyers didn't need much or any encouragement to get back in show rooms, but they got it; the vouchers can easily mean 20% off or more on a new car. Happy with their seeming success, Congress is now rushing to authorise $2 billion more for the programme.

It's a waste. Environmentally speaking, the money would have been far better spent closing budget shortfalls for mass transit systems or capitalising programmes to weatherise homes. Socially speaking, automobiles produce a lot of unpleasant side effects—including congestion and accidents—and really ought not be subsidised by government (particularly since the policy is doing such a rotten job addressing the one negative externality it's supposed to help with—emissions).

Most of these purchases would have been made fairly soon in any case, and the households out there looking to buy new cars aren't those most in need of government assistance at this time. In terms of putting new money into the economy, use of the $1 billion to extend unemployment insurance or food stamps would have been far more effective.

But hey, the sight of hundreds of people rushing to buy new and more efficient automobiles will reflect well on Congress. Don't expect to see any legislators apologising for what is essentially a policy blunder.

http://www.economist.com/blogs/freee..._people_ca.cfm

[DanS]

This is a dumb program. Giveaways to special interests like this erode my confidence that the leadership in Washington has any clue what they are doing with taxpayer money.

The fact that they're screwing the pooch on administration of the program doesn't help.

[Drake Tungsten]

The employees at the dealership I dealt with were pretty disgusted by how poorly the program has been run so far.

[Kuciwalker]

Jaguar told me his parents got an old car that didn't work repaired so that they could trade it in under this program.

This whole thing is just the broken window fallacy.

[chequita guevara]

Did it stimulate you?

[Kuciwalker]

I'm not an auto worker, so no.

[Zkribbler]

And, of course, the process reduces the supply of used engines for people who can’t afford to buy a new car and come to the salvage yard looking to fix up old ones.

Let me get this straight. There's a program to take older engines off the road (1) so they no longer pollute and (2) so they are replaced by new cars with more efficient engines, which both cleans the air and helps the auto industry get back on its feet.

But it's being now criticized because it makes it harder to find old, used engines to put into cars?

If fact, the plan is so popular, the govt's website is crashing and the lady who runs a scrapyard is complaining that, "We have been overwhelmed with phone calls from the dealerships,” who want her to pick up their heaps.

If the Obama administration set out the clean up smog, Repugs would start complaining the sky is no longer that charming rust color but now is an irritating blue.

[Kuciwalker]

But it's being now criticized because it makes it harder to find old, used engines to put into cars?

It's being criticized because the whole plan is idiotic and creates perverse incentives.

[DanS]

Its idiocy is compounded because it is fashionable in so many capitals.

[KrazyHorse]

Cash for clunkers would have been a good idea if it had gone into effect 6 months or a year ago. This is a demonstration of one of the key reasons that Keynsian stimulus spending is so hard to do. Even fairly simple cash incentives to consume take far, far too long to work their way through the legislative and bureaucratic process. Recessions usually last less than a year. This recession lasted from Dec. 07 to (at a guess) June/July 09, but nobody knew we were in a recession (or how deep it would be) until the middle/end of 08.

In actuality, government spending often ends up being a DESTABLIZER. Backed up demand is supplemented by government spending that comes on line too late. In order to act as a stabilizer, fiscal policy needs to be automated. For example, if the US had a national sales/value-added tax then it could be set at a rate which was dependent on GDP outlook for the current quarter (say, via the aggregate leading indicator). Forward-looking agents would be incentivized to purchase during periods of weak growth/recession (before taxes rose again during the recovery) and this would tend to mediate downturns.

[chequita guevara]

Assuming we're not in a dead cat bounce.

[KrazyHorse]

a) "Dead cat bounce" doesn't mean anything. It's just a catchphrase for people who feel the need to explain something which is currently beyond our understanding.

b) Nobody can predict the future perfectly. But I think it's more likely than not that the worst is well behind us. Economic forecasting is a bit of a crystal ball. But as soon as we start talking about fiscal stimuli we're engaging in it implicitly, so we should at least do the BEST we can with it, rather than throwing in an additional 6 month or 1 year delay between data and action.

[ShaneWalter]

But it's being now criticized because it makes it harder to find old, used engines to put into cars?

It's being criticized because the whole plan is idiotic and creates perverse incentives.

Well the purpose of the program is to reduce harmful emissions, yes? In order to do that (from an economics standpoint) you will create some economic inefficiency. Doesn't mean the program itself is bad.

[Kuciwalker]

Well the purpose of the program is to reduce harmful emissions, yes? In order to do that (from an economics standpoint) you will create some economic inefficiency.

No, that's not the problem. In fact, reducing emissions only creates "economic inefficiency" when you aren't counting the emissions as harmful. The problem is that this has a huge deadweight cost associated with it that other methods of reducing emissions don't.

[KrazyHorse]

This recession has been a wonderful learning experience for me. Here are the conclusions I've come to:

1) Orthodox monetary policy can easily prove inadequate to resolve even those problems which originate in the financial sector

2) Central bankers are currently too reluctant/unable to respond with unorthodox monetary policy (for example, when the TED spread reached 450 basis points....where were the central banks?). This may be a lesson they've learned too. Hopefully they won't wait as long next time.

3) TARP will turn out to have been the smartest thing the Treasury dept. has done in a long time, and will end up costing the US taxpayer less than nothing. However, this sort of program should be in the purview of the Fed. Otherwise you end up with the sort of political circus nonsense which has plagued TARP since its inception. There is a separate question of whether or not the Fed would manage to maintain its political independence if it started doing these sorts of things itself, unfortunately.

4) "Orthodox" fiscal stimuli are generally ill-timed, badly managed, and vastly too small.

EDIT: the "less than nothing" bit probably should exclude the money "loaned" to GM et al.

[KrazyHorse]

I'm not going to bother to address the Clunkers program in terms of its environmental impact because that's too ridiculous for words.

[Sava]

Judging by the amount of people taking advantage of this program, it seems to me that it's nothing but a complete success. People who complain about it are splitting hairs and missing the point.

stop whining you *****es

[Kuciwalker]

Judging by the amount of people taking advantage of this program, it seems to me that it's nothing but a complete success.

Unfortunately, what it seems and what it is are completely different animals.

[Drake Tungsten]

"Taking advantage" is the key phrase. Thanks for the new car, *****es.

[Sava]

Judging by the amount of people taking advantage of this program, it seems to me that it's nothing but a complete success.

Unfortunately, what it seems and what it is are completely different animals.

Well, I happen to think that it would be a good idea for the government to just give away cars. So this program, stimulating new car purchases in a roundabout way, seems good.

C'mon now. It's not like the money used for this program is actually worth anything anyways. It's only backed by the full faith and credit of the US government.

The only way this program is bad is if you aren't smart enough to take advantage of it.

[Sava]

"Taking advantage" is the key phrase. Thanks for the new car, *****es.

Exactly

[BeBro]

The government should never plan things.

[Sava]

except the destruction of our enemies

[DinoDoc]

Well, I happen to think that it would be a good idea for the government to just give away cars.

If you don't wanna pay for your car, why should I pay for your car?

[Jon Miller]

I really can't take advantage of it, unfortunately. In fact, I am going to sell my car in less than 2 months.

JM

[Arrian]

The poor administration of the program does not inspire confidence, true. Setting aside whether or not the program itself was a good idea (I thought it made a modicum of sense, actually), that's just poor form.

-Arrian

[Sava]

If you don't wanna pay for your car, why should I pay for your car?

because

[Japher]

The argument isn't that the government is buying a car, it's that they are stimulating an industry. Reduction of auto inventories should lead to a need to refill inventories which will benefit everyone from the car maker, to the part maker, to the diner owner across the street from the part maker, etc...

IMO, the Cash for Clunkers was the first sign of intelligence by the government since the recession started and is the type of program money should be spent on. Much better than giving the arseholes at Goldman Sachs bigger bonuses for fvcking the system up.