Thursday, August 20, 2009

Cash for clunkers - a bad idea

Germany started this and other countries picked it. The US had its “cash for clunkers” programme this month and is closing it on Aug 24 after “a wild success”.

Cash for clunkers, is a dole the US government gives Americans for trading in their old car and buying a new one. The subsidy that Uncle Sam is willing to give could be as much as $4500 per car. The US government has just spent $1.9 bn on it.

In Germany, it was “successful” in that auto sales went up by some 20% or so. It is estimated that it cost Germany some $ 3.5 bn and it is claimed that it saved “thousands of auto jobs”.

The moral justification under which politicians have sold this idea is that carbon spewing clunkers will be replaced by fuel efficient cars and that this is helping the environment. Balderdash. They are doing this because its wildly popular as everybody loves a subsidy, if its given to them. And in car crazy countries like Germany and the US, that's pretty much everybody.

I can’t fathom the economic rationale for throwing money like this. Why is the auto industry so special ? Why not cash for clunkers for TVs, washing machines, dishwashers, or for that matter, kidney machines (Readers of Yes Minister will understand this allusion) which are all suffering similar declines of demand themselves. And how will this help ? A three month increase in demand is going to save “thousands of jobs”? Really ? And what do you think will be the demand in the next three months, pray ?

The problem with tinkering with an ecosystem is that you can hardly predict what the effects would be. Even in the auto industry, car repair shops have been severly hit by this programme. In Germany, general retailers have complained of falling demand - while people bought cars, they scrimped on buying groceries. So, is it the government's role to ensure that the car manufacturer benefits and Helmut Schmidt who runs the neghbourhood garage closes down ?

Governments spending money by investing , in say infrastructure, during times of recession is understandable. Governments lending money to prevent bank collapse (these moneys have to be repaid you know) is also understandable. But just doling money out to help “scared cow industries” ? When massive deficits are being run ? Taxpayers’ money is not meant to be spent like there’s no tomorrow, you know.

I’ve heard the argument that governments cannot sit idly by and let the recession ride. Sure it cannot fiddle while Rome burns. But equally, following the “politicians’ logic” (from that masterpiece Yes Minister), is downright foolhardy. Sir Humphrey, explains the politicians’ syllogism as follows – Something must be done. This is something. Therefore this should be done !! Cash for clunkers seems to be a scheme Jim Hacker would be proud of.