Rant For A Friend, Part II

Today's topic is the cash-for-clunkers incentive.

A total of 690,000 cars were sold under the CFC program. But Edmund's reported that only 125,000 cars were sold under the program that would not have been sold anyway (more on that later). So given the total cost to the taxpayer, that works out to an expense of $24,000 per sale, counting only those sales that wouldn't have taken place anyway.

That's a pretty steep price to pay for a one-time boost to consumption, and therefore GDP. But what does Congress care - it isn't their money, after all.

We did get a boost to GDP; third quarter output rose 3.5%, but absent the effect of the incentive, which ended in August, the gain was about half that. So what will happen in the fourth quarter?

Well, consider that total vehicle sales in the US averaged 16.35 million units (annualized) during 2006 and 2007, when the economy was still relatively unscathed. Then, sales dropped from an annualized pace of about 16 million units at year-end 2007 to just over 10 million by the end of 2008.

This year, the sales pace by month (annualized) for total vehicle sales in the US has trended as follows:

January: 9.57 million
February: 9.11 million (the lowest since 1981)
March: 9.86 million
April: 9.32 million
May: 9.92 million
June: 9.68 million
July (when CFC kicked in): 11.25 million
August (also a CFC month): 14.09 million
September (post-CFC): 9.20 million (second-lowest since 1981)

Get it? The problem with these incentives - as with the first-time homebuyers' tax credit - is that they tend to just front-load existing demand. People who were planning to buy a car (or house) within the next, say, six months, will just buy a little earlier than they otherwise planned to, cashing in on the incentive. So in terms of actually stimulating demand, these one-time stimuli do very little. And in terms of sales that otherwise wouldn't have taken place, that makes the price tag dear.

Besides boosting GDP, it's also worth noting that the US government owns chunks of GM and Chrysler, so spending more tax dollars to boost sales appears to help improve the return on that investment, though it's really simply robbing Peter to pay Peter.

On the docket tomorrow is the AIG bailout.