no third solution

Blogging about liberty, anarchy, economics and politics

Cash For Clunkers Program Ran Out of Money

July 31st, 2009

After less than a week, the government has pulled the plug on the cash-for-clunkers program, a part of the Auto Industry Bailout designed to encourage people to scrap their old, fuel-inefficient vehicles in favor of a large credit (up to $4,500) towards the purchase of a new, fuel-efficient vehicle. The program has been suspended because of fears that the $1 Billion allocated to it have been exhausted.

The U.S. government plans to temporarily suspend its “cash for clunkers” incentive program because Obama administration officials believe its $1 billion budget has been exhausted after just one week, said several congressional officials.

I am not particularly sad to see it go — sure, it happens to be several orders of magnitude smaller than the bailouts given to the banking industry, but it’s no less reprehensible. I’m just as surprised as anyone that the plan “worked” as well as it did.

From the start, I was very skeptical of this program: I just didn’t understand why people would be willing to turn in a serviceable vehicle (albeit, an old one) for a brand new one. On the surface, it sounds nice, but brand new vehicles also have brand new vehicle payments — $400/month or more. A clunker has zero monthly payment, although some allowance needs to be made for maintenace.

I also took issue with the program, as a combination of some of the most heinous economic fallacies. First, most people don’t pay cash for new cars, even with a nice big government subsidy to dampen the price. Most people finance new cars, which means they take on debt. And debt is kinda-sorta the root of the current economic crisis: adding to that shitpile isn’t going to (in the long run) be in anyone’s best interest.

Furthermore, the broken window fallacy is at play here. When I first heard that the vouchered vehicles needed to be scrapped after trade-in, I was immediately reminded of the farm policies during the great depression:

The [Agricultural Adjustment Act] immediately set out to slaughter six million baby pigs and reduce breeding sows to reduce pork production and raise prices. Since cotton plantings were thought to be excessive, cotton farmers were paid to plow under one-quarter of the forty million acres of cotton to reduce marketed production to boost prices.

Raising prices, or implementing policies intended to keep prices high when people are losing jobs hand-over-fist, and when people don’t have money or are reluctant to spend it, is the completely wrong thing to do. It is the destruction of an abundance of goods (i.e., affordable) at a time when people need affordable goods. Forcing people to destroy an otherwise functional piece of equipment impoverishes society. Every “clunker” that they scrap is a “clunker” that some poor college kid or some less-than-well-to-do person can no longer buy.

Artificially propping up automobile prices by destroying old vehicles, and subsidizing the purchase of new ones (with taxes and debt) is no different than artificially propping up agricultural prices by slaughtering baby pigs and plowing under the fields. It does not benefit the average consumer today, who gets shafted with a load of debt and unreasonably expensive goods, any more than the farm policies of the AAA and NRA benefitted the average sharecropper in the 1930s.

However, I suppose it illustrates that there will always be people willing to take a free-ride on someone else’s dime.

Why Will the American Auto Industry Fail?

June 18th, 2009

Following a system of management, distribution, and production that was destined to fail (call it “Sloanism” if you’d like), it is a miracle that there are any American auto manufacturers in existence today. The entire system is fatally flawed, has been for decades at least — maybe always like this.

It’s the Henry Ford plan, whereby the customer can have any color he wants, as long as it’s black. And this is exactly what we’re seeing during the GM/Chrysler shutdown: no new vehicles until the old ones sell.

Dealerships as Scapegoats

Dealers were strong-armed (under threat of losing their franchise) into taking inventory when they knew they couldn’t move it, just so The Corporation could pretend that the unsold vehicles were someone else’s problem. In order to move any inventory at all, in accordance with the Laws of Economics, the companies so desperate to keep the wheels moving in order to keep their unit-costs down, were forced to offer rebates to the customers, via the dealers. This worked only so long as the manufacturers were able to make up their losses on financing, which came to an abrupt halt in late 2008.

So the dealerships are now sitting on unsold inventories of 2009 model-year vehicles which wouldn’t sell at sticker price when they were new, and certainly won’t sell at sticker price now that they’ve been sitting in a parking lot for 6 months or a year, which is time, which is money.

Which of course, in accordance with the Laws of Simple Mathematics, means that new-vehicles are no longer profitable for the company (although they may still be for the Dealer). And now, because certain Dealers’ new vehicle sales departments are not posting operating profits for The Company, many of those Dealers have lost their franchises (and all appurtenances thereto) anyways.

Part of the blame may be with the Dealerships, just like part of the blame is on the UAW, and part of it’s on Management. But closing down half of the Dealerships isn’t going to solve the problem presented by selling every vehicle at a loss.

Push Distribution neglects the consumer

The consumer must buy a car off the dealer’s lot, rather than buying a car with the specifications s/he actually wanted. (I hear that they do the latter in Japan, and can deliver new vehicles to customer spec in 3-4 working days!) The Sloanist push-distribution method can only be accomplished with high-pressure sales pitches, gimmicky marketing, and round-the-clock production. It also means that the company is less responsive to actual customer demand than she otherwise could be.

A quick perusal of local inventories, for example, shows that dealers are full of Dodge Caliber SRTs, a pseudo-Rally compact crossover/hatchback that costs $28,000 — compared to the base-model Caliber SE (about $15k). Dodge/Chrysler is not making any new SEs, SXTs, or RTs until the shutdown is over, which would be tolerable if they were honestly attempting to liquidate the outstanding inventory, rather than pretend that knocking 8% off the sticker price of overpriced, over-optioned car that’s been rotting in inventory for a year is actually a “deal”.

If you were interested in one of these models, you’ll probably start looking at what new vehicles are on the competition’s floors.

Must take delivery from Dealer stock by 7/1/2009

“This is what we’ve got on the lot, these are the prices and incentives. Heaven knows what the incentives will be, week-after-next, so if you want this great deal, you better move quickly!” They give you a fake offer expiry designed specifically to push you towards making a $20,000 impulse-buy, and to sweeten the pot, they tell you that you can have the $6k option package (the only model they have left) for a $2k discount — which is only really a “deal” if you wanted the $6k option package in the first place. It’s not a deal if you didn’t want those options, or weren’t prepared to spend for them.

We’ll beat any offer!

Except this is a meaningless guarantee, since none of the dealerships making this bold claim are ever willing to actually provide customers with a legally binding “offer” in the first place. Try asking for a price quote, on letterhead and signed, so you can shop around. I’ll be damned if they don’t laugh you out of the showroom.

Not all buyers will qualify for the advertised price

Go ahead. Call your local dealer about an ad you saw in last week’s paper. Or place an inquiry on the internet. I’ll bet you dollars to doughnuts that they give you a lengthy response which doesn’t answer any of your specific questions, and they’ll probably note that the vehicle you’re interested in “starts at” such-and-such a price. Except you’re not interested in the “starts at” price, you’re interested in the actual price you’re going to pay. And of course the price quoted includes all possible discounts/rebates, for many of which you won’t qualify (General Motors is now advertising prices based on the fine-print assumption that customer has $4,000 worth of “points” on a GM credit card which can be redeemed much like frequent flier miles on a new GM purchase). Do you have a GM card with $4,000 worth of GM-Points? Doubtful.

Good Riddance to Bad Rubbish

None of these companies care about making a car you want to buy. They don’t care about giving you an honest price, or a fair price. They don’t care about you, and it’s pretty clear they don’t give a damn about their employees or franchisees, either.

“Good Riddance!”, right? For sure, but it’s got to get a whole lot worse, I think, before it gets any better. One or both of these companies won’t survive; were it not for massive taxpayer bailouts and clever bending/ignoring certain laws, they’d already have been sold for scrap.

“How can this happen in a free market?”

May 22nd, 2009

In light of Chrysler’s bankruptcy, George Joseph, the President and owner of Sunshine Dodge-Isuzu laments that he’s about to lose everything.

On Thursday, May 14, 2009 I was notified that my Dodge franchise, that we purchased, will be taken away from my family on June 9, 2009 without compensation and given to another dealer at no cost to them. My new vehicle inventory consists of 125 vehicles with a financed balance of 3 million dollars. This inventory becomes impossible to sell with no factory incentives beyond June 9, 2009. Without the Dodge franchise we can no longer sell a new Dodge as “new,” nor will we be able to do any warranty service work. Additionally, my Dodge parts inventory, (approximately $300,000.) is virtually worthless without the ability to perform warranty service. There is no offer from Chrysler to buy back the vehicles or parts inventory…

My business is being stolen from me …We did NOTHING wrong.

GSC

A number of distortions are mentioned in passing in the paragraph I quote from Joseph, above: the cartelization of the Auto industry, the backwards Sloanist distribution model, the fact that dealers routinely profited even while the companies were losing money hand-over-fist, retarded intellectual property restrictions and other nonsense license agreements, etc.

Joseph asks, presumably in all seriousness, “How can this happen in a free market?” It can’t, dude.  Check your premises.  These things don’t happen in a free market.  If these things are happening, the market isn’t free.  We aren’t even in the same ballpark.

It seems like apathy isn’t the right approach to these stories anymore, but I have a hard time getting fired up one way or the other. For starters, there’s the waste. Bill Waddell at the Evolving Excellence blog read through the Chrysler bankruptcy filings, and notes that the company had 140,000 people working at dealerships and 22,000 people making cars. Meanwhile, Toyota sold 50% more cars with 50% fewer dealers.

So, part of me wants to say to Mr. Joseph: You made your bed. You’ve invested your life in a company that’s been flirting with bankruptcy for the better part of a generation. You had ample opportunity to cut your losses, or to get out while the getting was still good. And had the Auto Bailout worked, I sincerely doubt that you’d be sending checks to all the taxpayers who financed the incentives that kept your dealership in business.

As you sow, so shall ye reap.  Right?

But another part of me agrees in full, that he’s being robbed blind. What’s unfortunate is that Joseph seems to be genuinely invested—emotionally and otherwise—in his family’s business. He believed that the Company was invested in his family’s business, too, which is now being revealed for the mistake that it was.

I know it should never have gotten this far, it should never have gotten this bad.  But it did, and it is.

There is no clean way out of this mess.

no third solution

Blogging about liberty, anarchy, economics and politics