Cash for Clunkers Makes No Sense
By Vahan Janjigian - Although I hate taxes, I like the fact that taxes affect behavior. In general, if you want less of something, tax it. If you want more, provide a tax subsidy.
Americans used to smoke a whole lot of cigarettes. Today, they smoke less than they used to. No doubt, some gave it up for health reasons. Others, however, decided it costs too much. We have taxed the hell out of tobacco products and we got less smoking as a result. That's good news for health, but bad news for politicians who thought higher taxes would create more revenue.
On the other hand, many of our politicians decided long ago that home ownership was a good thing. They wanted to encourage people to buy more homes. So they decided to allow home buyers to deduct the interest payments on their mortgage payments. Those who don't own homes are subsidizing those who do. Things worked as planned and we got more ownership as a result--maybe more than was optimal.
Now our politicians want us to buy cars. So they came up with the "cash for clunkers" idea. Trade in your old car for a new one now and the government (read taxpayers) will pay a good part of the cost. So today's car sales figures should be no surprise. Stocks like Ford took a big jump.
Unfortunately, the sales jump will not last. All we are doing with this program is bringing future sales forward. The more cars we buy now, the fewer cars we will buy later. Auto stocks that surged today will likely give up at least some of their gains tomorrow.
Americans used to smoke a whole lot of cigarettes. Today, they smoke less than they used to. No doubt, some gave it up for health reasons. Others, however, decided it costs too much. We have taxed the hell out of tobacco products and we got less smoking as a result. That's good news for health, but bad news for politicians who thought higher taxes would create more revenue.
On the other hand, many of our politicians decided long ago that home ownership was a good thing. They wanted to encourage people to buy more homes. So they decided to allow home buyers to deduct the interest payments on their mortgage payments. Those who don't own homes are subsidizing those who do. Things worked as planned and we got more ownership as a result--maybe more than was optimal.
Now our politicians want us to buy cars. So they came up with the "cash for clunkers" idea. Trade in your old car for a new one now and the government (read taxpayers) will pay a good part of the cost. So today's car sales figures should be no surprise. Stocks like Ford took a big jump.
Unfortunately, the sales jump will not last. All we are doing with this program is bringing future sales forward. The more cars we buy now, the fewer cars we will buy later. Auto stocks that surged today will likely give up at least some of their gains tomorrow.
posted by Vahan Janjigian | 5:10 PM
3 Comments:
200,000 cars in driveable are getting scrapped. (I hope they're using green-friendly scrapping equipment.) There are 14.7 million unemployed Americans. At least some of them could work if they had a car. Why not give them the clunkers?
Sam, that makes too much sense. Therefore, it would never fly in Washington...
Vahan, how about zero interest rates? we keep going back to that well to create new bubbles. Today there is talk of a USD carry trade (just like when JPY was the best game in town.) We keep going back to overly easy monetary policy to fix our problems. Zero interest rates punishes savers and rewards debtors while encouraging risk-taking (speculation?) In the meantime, USD is getting flushed down the tubes... Oh what a mess! This will all end badly (except, of course, for Goldman Sachs, since they seem to profit at everyone's expense in all cases!) ;-)
Pretty soon we'll have negative interest rates. Put a $1,000 in the bank, get back $950. Borrow $500,000 to buy a house, pay back $475,000. That will really punish savers and encourage consumers to take on more debt. The only saving grace is that people are actually saving more and borrowing money is becomming more difficult. For example, even though mortgage rates are near historic lows, getting one is more difficult.
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