MR Interview: Auto Industry Insider Explains How C4C Distorted The Market, Wiped Out Rebates, And Cemented Japanese Dominance
Smart move ending Cash 4 Clunkers today. Another few days and conservatives could have added "how do you expect to run health care if you morons bankrupted a simple auto rebate program" to their list of anti-ObamaCare arguments.
It's hard to run down all the ways this was arguably the dumbest government program ever. But just to give you a sense of the mind-bending layers of stupidity at work, here are a few excerpts from a MR chat with auto industry insider SPK. Accounting for the needs of anonymity, suffice to say that SPK plays a significant role in marketing and retail at a major dealership.
First the part everybody agrees on: inflation wiped out any gain for any individual consumer, meaning that (a) the taxpayer handout to auto companies turned out to be especially generous and (b) there were literally zero savings on the balance sheet to offset the Obama administration's literal destruction of wealth:
SPK: its crazy. dealers are almost out of cars
SPK: aside from the fact that the govt hasnt paid them back they're drowning in money
SPK: its silly. they're not discounting anything
SPK: avg gross per car is up like 300% vs 90 days ago
Omri: that's the thing you want in a recession triggered by a bubble - a massive market distortion
SPK: well heres the worst
SPK: ppl who arent clunkering are FUCKED
SPK: the govt subsidy caused massive inflation like it was supposed to
SPK: lots are turning down deals today that have like $1800 in profit
SPK: someone who wants to buy a regular camry wo clunker money
SPK: has seen their price go up by at least $2000 in the last few mos
SPK: the shortage basically motivates dealers to eat up most of their subsidy
SPK: if you have a clunker thats worth $2000 on the free market
SPK: you probably dont come out ahead by using the program
Why wouldn't people eligible for Clunkers money still try to strike something close to a bargain? Because i's not just supply and demand. It's also that customers knew that they had to make their purchases by the close of business today. Otherwise no sale. So dealerships were willing to drive up prices knowing that customers needed to buy more than they needed to sell. Game theory 101.
That also means that the dealerships who benefited relative to where the market would have been five years out are those who have the most efficient cars today. Guess who that is:
SPK: this is cementing japanese dominance btw
Omri: bc they've got the most efficient cars?
SPK: yeah
Omri: great. very well thought out
SPK: im telling you cash 4 clunkers is a giant subsidy for toyota dealerships
SPK: this will affect future sales, almost linearly
SPK: for the next few years every month there will be several ppl
SPK: who might have been ready to buy who wont bc they clunkered
Here's where things get particularly fun. A price is a market signal, but it's not a signal only for buyers and sellers of that particular good. Even if auto companies knew that the goosed price signal was garbage - and there's a punchline on that a little lower - people who supply component parts need the signal. And since they're not privy to the "this is all going to end soon" chat around the dealership water cooler, they're pretty boned:
Omri: isn't this guaranteed to be a disaster simply on the basic level that car lots are buying more cars than the market -can sustain?
SPK: no. they all know this party ends in a month
Omri: so no one's actually using the price signal to produce more tires or steel for cars
SPK: well, savvy dealerships are fine
SPK: but yeah those people are kinda in trouble
It might be that savvy dealerships knew enough not to put any faith in the C4C price point. But apparently our national car company seems to have missed the memo:
General Motors Co said on Tuesday it is increasing production in North America for the second half of 2009 after a surge in sales ignited by the U.S. government's "Cash for Clunkers" incentives program. The No. 1 U.S. carmaker said it would build 60,000 more vehicles than planned for the third and fourth quarters by increasing overtime and adding shifts at several North American assembly plants. The move will bring about 1,350 hourly workers in the United States and Canada back to assembly lines, GM said. With the actions, GM now plans to produce 535,000 vehicles in the third quarter, and build at least 20 percent more vehicles in the fourth quarter than the third. "We are extremely short on a number of products and our dealers are clamoring for more vehicles in almost every segment," GM U.S. sales chief Mark LaNeve said on a conference call.
I'd be surprised if GM dealers were actually "clamoring" for a glut of vehicles that they knew wouldn't arrive until after C4C ended. I can see why unions would want to insist that's true to get more hours and overtime pay, but it seems like dealers on the ground would know how soft the price was.
Though who knows how high and how deep incompetence goes in that company? They did go bankrupt after all. And no worries - if all else fails, there's always eBay (Obama's MSNBC cheerleaders on GM's desperate move to put cars alongside second-hand beanie babies: "the move may radically change the U.S. used-car business").
It's kind of ironic that a government program designed to artificially prop up car companies managed to cause long-term miscalculations in a different government program designed to artificially prop up car companies. Almost as if centralized government economic control sets off a vicious cycle where ever greater distortions are needed to push back against the the free market. Strange, that.
References:
* Cash for Clunkers to end on Monday [AP]
* Cash for Clunkers: Dumbest Program Ever? [CATO]
* Watchers Council Results - Actual Literal Wealth Destruction Is Very Nuanced [MR]
* General Motors to sell used cars on eBay [MSNBC]
* GM raises production as "clunker" sales rise [Reuters]
Previously:
* Obama: You Know What The US Really Needs? A Market Intervention That Spectacularly Collapsed In Europe Last Week
* Famously Brilliant VP: When Obama And I Both Personally Promised The Stimulus Would "Jolt" The Economy We Meant "Not Jolt"
* Impending Obama Victory Already Trashing US Trade, Economy
