Next up: the Cash for Clunkers hangover

Yesterday, as the Cash for Clunkers program finally ended in a flurry of showroom visits and dealer complaints, I wrote that the program was perhaps the most foolish attempt at government manipulation of the private market since the Community Reinvestment Act and the mandates for Fannie Mae and Freddie Mac to securitize sub-prime loans.  I’m not the only one making that argument, either.  The Washington Post warns its readers of the “hangover” coming after the government bender on outdated fenders:

The Obama administration declared the program a success. An estimate issued Monday by the White House Council of Economic Advisers said the program is projected to boost U.S. third-quarter gross domestic product by 0.3 to 0.4 percentage points and create 42,000 jobs by the end of 2009.

Many auto industry analysts and dealers expect sales volumes to fall now that the program is over. They worry that many people who took advantage of the program were merely accelerating purchases they would have made later in the year.

If that’s true, the premature sales could hurt automakers, which increased production in the third quarter to replenish clunker-depleted inventories that had already grown low because of factory shutdowns over the summer.

Because there’s a lag time between production and getting a vehicle to a dealership, the new vehicles “will hit when there’s a lower demand,” said Jeff Schuster, executive director of forecasting at the auto industry research firm J.D. Power and associates.

And when will that lower demand come?  Right as the new models get to the dealers, when prices are highest anyway.  Small wonder that Edmunds.com president Jeremy Anwyl says, “Nice party, but the hangover is awful.”

The problem with C4C and the CRA/Fannie/Freddie interventions is that they can’t change the basic laws of economics.  Big-ticket sales have multi-year impacts that go far beyond the point of sale.  In both cases, the investment in vehicles regulates who can buy, and when.  The people who bought cars under C4C would likely have bought new vehicles when the prices dropped enough, especially if gas prices pushed them to look for more fuel-efficient vehicles. Destroying their trade-ins make it more difficult for other families to buy used vehicles, both by ensuring a lack of inventory and having the supply squeeze drive prices upward.

To the extent that the program pushed people only marginally able to buy a new vehicle through the magic of trade-in inflation into making these purchases, it encouraged them to take on additional debt they likely can’t afford.  Since the chronic issue with American families is too much debt rather than too little, that aspect of the C4C program will almost certainly produce bad results in the long term.  We can expect higher-than-normal repo rates and loan failures, exactly the problem that created the current economic crisis.

The Obama administration says that the program will create 42,000 jobs this year and boost the GDP in the 3rd quarter.  Do we expect the White House to follow that up with reports on how it damaged new-car sales in Q4?

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