It appears the government's "Cash For Clunkers" program ran out of money already.

The program itself was an absurd idea, giving people excessive amounts of money for old cars, provided they bought new "fuel efficient" autos, all in an effort to stimulate the economy. Anyone could have predicted that if you agree to pay someone more than a given item is worth you would have more sellers than you could handle. And sure enough,that is precisely what happened.

However, how much "stimulus" did we buy for all our money?

Well, judging by Wall Street's reaction, not much. Since ti was founded, the Motors Liquidation Company (MTLQQ) which replaced GM on the exchanges, has fallen consistently, "Cash for Clunkers" or not. Ford (F) has risen, but not as fast as the overall Dow Jones (DJI) has.  And in the past 2 months or so, Daimler Chrysler (DCX) has been largely flat. Even companies which are not expected to directly benefit haven't done that well. I happen to have invested in both Honda and Toyota many months ago, and both have not performed as well in the past month or two as they did earlier in the year, though in the last few days, when "Cash for Clunkers" ran out of money, they did show a little bit of a spike.

So, it appears, like most stimulus ideas, this one did little to stimulate the economy.

But that was predictable. Think about the mechanism here. The government was going to give people more than the cars were worth, in order to induce them to buy new cars. Now, this was obviously  a bonanza for anyone who was planning to buy a car, but what about everyone else? Cars are major purchases. Suppose you had a trade-in worth $1000, and now the government will give you $5000*. That is great if you were already buying a car. Even if the "fuel efficient" requirement meant you would have to buy a car $2000 more than you expected, you would end up $2000 ahead.

However, if you weren't planning on buying a car, the deal is probably not enough to induce you to do so. After all, even with the trade-in, you are talking $10,000-$20,000 easily. The government may have taken a $15,000 purchase down to $10,000, but if you weren't willing to spend $15,000, odds are good you weren't going to spend $10,000 either.

The only case I could see this making a difference is in marginal cases, cases where someone was planning on buying a new car in a few months, but moved up the purchase due to the government inducement. So, in a handful of cases it might have increased sales, but at the expense of reducing sales in a future month. And, at a tremendous cost.

And that, in a nutshell is the whole problem here. The government spent a billion dollars to move a few auto sales from the next six months to the present month. Not only did it increase sales a trivial amount, but it did so almost entirely by depressing sales in coming months. Even ignoring that, however, the cost was exorbitant for the trivial number of sales it likely added. Basically, it just gave some money to people who were already buying cars, and may have made a few buy more fuel efficient cars than they would have otherwise**.

Is that really a wise use of money during hard economic times?

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* These numbers are entirely fictitious. The real numbers would not change the argument, so I stuck with large, round numbers to make the argument simple. If anyone thinks that using real numbers would change the argument, I would be happy to look up such numbers and run through the logic again, but unless the government subsidy is large enough to make a car purchase a trivial amount (say a $20,000 trade in value), I can't see it changing the argument one iota.

** Given CAFE standards, emissions guidelines, and the many additional laws enacted by states such as California and Maryland, I can't see any new car not qualifying as "low emission". Modern cars put out fewer pollutants than most home heaters of a few decades ago. Not to mention the coal and wood fires most of our ancestors used for heating, cooking and light. (Something that always makes me chuckle when hearing about "second hand smoke" and "pollutants". Everyone seems to forget that pollutants, such as coal smoke, were omnipresent in homes and cities in the very recent past. And cigarette smoke, whatever the risk, is certain not that much more dangerous than coal smoke. Especially in an enclosed area.)

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POSTSCRIPT

When checking my facts, I noticed that congress pumped another $2 billion into this. Despite the lack of success, despite the exorbitant costs. And we wonder why we can't control government spending? Perhaps we should start with the fact that  failure gets increased funding.

POSTSCRIPT II

You can read my first post entitled "Government Efficiency" by following the link. For other examples of government inadvertently increasing costs, I recommend "When Help Hurts", "High Cost of Medical Care" and "Clarification of My Argument for a Free Market in Medicine". I have written endlessly about the various stimulus plans, and the futility of trying to solve our economic problems through spending. I would recommend reading "Proof Keynes (and Krugman) Are Insane", "The Rubber Yardstick", "Inflation and Uncertainty", "Shopaholic Government", "Interesting Correlation" and "Why Do People Consider George Will Bright?", as well as the many articles listed in the postscripts to "Overlooking the Obvious".

POSTSCRIPT III

Actually, looking at the article on the new cash infusion, it appears the top trade in is just a bit less than in my example, but the restrictions on what can be traded in are pretty narrow. I am amazed enough cars met the requirements to bankrupt the program. Probably a lot of trucks and SUV's met the low fuel efficiency requirements for the trade in. Which means it is likely the government subsidy wasn't that much more than they would have received on trade-in, making this even less of an incentive for consumers, though it must be nice for dealers to have the government pay for trade-ins rather than taking the loss themselves.

I have to say, the more details I read, the worse this deal appears.

POSTSCRIPT IV

This Friday, the WSJ's Best of the Web had an amusing take on the funding problems of "Cash for Clunkers".