Tuesday Quick Hits

I'm still shaking off the Labor Day cobwebs (no, not from LaborFest), and my fantasy football draft's tonight, so only some headlines tonight:

• Here comes Boeing-Airbus, Round II.  With most folks expecting the WTO to issue a pretty solid rebuke of American subsidies to Boeing, I wonder just how many members of Congress next week will take back all those nasty things they said about Airbus when its adverse WTO ruling came down. (Hint: it's somewhere between zero and none.)

• Have we already become a nation of men, not laws?  Word out of Nevada sure makes it appear that way, with plenty of so-called "Republicans" backing Sen. Harry Reid because of all that juicy pork (and influence) he brings to the state as Senate Majority Leader.

• Maybe there's hope for free trade in America just yet...  WaPo progressive blogger Ezra Klein mails in a yaantastic, and still wrong, lament about the sad state of the American manufacturing sector.  Normally, I wouldn't even give such trite nonsense the dignity of a even blog mention, but the debate in the comments section makes it noteworthy.  (Talk about a backhanded endorsement of Klein's work!)  Therein, several commenters actually set Klein (and other ignorant folks) straight.  And - I checked - none of the educated commenters was Cato's Dan Ikenson!  Maybe some of this stuff is actually sinking in.

•  ...Then again, maybe not.  Nate Silver at the NYT has an interesting analysis of the campaign platforms of 33 "toss-up" congressional seats.  We know that the Dems are running on protectionism, so it's not surprising that Silver finds a few of them doing so here.  But guess how many Republicans are running on expanding free trade?  Yep, zero.  Sigh. 

• Never fear, folks, Larry Summers is on the RMB case!  Oh, wait....  So the White House has dispatched Summers to China to discuss China's currency and other bilateral economic issues.  Problem.  Solved.  (<--- sarcasm)  Fortunately, this WSJ Asia editorial hits on several things that Summers could discuss with the Chinese which might, you know, actually help matters.  Crazy thought, I know.

• Clunkers Revenge.  I must admit that I find it really difficult to pity the folks who jumped at the chance for some free gub'mint cash but are now having buyers remorse.  Nevertheless, this news isn't good for the economy, and it's further proof that top-down, Keynesian economic planning is just an awful idea.

• Chances for the KORUS FTA may have just gotten a little worse.  Most experts opined that the upcoming implementation of the EU-Korea FTA was going to light a fire under the administration's butt to finally move the US-Korea FTA in 2011.  The news that Italy is threatening to derail the EU agreement might just pour a whole lot of San Pelligrino on any near-term KORUS plans.

Clunkers Fail, Ctd.

I fear I'm sounding like a broken record, but this is one song that deserves to be played until your ears bleed.  Once again proving that Americans buy stuff with a finite supply of money (as opposed to an endless supply of magic beans and pixie dust), consumer spending dropped dramatically upon the conclusion of the "successful beyond anyone's wildest dreams" Cash for Clunkers program.  Here's MarketWatch on Friday with the disheartening-yet-totally-expected news:

U.S. consumer spending fell sharply in September after the government's cash-for-clunkers program expired, while after-tax incomes dropped for the fourth month in a row, the Commerce Department estimated Friday.

On a real (inflation-adjusted) basis, consumer spending sank a seasonally adjusted 0.6% in September, a reversal from the 1% gain seen during in August, the government's data showed. It was the largest decline in spending since December.

Real disposable incomes after taxes also fell, off a seasonally adjusted 0.1% to mark the fourth consecutive decline.

Despite overall growth in the economy in the third quarter, incomes aren't growing and jobs are still being lost at a rapid pace.

"The labor market remains challenging and until we see real improvement, sustained wage gains will be elusive," wrote Adam York, economist with Wells Fargo Securities....

Sluggish income growth is a major challenge for consumers in the fourth quarter, said Lori Helwing, economist for Bank of America's Merrill Lynch. She expects consumer spending to grow at an annualized pace of just 0.5% in the quarter, a big downshift after a 3.4% pop in the third quarter.

Meanwhile, the Commerce Department said current-dollar (not inflation-adjusted), spending dropped 0.5% in September after a 1.4% gain in August. Current-dollar incomes were flat, coming down from a 0.1% gain in August.

Economists surveyed by MarketWatch had been looking for nominal spending to fall 0.4% and for incomes to ease 0.1%....

The decline in September spending was largely due to the end of the government's subsidy program for autos.

Real spending on durable goods, including autos, fell 7.2% in September, pivoting off a 6.7% increase seen in August. Still, the level of spending on durable goods in September was higher than in July.

Real spending on nondurable goods rose 0.5%, on the heels of a 0.9% gain in August. Spending on goods excluding autos was "solid," according to Morgan Stanley economist David Greenlaw, who projects spending will rise about 2% on an annualized basis in the fourth quarter.

Totally and utterly unsurprising.  I just hope that the White House won't now attack the Commerce Department for this unapproved bad news.  (Edmunds fired back today at the White House, btw.)

Clunkers Fail Update: Proof That Americans Do Not Buy Cars (Or Anything Else) With Magic Beans

I've blogged a few times on the epic failure that was the Government's "Cash for Clunkers" (C4C) Program.  Those entries demonstrated that the "successful" Program was, by pretty much every measure available at the time of posting, anything but.  I also noted auto-expert analysis warning that C4C probably wouldn't even boost auto sales, despite passing out tons of free money to do that very thing: "Several auto experts have said that the program will do nothing to improve the long-term health of the auto sector because C4C only pushed new car sales forward a few months (e.g., people buy today instead of in January)."

Last Friday brought evidence of that basic economic reality.  After strong sales during the months in which C4C was active (July-August), Edmunds.com reported on Friday that September sales will be abysmal.  Here's Automotive News reporting on this utterly unsurprising development:

September’s light-vehicle sales rate will fall to 8.8 million units, consumer auto site Edmunds.com said. That would be the lowest rate in nearly 28 years, tying the worst demand on record.

After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once -- in December 1981 -- with records stretching back to January 1976.

Amid a global recession, U.S. sales fell to 13.2 million units in 2008, from 16.2 million in 2007. The slide continued, with demand ranging from 9.1 million to 9.9 million in the first half of this year.

End of clunkers

But the cash-for-clunkers program’s official run from July 24 to Aug. 24 bumped the sales rate to 11.1 million in July and 13.7 million in August.

Now that consumers can’t receive $3,500 to $4,500 for trading in gas guzzlers for new vehicles with better fuel efficiency, they aren’t rushing to purchase vehicles, Edmunds.com analysts said.

“Many people regard February as the darkest month of the recession, but even then the SAAR was higher, at 9.1 million units,” Edmunds.com senior statistician Zhenwei Zhou said in a statement.

The sales rate from Aug. 25 to Aug. 31 fell to 8.3 million, Edmunds.com said. That week’s transactions saw 6.4 percent of transactions carried over from the cash-for-clunkers program, which allowed dealers to submit requests for voucher repayment for cars not yet delivered from the factory.

September swoon

Demand increased to 8.9 million in the first five days of September, with 3.6 percent of sales from cash for clunkers. The rate slipped to 8.7 million from Sept. 6 to Sept. 12, Edmunds.com said, with 3.3 percent of deals leftover from cash for clunkers.

The slide in demand also has lowered the average dealer profit per vehicle, the consumer auto site said. The average was $981 the week leading up to the July 24 launch of cash for clunkers, and that steadily increased to $1,494 the last week of the program. As of last week, average dealer profit had slipped to $1,303 per vehicle.

The lesson: the American people buy cars with their money (borrowed or saved), not magic beans.  And unlike the beans, people's money is finite and runs out (and doesn't sprout beanstalks which lead to a magical cloud-kingdom, but that's a story for another time).  So when people are artificially induced to spend their money early, they won't spend it later. This is why Keynesian stimulus packages like C4C can't work, and it's a simple economic concept that even a lawyer like me can understand.

(Although it was lost on almost all of the lawyers who work on Capitol Hill, of course.)

Now indulge me in a simple hypothetical.  Let's say that the monthly September auto sales rate ends up at 8.8 million units and the next few months have similar rates (say, 9.0 million units, although I'm not sure why they would increase without any Clunkers holdovers or more government meddling).  By my basic math, the dismal "September-December 2009" would mean [(11.1+13.7+8.8+9.0+9.0+9.0)/6=10.1] that the Government's $3 billion "investment" resulted in almost no improvement over that awful pre-Clunkers rate of 9.9 million units, and nothing even remotely close to the below average rate of 13.2 million units in 2008.  So domestic carmakers, dealers and the broader American economy got nothing from C4C, except a bill from the federal government for another few billion bucks and a lot of harmful unintended consequences.

So much for that "success," huh?

Re: Clunkers Fail

Two very important developments since I last posted on the debacle that is Cash for Clunkers:

1) Multiple reports of dealers leaving the program. Here's the Washington Post summarizing:

Dozens of auto dealers in the New York area and at least one in Maryland are pulling out of the U.S. government's popular "Cash for Clunkers" program because of problems in getting reimbursed.

The general manager at Toyota of Bowie said the dealership stopped participating earlier this week because it cannot afford to advance the money for more rebates while waiting on the government to pay. And about half of the 425 members in the Greater New York Automobile Dealers Association have also left the program, according to the group's president.

"We're sitting with $1 million out," said Jim Bee, general manager of the Toyota of Bowie dealership. He said he has taken in between 150 and 160 clunkers and has not been paid a dime from the government.

...

"Let's say we've given the customer a $4,500 voucher," Bee said, "we've given that money in good faith. But if the clunker isn't approved, we'll have to eat that $4,500."

Mark Schienberg, the president of the New York area automobile dealers group, said the government needs to speed up the approval process because dealerships are cash-flow businesses. He said many of his members have complained about the length of the 10-page-plus application and about rejections that do not give clear explanations of what the problem was. If dealers that are already living hand-to-mouth do not get repaid soon, he said, it could force them into bankruptcy.

"The program was becoming too difficult for them to get through, and they couldn't float any more money," Schienberg said of the dealers that have pulled out.

2) RIP Clunkers. On August 24, 2009, this awesome "success" will terminate. Amazingly, the US Government made no mention of Development #1 in announcing the time of death. The WSJ explains:

The government's "cash for clunkers" incentive program will end Monday at 8 p.m.., a month after it began.

The $3 billion program provides vouchers of $3,500 or $4,500 to consumers who trade in older, less fuel-efficient vehicles for new ones that get better gasoline mileage. It has emerged as a successful economic-stimulus program and helped boost hard-hit auto makers.

"It's been a thrill to be part of the best economic news story in America," Transportation Secretary Ray LaHood said in a statement. "Now we are working toward an orderly wind-down of this very popular program."

The move comes as the department tries to get an accurate accounting of how much money is left in the program, formally called the Car Allowance Rebate System.

The Transportation Department said the program recorded more than 457,000 dealer transactions valued at $1.9 billion in rebates.

Mr. LaHood said the program's conclusion Monday night will allow car dealers and buyers "plenty of time" to finalize purchases and submit applications for rebates.

"Based on conservative estimates of valid transactions so far, DOT analysts have projected that there is enough money to continue accepting submissions until the Monday deadline," the agency said in a statement.

And the AP starts placing blame (after, in typical AP fashion, calling the program a "success" without a shred of evidence of that):

The responsibility for the $3 billion stimulus program's flaws is widely spread.

—Congress—relying on auto industry forecasts that the program wouldn't have a major effect on moribund sales—deeply underestimated how many people would be lured to dealerships by rebates of up to $4,500. Initially, lawmakers committed just $1 billion, an amount that was burned through in just a few weeks.

—Transportation Department officials, presented with just 30 days to get the program up and running, didn't set aside enough staff or resources and were overwhelmed by the heavy response from consumers. Systems set up to handle and reimburse dealer claims were swamped.

—Government rules to prevent fraud created paperwork requirements that many dealers didn't fully understand.

—Hungry for sales, dealers made Cash for Clunkers deals weeks in advance even though they were advised against it. This created a big backlog the moment the program officially began. And many are still filing bad paperwork that is holding up their claims, despite repeated government attempts to clear up the confusion.

And liberals really want these guys in charge of the American health care system? Of one-sixth of the US economy?

REALLY?

Anyone want to bet me that next Monday is not the last we've heard of this "success"? (And I don't mean in a good way.)

Can We Officially Declare "Clunkers" An Abject Failure? (Answer: Yes)

A little over 2 weeks ago, I documented why the "successful" Cash for Clunkers ("C4C") program was actually anything but. As I said then, "Only in Washington can a plan to give away free money over three months, which was delayed, then collapsed after 4 days and was riddled with administrative problems, be deemed a 'success.'" I also highlighted other problems, namely (1) the unintended consequences of the program - harming used car and parts dealers and the poor people who shop there; (2) the incompetence of government management - including how the program would probably have no positive economic or environmental effects; and (3) how ripe the program was for fraud and abuse.

Nevertheless, as I not-so-boldly predicted the Senate approved another $2 billion of funding for the program, and the US government tore a rotator cuff patting itself on the back. Everyone cheered... well, everyone except the poor, independent car dealers, used parts sellers, and taxpayers not in the market for a new car (or wanting to game the system for a free wad of money). But government was happy because car dealers and American automakers were loving the influx of customers. And the government loves itself some auto-money. WOO HOO!

Now, only 2 weeks later, dealers aren't so happy anymore. The Detroit News reports that the Transportation Department is “ramping up efforts to speed payments to dealers under the $3 billion ‘cash for clunkers’ program.” It's hiring 1,100 workers (stimulus!) to process voucher payment requests by tapping the Enterprise Services Center in Oklahoma City, Okla. I guess that would be good news if we didn't also hear today from the AP, which informs us that dealers “have reported submitting tens of thousands of dollars — in some cases more — worth of rebates to the federal government for repayment that are still outstanding. Many report they have been repaid for only a small fraction of the deals they made under the program, creating strain on cash flows at dealers nationwide.” Uh oh. And the Chicago Sun-Times piles on: “dealers across the country, who have been giving discounts to car buyers, are still waiting for their money.” While “problems with applications have been reduced, getting approval for reimbursement requests still faces ‘significant hurdles,’ said John Lyboldt, vice president for dealer operations at the National Automobile Dealers Association.” Things have gotten so bad that a lot of dealers are thinking of dropping out of the program, says the Milwaukee Journal Sentinel.

Ok, so new car dealers aren't big fans anymore, but at least Ford, GM and Chrysler are psyched, right?

Wrong, as the FT reports:

According to data published by the National Highway Traffic Safety Administration on Monday, Americans are using the scrappage incentives to buy more vehicles from Toyota than any of the three Detroit carmakers.

...

The top models bought since the scheme began on July 24 are the Toyota Corolla, Honda Civic and Ford Focus, all small sedans. Three of the top five are Toyotas.

The popularity of smaller models underlines the price paid by the Detroit companies for their strategy to all but cede the passenger car market to their foreign rivals during the 1990s as they concentrated on bigger and more profitable sport-utility vehicles, pick-up trucks and minivans.

Ugh. Ok, so dealers AND the Big Three aren't huge fans, but, well, umm, at least the economy is cranking now, right?

Wrong again, as MarketWatch informs us (emphasis mine):

U.S. retail sales unexpectedly fell 0.1% in July, as soft sales for most types of merchandise offset a boost from the government's cash-for-clunkers subsidy, the Commerce Department reported Thursday.

It was the first decline for seasonally adjusted sales in three months. The report shows that consumer spending is still weak despite attempts by the government to stimulate demand. Sales at most kinds of stores declined in July.

Economists surveyed by MarketWatch were looking for sales to rise 0.8% in July after an upwardly revised 0.8% increase in June. See Economic Calendar.

"We know a clunker when we see one, and the July retail sales report was a real clunker," wrote Richard Moody, chief economist for Forward Capital.

...

The government subsidy that gives owners of older, less-efficient vehicles as much as $4,500 toward the purchase of a new one had a major impact, as auto sales rose 2.4%. Analysts expect the program will have an even larger effect on auto sales in August. The program was running for just one week during July.

Excluding autos, retail sales fell 0.6%, against an expectation of a 0.1% increase. Sales excluding autos rose 0.5% in June and are now down 8.5% in the past year.

The cash-for-clunkers program may be having a negative impact "as consumers shift dollars to paying for their new vehicles instead of other purchases," said Adam York, an economist for Wells Fargo Securities.

"The consumer is still under considerable pressure tied to a weakening labor market, a negative wealth effect and tight credit conditions," said David Greenlaw, an economist for Morgan Stanley. "Also, it appears that the recent tax stimulus is having limited impact. We look for a modest pop in consumer spending in the third quarter driven by the success of the 'cash for clunkers' followed by a return to a more tepid pace in the fourth quarter."

Wait, so people who bought cars didn't also buy other stuff? NO WAY!! On the bright side, this dispels the "magic beans" theory of liberal economics.

But with car dealers, the Big Three, and the US economy all hating on C4C, the environment - mother Gaia herself - still has gotta be a (small) fan of a program that takes all those carbon-emitting clunkers off America's roads, right? Right?!?

Wellllll.... maybe not. In fact, a brand new study (PDF) by economists Lucas Davis and Matthew Kahn shows that, when factoring the large international trade in used cars between the US and Mexico, C4C and programs like it might actually increase global carbon emissions over the long term. Here they are explaining why in a new op-ed (caution: nerdspeak and euro-spelling ahead):

Under the US “cash for clunkers” programme, billions of dollars are being allocated to pay drivers to purchase a new vehicle and scrap their old automobile. This column says the programme will reduce international trade in used cars, which significantly benefits consumers in developing economies. Such trade also increases the average emission efficiency of automobiles in both the US and developing nations, which raises the possibility that “cash for clunkers” might raise global emissions.

In other words, people who say C4C will help reduce carbon emissions totally failed to consider international trade in used cars. These clunkers are typically less efficient than the average American car, but they're far more efficient than the Mexican averages. By destroying the clunkers, C4C will dramatically reduce the used car trade between the US and Mexico. This will not only harm poor Mexican car-buyers (who must pay more for a smaller supply of used vehicles), but it also could decrease the average fuel-efficiency of Mexican cars and thus increase total carbon emissions in Mexico (where more polluting cars aren't replaced with less-polluting American clunkers). The result: more overall pollution, not less. Quick conclusion: yet another one for the "nasty unintended consequences" file.

So who the hell is still calling this program a "success"? Anyone? Anyone? Bueller?

(Ok, ok, other than the tiny percentage of American consumers who are getting free money, of course.)

The "Success" of Cash-for-Clunkers

Only in Washington can a plan to give away free money over three months, which was delayed, then collapsed after 4 days and was riddled with administrative problems, be deemed a "success."

Welcome to American Government 101.

Administered by the National Highway Traffic Safety Administration (NHTSA), the Cash for Clunkers program is a hair-brained scheme of Congress to pay people $3500-$4500 to trade in their old cars for new, more "fuel-efficient" cars. Hence, "cash for clunkers." Get it? C4C was intended to do two things: (i) help the auto industry recover by stimulating domestic consumption (via consumer subsidy); and (ii) help the environment by getting gas guzzlers off the road (dealers have to destroy the clunkers).

C4C was signed into law on June 24 and was supposed to start one month later on Friday July 24, just in time for the weekend. But for some unknown reason (NHTSA wouldn't say), it was delayed 3 days and began on Monday July 27, right when everyone was going back to work (or starting vacation). Once it began, the program was beset with problems. Dealers and consumers complained of ridiculous paperwork and eligibility confusion (there are 100 pages of rules and registration takes at least 90 minutes). Even the NHTSA website froze up. Adding to that confusion, the EPA (quite brilliantly) changed automobile fuel efficiency standards right before the program started, so some cars that were eligible when the law was enacted were no longer eligible when the program actually began. This forced the Transportation Department to make an ad hoc rule that that people who made clunker deals on or before the date of those EPA revisions would be allowed to go forward, even if their car was no longer eligible. Smooth, huh?

The program was supposed to run until November, but because Americans love free money, it lasted four days. Four. According to numerous reports that the NHTSA and White House would later refute, the program was halted because of a massive influx of paperwork and fears that the $1 billion in subsidy funds had been exhausted. (Only $96 million had actually been doled out, but apparently some estimates showed that $950 million had been accounted for.) At this point, nobody really knows what's going on.

Because of this "success," the House voted yesterday to infuse another $2 billion into the program from Stimulus* funds. And barring the alien abduction of 75% of the US Senate (a boy can dream!), the Senate will approve that funding on Monday. In the meantime, the First Dealer has promised consumers that the FedGov will honor any deals made this weekend. The nation's car dealers are suspicious of that guarantee: the Chairman of the National Automobile Dealers Association (NADA) told his members yesterday "Nonetheless, until further definitive guidance on the availability of funding is provided by the administration, dealers who accept additional 'clunkers' deals may face a risk that they will not be reimbursed."

Based on all of this, President Obama said yesterday:

"I'm happy to report that [C4C] has succeeded well beyond our expectations and all expectations."

Those must be some seriously low expectations.

Success (or lack thereof) aside, we can learn a lot from the C4C story. Here are a few off the top of my head:

1) The law of unintended consequences. While C4C has obviously been a hit with new car buyers and new car dealers, it's reportedly hurting several groups: used car dealers, parts recyclers and the people who frequent such places, namely poor people. The reasons are pretty obvious. First, it removes "clunkers" and their parts from the market (remember, dealers have to destroy the clunker), and second, it creates a hugely tilted playing field in the competition between new and used car dealers (most used car dealers are independently-owned).

2) Government mismanagement and incompetence. The program was supposed to run through October and made it four whole days. It has been plagued with administrative problems, including an overburdened NHTSA, confusing eligibility requirements and huge paperwork backlogs. And to top it all off, there are serious doubts that the program will achieve either of its two primary goals (auto sector recovery and environmental assistance). First, several auto experts have said that the program will do nothing to improve the long-term health of the auto sector because C4C only pushed new car sales forward a few months (e.g., people buy today instead of in January). Second, with pretty low fuel efficiency rules for new cars (thank you, Detroit lobbyists!), C4C's actual environmental impact will be a little more than nothing (analysis here). So we're 0 for 2. Perfect.

3) How easy it is to game a government program. Want to take free government money and turn it into the Hummer of your dreams? Cato's Alan Reynolds tells us how:

First of all, with Chrysler and GM dealerships folding, it should be easy to buy a mediocre Chevy Cobalt or Dodge Caliber for about $10,000 more than the voucher.

What you do next is sell that boring econobox, even if you end up with $1,000 less than you paid — that still leaves you with $3,500 of free money, courtesy of taxpayers.

As this process unfolds, the flood of resold small cars will make it even harder for GM, Chrysler and Ford dealers to get a decent price for small cars, because of added competition from new cars being resold as used.

That’s their problem, not yours.

So, take the $9,000 net from reselling the crummy little car plus the $4,500 from Uncle Sam. Then use that $13,500 to make a big down payment on a used Cadillac Escalade, Toyota Tundra pickup or Corvette.

If only I had a clunker......

So, to summarize: the federal government horribly botched a temporary, $1 billion program to sell cars. In the process, it hurt poor people and small business owners and created a situation ripe for corruption. And not only did it not accomplish its stated goals, it may actually undermine them.

Yet these are the same folks who want to run one-sixth of the US economy through ObamaCare and control our energy supply and consumption through Cap-and-Trade?

Really?

With any luck, the biggest "success" of Cash for Clunkers will be providing Americans with a perfect example of why ObamaCare and Cap-and-Trade will be bona fide debacles. At 1/300th the cost.