Sam Redman's Musings

Random thoughts on a variety of subjects

Cash for Cars success could be disastrous

By Sam Redman

While the cash for cars program, superficially, appears to be a success in stimulating the sales of new automobiles, the consequences of this ill-conceived program (especially if extended to a 25 or 50 billion dollar effort like some are saying) could be quite damaging to the country, causing a loss of jobs and virtually destroying three vital parts of our economy and peripherally even more (as I will explain). Smashing up old cars which are being currently used will have a very detrimental effect on a huge and profitable (and up to now growing) industry, the repair of cars which are out of warranty and the market for reasonably priced functioning automobiles for the working poor and the middle class.

First, this will be devastating to the auto repair shops. Thousands of shops fix old cars (they don’t fix new ones because those don’t break down for many years and warranty repairs are done by the dealers). Scores of mechanics earn their living repairing those vehicles.

Secondly, this will destroy a now booming auto parts industry. Those repair shops and hundreds of thousands of do-it-yourselfers keep those old cars running by buying parts at places like AutoZone, PepBoys and O’Reily’s. Those auto parts stores don’t sell parts for the new cars in warranty (they won’t need them for up to ten years). Taking old cars out of circulation means that repair shops and auto parts stores will be losing their customers by the hundreds of thousands (and maybe millions depending on how much congress is deluded into extending the program). This industry (because of it’s growth) has been able to offer very low priced parts which allow a working person to affordably (cheaply) keep his car well maintained. If the parts business suffers on any grand scale, parts prices will go up creating a situation where keeping a car running at low costs will become prohibitive.

Thirdly, smashing up functioning (and repairable) cars will be a real blow to the segment of the population which can ill afford it, the bottom rung working poor. This will seriously damage a giant lower level used car market. Older used cars in the marketplace enable a family struggling to get along to be able to purchase transportation at a reasonable price and have a way to get to work and to the stores without incurring the crippling debts which financing newer cars requires. And taking hundreds of thousands of older cars out of the market pool will cause the prices of those which remain to go up and so the availability of something a poor family can afford becomes very limited.

Finally, lots of middle class people over the past years have been able to restructure their lifestyles and cut down on their debt. They have realized that they could be very happy with that older car and they have been able to pay off debts and learn to live more reasonably (driving a car without payments is quite a joy). This program offers the siren song of a brand new shiny vehicle, but brings those people right back into the snare of a debt load which they didn’t need. When they buy a 30 to 40 thousand dollar automobile they end up paying out sometimes twice that over the course of the payment period. Those new payments (which is spendable cash they now have) comes out of the market place for other goods like clothing and school supplies and food. By the car industry and the banks sucking away that disposable income, those other segments of the economy suffer.

Is anyone in congress considering any of these ramifications to their “cars for cash” stimulus?

This post also was made in the 7/31/09 online NYtimes in the comments section to a news article about the program:

Click here to read on NyTimes site

—- Sam

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This entry was posted on July 31, 2009 by and tagged , , .