July 12, 2024

Super Clunkers – How Congress Can Double US Vehicle Sales

Clash for Clunkers Increases Car Sales

The much maligned Cash For Clunkers program has three remarkable features that differentiate it from the other wide assortment of endless government stimulus/bailout programs.

1. The Cash For Clunkers program, at an initial $1 billion cost, is relatively “small” compared to the trillions of dollars that have been deployed for other stimulus and bailout measures.  The concept of the Cash For Clunkers program did not originate in Congress but rather was the brainchild of Jack Hidary, an entrepreneur who noticed the success of similar programs in Texas and Turkey.  Mr Hidary’s lobbying efforts ultimately resulted in the Clunkers program approval by Congress.

2. The Clunkers program is the only stimulus/bailout program enacted that allows participation without regard to income or financial need status.  A Clunkers applicant does not need to be unemployed, facing foreclosure, financially inept or destitute.

After seeing trillions of taxpayer dollars spent to bail out banks and homeowners for making stupid financial decisions, it is almost refreshing to see a program that helps those who probably don’t really need any help.  A purchaser of a new $30,000 car who can obtain financing or pay for the car in cash is probably still employed and doing quite well.

It would be interesting to see the income and credit stats on new car buyers under the Clunkers program but my guess is that many of the new car buyers are frugal, financially responsible individuals who had driven the same car for many years and would have purchased another vehicle soon anyways.  The Clunkers handout merely pulled forward future car sales – but that was the intention of the program.

3.  Without debating the merits of the Clunkers program, from a strict Keynesian economic theory standpoint, the program was a resounding success based on the multiplier effect.

Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.

In the Clunkers case, assuming increased unit sales of 250,000 at a cost of $30,000 each,  sales revenue of $7.5 billion was generated based on a $1 billion government cost.  Compared to other government stimulus, the Clunker program can only be viewed as a resounding success.

Clunkers Encore

Under the theory that government programs never die but only get larger I would expect that the government will expand the Clunkers program to the point of absurdity.   The original program has already been extended and doubled to $2 billion.

Lobbyists for the car industry should have an easy time convincing Congress to expand the program based on its “success” in generating sales.  Let’s not forget, of course, that the government and the UAW now own General Motors.

How Congress Can Double Car Sales

If  Congress really wants to get creative about stimulating car sales and lending, they may start by looking at the average age of US vehicles currently on the road.

According to USA Today, the automotive consultants R.L.Polk calculate the median age of cars in the US in 2007 at 9.2 years and the median age for trucks and SUV’s was 7.1 years.  Over 41% of all cars in 2007 were over 11 years old.  There are 235 million passenger vehicles in the US, including 135 million autos and 100 million SUV’s and trucks.

For the sake of saving the environment from old polluting cars and stimulating the economy, Congress, by legislative fiat, could prohibit the possession or use of any vehicle over 10 years old.   The mandatory new vehicle replacements could be phased in gradually over 5 years,  and would effectively force the purchase of at least an additional 60 to 70 million vehicles.   Vehicle sales for the next five years would easily double from the 2009 estimate of 11.5 million units.

The government’s investment in GM would be worth a fortune, and the States’ budget problems would disappear with the flood of sales and property tax levies on all those new vehicles.  Government guaranteed easy financing would be provided to all, regardless of income or credit.  Cash rebates on traded in vehicles would be increased to offset the new vehicle’s cost.

Result for the US economy –  large GDP increases as $2.5  trillion dollars in new car sales jolts the economy back to life.   Unemployment drops to low single digits as the multiplier effect of  booming car sales ripple across the economy.  How does the Government finance the cost of this “Super Clunkers” program?  Not a problem – the Treasury Secretary is already requesting a large increase in the national debt limit.

What politician would not vote for this plan?

Disclosures: No Positions

The GM Debate Continues – Why GM May Survive

dealCharles Wilson, the head of GM in 1952, stated that “what is good for the country is good for General Motors, and what’s good for General Motors is good for the country”.  This imperial statement was made at a time when GM and other US manufacturers dominated  world production of goods.  Times have changed and the country now debates the best way to keep GM in business.  Opinions vary – here are some well crafted thoughts on the matter.

GM’s Problems Are 50 Years In The Making

The remarkable thing is that, once you account for the economic cycles, the trend for GM is exceptionally steady — an exceptionally steady trend downward.

If I were an alien beaming down from Rigel-3 looking at this pattern — an alien with an MBA degree — my first guess is that it would reflect some sort of systemic problem, some chronic imbalance that magnified over time. Something, in other words, like the costs of GM’s retiree pension and health care programs. It’s difficult to get a precise figure on these so-called legacy costs, but they averaged about $7 billion per year between 1993 and 2007 and are probably at least $10 billion per year now. Considering that GM has never made as much as $10 billion in profit in a year and that its entire operating lossses in 2008 were $13.8 billion, you can see why this is a significant problem.

Of course, GM benefited by promising its employees access to lucrative retirement programs — it benefited by being able to pay less to those employees in the form of salary. But whereas the benefits to GM came long ago, the costs come now.

GM was willing to cut its employees some very attractive deals in the 1950s through the 1980s — provided that they took them in the form of retirement benefits rather than salary, which wouldn’t hit GM’s books until much later and which until 1992 weren’t even required to be carried on its balance sheets all, making its financial statements (superficially) more appealing to its shareholders.

This issue is wrongly portrayed by both the liberal and the conservative media as one of management versus labor, when really it is a battle between General Motors past and General Motors present. In the 50s, 60s and 70s, everyone benefited: GM and its shareholders got the benefit of higher profit margins, and meanwhile, its employees benefited from GM’s willingness to cut a bad deal — for every dollar they were giving up in salary, those employees were getting a dollar and change back in retirement benefits. But now, everyone is hurting.

Nor does this provide for much in the way of solutions. The retirees might have benefited from GM’s short-sightedness — but they also worked hard Monday through Friday every week of in expectation of receiving the benefits that GM had promised them. From the standpoint of fairness, it would be much better to require GM to take the hit — but there isn’t much of GM left to punish, as its outstanding retiree obligations exceed its market capitalization many times over, and as the decision-makers who led GM into this position left the company decades ago. Today’s employees at GM, and the unions that organize them, likewise don’t have anything much to do with the problem — most of the excess costs it requires to produce a Buick versus a Toyota come in the form of legacy costs, not what those employees are receiving in salary and benefits today. And the taxpayer is bound to to get screwed either way, either picking up the tab to bail out GM, or bearing the costs of the pension programs, which are guaranteed by the government (although the legacy health benefits aren’t guaranteed).

US Hopes to Ease GM into Bankruptcy

The government may seek to ease General Motors into what it calls a “controlled” bankruptcy, somewhere between a prepackaged bankruptcy and court chaos, by persuading at least some creditors to agree to a plan that would cleave the company into two pieces, according to people briefed on the matter.

G.M.’s new chief, Fritz Henderson, also said that the pressure from the government pushed the automaker closer to bankruptcy.

“By no later than June 1, if we’re not able to accomplish this outside bankruptcy, we’ll be in bankruptcy,” he said at a news conference in Detroit on Tuesday. “It’s pretty clear. The government was unequivocal.”

G.M. joins a long list of companies in industries like airlines, railroads and steelmakers that have faced the prospect of being remade in bankruptcy.

The administration hopes to win support from some of G.M.’s creditors, notably the United Automobile Workers, which would be forced to pare its health care benefits and whose pension obligations would probably remain in the old company.

History offers almost no precedent for a G.M. bankruptcy filing. Companies like Continental Airlines and the Delphi Corporation, the auto parts maker, have used the courts to transform their businesses and reduce their costs. But none matched the size and interconnectedness of G.M.

There are critical differences between the airlines and G.M. There was no question of the demand for air travel in the United States, while critics of American automakers have questioned whether there is demand for their products and whether reducing costs will produce viable businesses.

GM Bankruptcy? Tell Me Another

President Obama rightly says “sacrifices” must be made if GM is to emerge as a viable company. But there’s one sacrifice he won’t make: his re-election chances, by leaving the fate of the UAW truly up to a bankruptcy judge.

Keep that in mind amid the defenestration of Rick Wagoner, who was not as popular with UAW Chief Ron Gettelfinger as Mr. Wagoner’s replacement, Fritz Henderson. Keep that in mind amid reports the administration favors a “quick and surgical” bankruptcy. It’s a bluff. The same administration that inserted itself into GM’s corporate governance to order the resignation of a CEO is hardly likely to defer to the prescribed legal order for a failing company, namely bankruptcy. Even a “prepackaged” filing runs too much risk of a judge imposing more “sacrifice” on the UAW than the administration is prepared to tolerate.

GM bondholders understand this: They’ve been intransigent precisely because they calculate the UAW is too important to Democratic electoral politics for Mr. Obama to risk losing control of the reorganization process to a bankruptcy judge.

Mr. Obama played the tough guy in getting rid of Mr. Wagoner, but he won’t go after the labor monopoly. In fact, the union will emerge with a stronger grip on Detroit — because it will be a major shareholder in a reorganized GM.

The irony is that Detroit has given plenty of evidence that it can make money, even with UAW overhead. Three of the top seven best-selling vehicles in February were Ford, Chevy and Dodge pickups.

Better than trying to rewrite GM’s business relationships — the job of a bankruptcy judge — Mr. Obama might take up the duties of a president. He might try giving the country a coherent auto policy for a change. He could repeal two fleets so Detroit could build its small cars profitably offshore and tame the UAW monopoly in the process. He could dump CAFE or impose a $5 gasoline tax so at least customers would have a reason to buy the cars Washington is forcing Detroit to build.

None of this will happen. Mr. Obama will be content with incoherent policies that poll well — which means GM, Chrysler and perhaps Ford eventually will need taxpayer subsidies as far as the eye can see — or until a real bankruptcy sometime after November 2012.

Can GM Survive?

There is no easy or quick solution for GM.  Politicians, economists and others can debate forever, but whether or not GM ultimately survives will depend on the American consumer.  If there is no demand for GM cars and trucks then GM will have no future.   I believe that GM can survive and prosper long term based on my great experiences with GM products, having owned 5 different GM vehicles over the years.   My last GM vehicle was a Cadillac CTS, a superb vehicle that outclassed any competitor in its class.   As long there are buyers for GM products, GM will have a future.

GM Bankruptcy- Obama’s Socialist Hat Trick

carObama Said To Conclude Bankruptcy Best Option for GM

March 31 (Bloomberg) — President Barack Obama has determined that a prepackaged bankruptcy is the best way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said.

The headline above was enough to make a “sick of the bailouts” capitalist rejoice.   Was the discipline of the free market system finally being allowed to work?  Sure sounded good until the GM bankruptcy option was shortly thereafter revised from “best option” to “likely”.

Obama Said to Find Bankruptcy Likely for GM

April 1 (Bloomberg) — President Barack Obama believes a quick, negotiated bankruptcy is the most likely way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said.

The president gave GM 60 days to come up with deeper cost and debt reductions than the biggest U.S. automaker proposed in its plan submitted last month.

“The president’s position has not changed,” a White House official said. “He remains committed to a significant restructuring without a bankruptcy if at all possible.”

It’s hard to believe that all three of the above contradictory statements were all in the same article.  Obama wants a quick bankruptcy but gives GM 60 more days to reinvent itself while a White House official stoutly maintains that Obama does not want a GM bankruptcy.

Deliberate Confusion

This could all be very confusing until you realize that Obama’s “bankruptcy plan” for GM is merely a socialist hat trick motivated by polls that show over 60% of the public is opposed to bailing out the auto industry.   Politically, Obama is saying the right words but in the end there will be no bankruptcy for GM. Instead, we will have a bailout disguised as a restructuring.

Barney Frank, chairman of the House Financial Services Committee, in an interview with BusinessWeek late last year, was at least honest enough to tell us what the government’s real position on GM is when he said “Well, in the first place, it’s hardly the American way to just let people go bankrupt”.  Barney Frank was attempting to define  capitalism as socialism, but that’s another story.

Likely GM Outcome

Once the confusing clouds of doublespeak dissipate, here’s the most likely ending to the GM disaster.

-GM will come up with a magical plan within 60 days showing deep cost reduction, debt restructuring and a return to profitability within 2 years.  The government will decide that bankruptcy is not necessary after all.

-GM bondholders will be beaten into submission by the Government and given two options – accept pennies on the dollar for all debt or receive an equity position of dubious value in exchange for debt forgiveness.

-The unions will do their part with token concessions and happily avoid any bankruptcy ordered pay or benefit reductions.  Those GM employees given early retirement or let go were offered billions in severance and benefits; don’t expect those still employed to accept major wage or benefit reductions.

-The United Auto Workers declare their support for the government blessed “restructuring”.

-GM receives major back door government funding disguised as subsidies or tax breaks for various actions deemed desirable by the government.  How about a government subsidy to GM for every “green automobile” that they produce?

-The American public is duped into believing that the GM problem is solved without a bailout until GM needs a bailout again.

-GM continues to suffer from its high cost structure and struggles to compete globally.

Does GM ultimately survive and become a financially profitable enterprise at some point?   Who knows – the more important question is can the American taxpayer survive?

GMAC Sets Example For TARP Borrowers

This past week the Treasury used $5 billion of funds from the Troubled Asset Relief Program (TARP) to purchase senior preferred equity in GMAC, the financing arm of General Motors.  GMAC reacted immediately to deploy the funds by lending to new car buyers with credit scores as low as 621.

According to GMAC President Bill Muir, “We got the TARP money yesterday and today we’re out in the marketplace offering it to consumers”.

AutoNation Chief Operating Officer Michael Maroone was equally elated noting that “We want to get out there and let people know that we can get them credit now.  There are plenty of people with credit scores in the 600’s who want to buy cars”.

GMAC was masterful in showing its appreciation for taxpayer dollars by its quick lending, thus avoiding the criticism the banks received for not lending out their TARP funds.  The Treasury will, no doubt, show its appreciation by supplying GMAC with billions more as soon as possible.

The Treasury should reflect on the following points before advancing GMAC additional funds.

  • A credit score in the low 600’s is sub prime.  You earn such a score by paying late and taking on obligations in excess of your ability to repay.  A low 600 credit score reflects a financially stressed consumer, typically with little in the way of savings and in need of constant new credit to pay off old credit.   Any consumer in this category should think twice about buying an expensive new car.  What they should really be doing is trying to save some money, pay down some debt and visit the used car lot.
  • The free market was not providing car loans to sub prime borrowers for the reasons listed above.  The TARP fund is essentially subsidizing car loans, at taxpayer expense, so that customers who couldn’t buy a new car based on their low income or credit score, can now do so.
  • AutoNation’s Mr Maroone is certainly correct when he states that there are plenty of sub prime borrowers eager for loans.  I doubt very much that Mr Maroone would personally lend money to a sub prime borrower because he knows better.  Lending taxpayer bailout money, on the other hand, is apparently a great idea.   Have we already forgotten the results of lending to sub prime mortgage borrowers?

If the government really wants to get the lending machines running again, they now know where to go especially since GMAC also makes mortgage loans through its ResCap subsidiary.  Here are the results of GMAC’s mortgage operation:

GMAC mortgage lender’s future in doubt

courtesy of Reuters

The Residential Capital LLC affiliate of automaker General Motors Corp (GM.N) may soon join the ranks of U.S. mortgage lenders that failed to navigate the deepening housing crisis.

The specter of a ResCap failure grew after parent GMAC LLC on Wednesday said “substantial doubt exists regarding ResCap’s ability to continue as a going concern” absent more support from GMAC, best known for lending to GM customers.

Christopher Wolfe, an analyst at Fitch Ratings, added: “If GMAC can’t provide support that ResCap needs, then bankruptcy is an option for ResCap.”

The lender has lost $9.1 billion in the last two years, and said that as of September 30 it wasn’t receiving interest payments on 21.8 percent of loans, up from 5 percent a year earlier.

“We can only describe credit quality trends as ugly,” CreditSights Inc analyst Richard Hofmann wrote.

“With equity down to $2.3 billion, clearly ResCap cannot survive much longer at its current quarterly loss rate,” he added. “Absent of any government support, we believe GMAC’s statement points toward the filing of ResCap for bankruptcy.”


Lending more money to those least able to repay guarantees financial losses on a colossal scale.   In the very short term, Government subsidized lending may give the economy a modest boost.  In the long term, such reckless lending will result in the insolvency of our nation.