The market continued its rally today. This was in no small part to good news coming out of the government's "Cash for Clunkers" program. Most of the pundits out there are calling this a great success since this has risen auto sales month over month. Something that hasn't happened in a long time. But is everything really that great?
In short, no. I think the analysis that states that this marks the bottom of the recession is a little short sighted. The problem with any program like this is that its long term effects are hard to measure and almost impossible to see. While I have no doubt that the program had beneficial effects for the auto industry this month, its longer term effect is not so clear. One problem that a government provided subsidy like this poses is the same problem we have had for the last decade or so. What happens to auto sales six months from now when the money has run out? Will demand still be there for automobiles or will yet another government stimulus be needed? Are we just pushing sales to the near months and the expense of the far months? How many of these sales would have happened without the stimulus? Compounding the problem, we will all pay for this with interest.
What most people do not realize is that this is a simple transfer of wealth from all of us to those who are buying cars now. Government subsidies must eventually be paid for and that money comes from the income tax that we all pay. I know for many people, this seems like a good thing. I mean, it is free money right? Sadly, no. We all pay. Does that mean I think the program is a bad thing? Well the jury is out. Being pro-environment, I'm at least glad some of the cars being traded in are being taken off the road. But as an economic stimulus? Sadly, I think it will fail.