The recently announced September auto sales data demonstrates the absurdity of the Cash for Clunkers program as “stimulus” and illustrates how effective the Government can be at distorting consumer behavior through deficit-financed subsidies to no positive result.

September US auto sales declined by 23% as buying a car became far less attractive when the purchaser was not being paid $4,500 to do so.  GM’s sales fell 45% and Chrysler’s declined by 42%.

Remember those heady days when cars were flying out of the showrooms and the auto industry was experiencing a much needed “recovery”?  In reality those sales were a distortion of efficient behavior and in most cases simply adjusted the timing of planned car purchases at taxpayer expense.  

Today no reasonable person would argue that the auto industry is experiencing a recovery.  Yet the same kinds of distortions are being generated within the housing industry and the broader economy and many pundits argue that the subsidized consumption is a sign that a recovery is underway. 

Cash for Clunkers was a disastrous waste of money which increased the deficit and resulted in a net destruction of the nation’s capital/wealth. 

Despite protestations to contrary, there is no real housing market or broader economic recovery other than a stabilization of the capital markets (which is not independent of Government subsidies and may prove to be fleeting).  There is only the Government paying people to behave in ways they otherwise wouldn’t.  Stimulus checks, subsidized mortgage rates, Cash for Clunkers, trillion dollar spending plans and $8,000 tax rebates for new home purchases.  But they are all the same animal.  Deficit spending used to subsidize consumer purchases accomplishes nothing but to temporarily obscure reality.

When the Government’s auto subsidy lapsed, car sales collapsed.  We can expect the same result as housing subsidies fade or the beneficial impact on demand is exhausted.  Unlike cars, the housing reversion will be in the form of a resumption of declining prices.  And since many of the Government’s subsidies are indefinite, the slide will be far more gradual.  This process may have already begun as Bernanke’s $800 billion mortgage rate subsidy has been exhausted and the house buying season has come and gone.   


Have you ever wondered what your house would be worth if ALL Government subsidies were eliminated?  How many Americans do you think could afford a 20% or higher down payment to buy a house if the Government wasn't inappropriately making highly leveraged loans available to anyone with a pulse?