Bank of America's Take on Cash for Clunkers

I love it when $3 billion in tax payer money goes to buy new cars for people. Here is Bank of America’s economists take:

Bad policy meet economic theory
Economic growth is usually defined as the expansion of a nation’s capability to produce the goods and services its people want. Therefore, growth depends on changes in the economy’s potential for production and the extent that capacity is utilized. This leads to the first problem with the Cash for Clunkers program. As the new vehicle is purchased, the trade-in vehicle is destroyed. In other words, under the CARS program, there is no addition to the capital stock. The investment undertaken is simply replacement demand. Secondly, while manufacturers will have to increase production to replace the sold vehicles, the boost to production will have only a temporary impact on the economy. The third problem with the Program is that the removal of the clunkers reduces the supply of vehicles for the used-car market. This will raise prices for those who can not afford a new vehicle. The fourth problem with the Program is that for the consumers who purchased new vehicles, their balance sheets are degraded. In many instances, the trade-in vehicle was fully owned by the consumer. To acquire the new vehicle, the consumer either borrowed the money, putting himself further in debt, or paid cash, losing out on interest earned. In either case, the consumer is poorer. For those that still owed money on their “clunker”, they likely swapped a small debt for a larger debt. As we highlighted earlier, the Cash for Clunkers program may be good for the environment, but it is not good for the economy or the consumer.

Cash for Clunkers and the Economic Outlook
On August 6th, President Obama signed into law a $2 billion extension of the “cash for clunkers” program. Whereas the original program was set to expire on November 1, with the extension, the program expires around Labor Day. As with any temporary program, the impacts will be short-lived. We now expect real consumer spending on durable goods to increase an annualized 12.0% in the third quarter and decline an annualized 4.5% in the fourth quarter. Previously, we were projecting annualized gains of 9.6% for 3Q and 3.5% for 4Q. (Recall that the original program expired in 4Q.) As for real GDP, we now anticipate 3Q annualized growth of 3.0%, up from the previous forecast of 2.6%. Fourth quarter growth is now projected to be 2.3%, down from the previous estimate of 2.8%. Not a lot of stimulus for $3 billion.