Market Signals from Cash for Clunkers

My view about the Us government's stimulus programme is that it really did help the economy from a faster slide and a worse crisis. In spite of this general approval, I was most upset by the support for banks considered too big to fail on the one side and the support given to US-domiciled car manufacturing companies based in Detroit. To my mind, there was no justifiable reason to save firms that were out of touch with their main customers and produced cars that nobody bought.

As if that was not enough, the stimulus plan had this bright idea of subsidizing US citizens who wished to but new fuel-efficient cars. By all accounts, this part of the stimulus has also been successful and has had to be shut a little earlier than initially anticipated. For all its successes, this NYT piece leads me to surmise that the way in which the plan worked out showed very strong consumer choices. Two facts stand out. The first is that a majority of the cars purchased by US citizens taking advantage of the subsidy were Asian made. This stresses the fact that even with a subsidy, fewer US citizens are willing to buy the cars manufactured by some of the US firms that benefited from a subsidy too. Secondly, the cars that have been surrendered under the programme are also overwhelmingly those produced by the same US car makers. Essentially therefore, there is some kind of substitution away from some of the US manufacturers towards the Asian cars.

To my mind, the lessons are clear here. The Detroit corporations have some carching up to do and it may even be too late for a number of them.