Kass: Cash for Clunkers Is a Junker

This blog post originally appeared on RealMoney Silver on Aug. 4 at 8:50 a.m. EDT.

From my perch, there is far too much hyperbole surrounding the cash-for-clunkers program. Not only is the size of the program small ($2 billion-plus) relative to the scale of a $10 trillion domestic economy and a $750 billion-plus fiscal stimulation program but, similar to the euphoria and outsized market response surrounding the second derivative economic recovery (which followed the unwarranted depression in March 2009), the Car Allowance Rebate System (CARS) program is not an economic sine qua non.

CARS will provide a modest boost to third-quarter 2009 GDP and will contribute to a lower-than-anticipated CPI. According to Goldman Sachs, "With auto production comprising around 1.1% of GDP, the boost (from the CARS program) from 9.6 million over the first half of the year to 11.2 million would add 0.6 percentage points to annualized GDP growth in Q3 if this level of sales is maintained through the rest of the quarter and production rises in line."

CARS is a popular program that appeals to consumers and to our government officials who are elected by those consumers. It will no doubt serve to further buoy consumer-confidence levels. I fully recognize that the CARS program provides a psychological positive, which, however fleeting, is important in these times, as it can become psychologically self-reinforcing to the consumer. After the initial positive effect on production (and confidence), however, CARS (unlike other programs) will likely neither be enduring nor supportive of a self-sustaining economic expansion.

Most consumers who are participating in the program are taking on additional financing, the timing of which might be suspect as most consumer balance sheets have yet to be repaired. Moreover, the ultimate termination of the program could heighten fears of an economic double-dip as CARS program 2009 buyers borrow from 2010 automobile sales.