Why The “Cash For Clunkers” Idea Is Stupid

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In case you haven’t heard, Congress will soon implement a “Cash For Clunkers” program. If you trade in your old car, you’ll get $3,500 towards the lease or purchase of a new one. If you have an old SUV you’ll get $4,500. Seems like a good plan doesn’t it?

Yesterday I had a short phone call with Bob Meigan, VP of TurboTax and we discussed the short-comings of this program. First of all, your car has to be a clunker. That is it shouldn’t be worth more than $3,500 since you won’t get anything extra if it is worth more.  By law, the dealer will have to scrap the car so even if its worth $5,000 he’s not going to give you a dime more than the $3,500 he’s getting from the goverment.

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So basically you need to be driving something like a  salvaged car that you’ll trade in for a brand new one. Secondly, the salvaged car needs to be getting 18 miles or less ( I think its 16 for the SUVs) according to the EPA sticker when you first bought it. 

Don’t you think that people who are driving around worthless junk with terrible gas mileage are doing it becauase they can’t afford a nicer car? Do you think a $3,500 incentive will enable them to afford a new car? The incentive is probaly worth only $70/month over a 5 year period on a car loan – I’m pretty sure you’ll need to come up with the rest.

And in order to prevent people from gaming the system and buying salvage car for a thousand dollars and using them to get a bigger discount, the plan enforces that you must have owned the car for a year. (And the promotion only runs from July to November 2009).

So probably the only people who will be able to use this program are students who were driving around clunkers and now having found jobs despite the tough economy are looking to upgrade. However, these people would’ve bought cars anyway, so there’s no real stimulus to the economy or the car companies. Just another waste of time and money.

However, if you are in the market for a new car, remember you can deduct the sales tax this year.

Should Congress Bail-Out The Auto Industry?

I got into a lively debate yesterday with a fellow student about the bailout of the auto-industry. He said the social ramifications of letting them fail were too high. The impact on the local communities would be too high and so they should be bailed out by the tax-payers.

I said they were not cost-effective and there wasn’t enough demand for their cars to keep them in business. Even if the government gave them $25 billion, they’d plow through it and be back at the door asking for another handout. The government, too ashamed to admit it had wasted the first $25 billion would probably hand them another $25 billion. (This is called the Concorde effect, after the failed Concorde partnership between England and France which was a financial disaster).

I read some articles with also drew similar conclusions, but with different viewpoints.

In 2006, the average hourly wage of a person with a high school diploma was $13.46 per hour. For those fortunate enough to receive insurance and other forms of compensation, the average was $17.50 per hour in total compensation. These averages encompass all age groups.

However, if you are a Detroit auto worker with a high school diploma, your total compensation comes to: $67.78 (Ford), $70.43 (GM) or $72.59 (Chrysler) per hour.

That’s right, it cost Detroit 4-5 times more to hire unskilled labor! I think it’s the auto unions who are driving the US car manufacturers out of business.

I think its said that someone who spent 4 years in college and graduates with a student loan has to work for about $20-$25/hr while an unskilled worker makes more than that. Even grocery baggers in California supermarkets used to make $27/hr after working there for 7 years because of their union deal! That’s a pretty sweet deal if you can find it.

But moving on…

All of this brouhaha about bailing out the auto industry and how destructive it will be to the country – sounds a lot like the moans and groans of the steel industry (and steel unions) a few decades ago when the Japanese and Koreans were killing the U.S. companies with low prices for bulk steel. The biggies, like U.S. Steel and Bethlehem, went under.

And you know what? Small, progressive and aggressive steel companies arose in the U.S. – not for the cheapo junk steel, but for the better grades, for alloys and for hi-tech steels. And in a few decades, the industry bounced back better than ever. The U.S. was THE place to buy the good stuff. The Far East was where you bought the cheap bulk stuff. Did it ‘hurt’? Yeah, for a while, but you know, we got over it and came through it all the better. We just forgot what we learned.

How many innovative car companies do you think will start popping up in the U.S. when the dinosaur Big 3, and their fat-assed dinosaur management, are finally gone? I don’t think that innovation is completely dead in the U.S.; it’s just been shut down in favor of huge management bonuses paid for killing industries through blind stodginess. Let’s see, how many U.S. car companies were still trying to crank out SUV guzzlers when gas prices were scaling Everest? Let the dead die so that the living can grow.
Sorry, unions and union members, but the day is over that a dumb back can command a sizeable (read uncompetitive) wage and benefit package just for showing up to do a job that, in many cases, a monkey could be trained to do. Better get some education. The new companies will be high-tech – there will be plenty of jobs for those with a reasonable education and training. Dumb backs will get to clean toilets at a commensurate wage.

Hear that Fed and Treasury and Congress? Don’t waste money trying to resurrect dinosaur corpses. Put the money into opening up investment in new technologies, good products and well-run companies. Put the money toward training a labor force that can be part of competitive industries. And start the ‘do it or fail’ philosophy in the schools. First-grade would be good.

This reminds of an excellent book I read a few years ago called God Wants You to Be Rich: How and Why Everyone Can Enjoy Material and Spiritual Wealth in Our Abundant World. The author states the example of automated farming techniques introduced in the early 1900s, reducing the workforce required for producing food from 30% of the population to the 3% we have today. Did those people starve to death? No, they went on to find other jobs. I think society, (and by society I mean the US taxpayer) is better served by having an overpaid segment of society go find some other work to do.

And lastly, if the economics isn’t enough, lets look at how poorly managed these companies are.

The execs for the Big Three automakers each took private jets to their testimony before Congress yesterday. Average cost for the flight from Detroit to Washington? $20,000… Northwest had flights available that day for $288 coach, $837 first-class.

“It’s almost like seeing a guy show up at the soup kitchen in a high hat and tuxedo,” Rep. Gary Ackerman, a Democrat from New York, said of the dynamic trio. “Couldn’t you have downgraded to first class or something, or jet-pooled or something to get here?”

Maybe they should have driven?

The southern states make cars like Honda, Acura, and Nissan. They don’t have the high labor rates and are actually profitable car companies. Obviously they’re opposed to the bailout because it use’s their tax money to help the competition.

So what do you think of the car industry bailout?


How The World’s Cheapest Car Is Bad For Your Wallet

India’s Tata Motors just unveiled its 100,000 rupee car today. According to today’s exchange rate, that works out to $2,551 which makes it the world’s cheapest car. Its a small car, with a 624 cc engine and seats 4 adults comfortably. (If you’ve ever sat in a rickshaw, you’d have a slightly lower standard of comfort).

[Tata Motor's Nano: The World's Cheapest Car.]

This is good news of hundreds of millions of Indians who currently drive scooters and motorbikes and can now afford a car. The Nano costs about twice as much as a mid-range bike does. So you can expect it to wildly popular, especially in India and South East Asia.

Even though its very fuel efficient, at 76 miles/gallon in the petrol version (diesel version is expected to give you 92 miles/gallon) compared to the 195 miles/gallon you’d get from a scooter (& more from some bikes), its a rather large step down. This means that India’s consumption of oil is set to increase.

According to Peter Schiff‘s Global Investor Newsletter:

In 1900, we Americans were using one barrel of oil per person annually. By 1970, we were using 27 barrels per capita. At the end of World War II, Japan was using 1 barrel per person. By 1970, they were using 17. Today, China uses 1.3 barrels per person annually and India uses .7. The increased demand this similarity infers is staggering.

The standard of living for millions of Asians has been increasing dramatically over the past few years. The per capita consumption of oil is going to rise significantly as these people buy more cars and goods. If you believe that we’re at peak oil production already, this means that there is going to be a severe shortage of oil over the next years, which should lead to higher prices. Higher oil prices led to higher inflation.

According to Bloomberg, option traders are speculating that oil will hit $200/barrel in a year. While I think this is a long-shot, oil prices are likely to keep heading higher.

Oil is currently trading around $100/barrel. Why oil at the pump costs the same as when oil was $60/barrel is a bit of a mystery. Maybe the upcoming election has something to do with it? I really don’t have a clue. But so long as my Canadian Income Funds keep producing, I’m happy!

Click here for deals on a used bmw or used japanese cars.

Too Rich To Save?

According to a study by HSBC,

49% of respondents with at least $250,000 in income aren’t saving more because they simply “want some spending money.” In 28% of the cases for those who earn between $100,000 and $250,000, respondents say they do not save more because “something unforeseen always comes up.” And in nearly one in 10 situations, people who earn $250,000 or more say they aren’t even earning “enough to make ends meet as it is.”

I feel so sorry for them. 10% of people who make over a quarter of a million dollars a year, can’t make ends meet! That’s just amazing. Maybe they should sell their fancy watches, cars and downsize to a smaller house for a while.

Or maybe not being able to make ends meet has a different meaning for rich folk. Maybe it means you can’t take the $20,000/week vacation to Turtle Island in Fiji, or you’re going to have to fire one of the nannies. Maybe downgrade the Porsche to a more humble 5-series BMW.

More people who earn between $50,000 and $100,000 save consistently than people who earn between $200,000 and $250,000 per year.

I can’t comprehend how anyone without a gambling problem can’t make ends meet on $250,000 income. I guess it boils down to living beyond your means.

The best way to become really rich is to save, invest and keep re-investing the gains for as long as possible. Investing only 5,000/year for 35 years at 12% will let you end up with approximately $2.5 million. If you not able to earn 12% or you don’t have 35 years of working life left, you need to save more. Compounding really is the greatest asset available. If you only have 25 years to save, even if you can get 12% return, you need to save $17,000/year to retire with $2.5 million.

If you’re not going to save even 10% of your $250,000 income, you’re either going to retire broke or going to have to work past 65.

Being rich isn’t necessarily about having money or material objects. Its about having the freedom to do whatever you like. (like Paris Hilton, only she’s not rich enough to stay out of jail. For that, you need to be Michael Jackson or OJ rich!)

The Object of My Desire

While blogging about saving money, making money and living frugally is all very fine, the whole idea is to get so damn rich you can buy any old crap you want. The object of my desire is the Ferrari Enzo. Only 350 were made and it costs around $700,000. While pretty ugly from certain angles, it looks like a space ship and packs a whopping 660 horses. Ferraris are expensive to maintain and require a transmission overhaul every 40,000 miles. So you have to be really really loaded in order to afford one. [Notice I said afford and not buy].

Something a little more affordable and probably just as much fun to drive is the new BMW M5. It packs 400 horses but at the touch of a button magically changes to 500! It won the highly covetted Internation Engine of the Year Award and costs a more affordable $85,000. Of course I won’t be buying one of these pretty soon [although my CPA might]. This should be more fun to drive than the Transporter’s 7 Series!

My next car is probably going to be the ultra cheap and fuel efficient Toyata Yaris which costs under $12,000 and gets upto 40 miles/gallon. However, if the wife will permit I may forgo this in order to get the new Dodge Charger. For $30k, you get a V8 hemi with 340 hp and 25 highway miles to the gallon! Now that should be fun to drive.

May be I’ll just have to make do with one of those bright red Ferrari Jackets for now!