Life on the other side of cash for clunkers

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From Zeit Online (clunky translation mine):

In Germany the government-promoted auto boom is gradually coming to an end. Thanks to cash for clunkers (Abwrackprämie) the number of new-car sales in July was, at 340,000 vehicles, still 30% higher than the previous year’s level, reported the Federal Motor Vehicle Office (Kraftfahrt-Bundesamt) Tuesday in Flensburg. In June, however, the increase amounted to 40%.

Experts project that the politically engineered demand peak has passed, and in 2010 a collapse will follow. Altogether the government set aside 5 billion euros ($7 billion) to promote the purchase of new cars. According to researchers in Regensburg, that money-pot will empty not long before the Bundestag election (Sept. 27). At the moment there’s enough money left for about 300,000 clunkers—in all, two million buyers are expected to profit from the program. For the year 2009, cash for clunkers may drive auto turnover in Germany to a 10-year high of 3.5 million new vehicles.

The first thing that strikes me about this is how large the German cash for clunkers effort is in comparison with the American one. The U.S. program, if the Senate okays an additional $2 billion in funding, will cost $3 billion—or about half as much as the German one. But Germany’s GDP and its car sales in a normal year are less than a quarter that of the U.S. So Germany’s cash for clunkers spending is equivalent to about $30 billion here.

Then again, the purpose of the two programs is different. In Germany, the animating idea is to help a crucial, export-oriented domestic industry weather a collapse in global demand. So it’s okay if German car demand falls sharply next year, as long as global demand picks up. But if demand from abroad never returns to pre-2009 levels, and it turns out that what the German auto industry really needed to do was shrink, then the Abwrackprämie will have been a gigantic waste of euros.

The smaller U.S. cash for clunkers program is intended more as a kick start for an industry and an economy just beginning to emerge from a brutal recession. The idea is to get animal spirits flowing again, and money moving through the economy again. So while there will surely be some fall-off in demand once all the cash for clunkers money runs out, the size of that fall-off will be crucial in gauging the program’s success. If we go all the way back to the pre-July level of auto sales, then cash for clunkers will have been a (less gigantic) waste of dollars.

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