Cash for Clunkers...SA style!

The number crunchers at Ernst & Young, that bastion of intellectual rationality and prudential fortitude, have just slipped a good many rungs down my rickety ladder of esteem.  According to Business Report today, E&Y has called upon government

“…to provide a scrapping allowance on old vehicles, similar to the taxi recapitalisation programme, to boost demand for new vehicles as the motor industry flounders to recover from the economic recession.”

Ernst & Young’s head of assurance in KwaZulu-Natal, Louis Pillay, said:

 “The motor industry is a crucial part of the South African economy. Intervention that creates production and stimulates demand is essential to retain jobs and continue bringing revenue into the country’s coffers.”

Does this ring a bell?  C’mon, you almost got it… Bingo!.  CASH FOR CLUNKERS… or in SA terms, CASH FOR SKADONKS!

Yip its true.  SA’s very own version of the biggest waste of money in motoring history  (probably.  maybe not.  GM bailout right up there but let’s keep focused) …Maybe E&Y figures that whatever Obama figures will add up to good figures must also figure out in SA, or something.  So one of SA’s chief figurers has got on board the Keynes-Obama-stimulate-everything-till-you-drop train…

The plan in a nutshell is this: 1) government pays people with old gas-guzzling, planet-hating, falling-apart-at-the-seams, road hazard beasts to surrender them in to be destroyed/trashed/ended. 2) People take the money (obviously more than they could have sold the monster for) and use it for a downpayment on a brand new planet-loving, metro-sexual, 4000km/litre, Asian-made transportation unit of the 21st Century. 3) Car makers sell more new cars.  4) The world is a better place, the local car industry is rescued from the pit of doom, and the economy recovers.

The plan in reality is this: 1) government takes money from some people and gives it to other people with old cars. 2) to fund this government gets us all in more debt, or taxes us more, or cuts spending in some other area of the economy. 3) the people with old cars take their cars to professional destroyers of cars. 4) Useful, productive capital is destroyed, wealth is lost.  5) People take the money and buy a newer more expensive car, get into more debt, and boost the sales of efficient Asian-made vehicles.

6) The used car market is pushed out of equilibrium.  Supply falls rapidly, prices jump.  Poorer people looking for used cars have to pay more.  Fewer used cars mean they either use buses/taxis or buy cheaper new cars.  Bus/Taxi fares go up.  Cheap new car prices go up. 7) Car makers initially sell a stack of new cars, then the real underlying demand conditions set in an sales drop again. 8) The additional capacity used to make cars for the ‘new’ demand has to made redundant again.  People get retrenched, again. 9) The economy is worse off because there are fewer used cars for those who need them.  Used car prices are higher.  Useful, productive capital has been destroyed.  Car makers make mal-investments.  Public debt is larger.

We can only hope that no-one is paying attention to E&Y.  Unfortunately we are not so sure about this.  Government is often all too happy to heed advice like this from such esteemed bean-counters.  The old axiom that “as America goes so goes South Africa 6-12 months later” appears to be holding very true throughout this recession. 

If SA copies America on this one, we’re all worse off in the end.