The Truth about Cash for Clunkers

Leadership Decision Making and The Law of Unintended Consequences

Certainly you’ve heard the axioms “nothing happens in a vacuum” and “for every action there is a reaction” before. We’re pretty sure that every thinking adult not only understands these sayings, but also believes them to be true.

Cause and effect, means and ends, seed and fruit cannot be severed; for the effect already blooms in the cause, the end preexists in the means, the fruit in the seed – Ralph Waldo Emerson

RWE is correct, but he fails to mention that each cause actually has multiple effects; every mean leads to numerous ends; and that each seed can bear bushels of fruit. Cause and effect, like means and end, can imply both good and bad outcomes; and both scenarios – unlike the planting of a seed – often create results that are unintended and unforeseen.

The law of unintended consequences is not a new phenomenon, and it’s especially not new to government action. History has shown at every turn that government intervention, regardless of the benevolent intention, leads to numerous unforeseen and unintended consequences. Certainly, some of the outcomes are beneficial, though the vast majority are not.

The Truth about Cash for Clunkers and The Law of Unintended Consequences

In a nutshell, the US Government created a program that requires taxpayers to spend $3 billion help 750,000 people to buy a new car. The program, officially the Car Allowance Rebate System (CARS) though more commonly known as Cash for Clunkers, was created solely “to energize the economy; boost auto sales and put safer, cleaner and more fuel-efficient vehicles on the nation’s roadways” – this, according to the government’s official website.

While nearly everyone in Washington was breaking their arms patting themselves on their collective backs after just two weeks of CARS, the truth is that this program, like all government programs, has already spawned numerous unintended consequences (and none of them positive). Here are just a few:

  • Kelley Blue Book analysts are predicting a bubble in used car prices as a result of the CARS program. This means the cost for a used car is going to be higher, creating a burden on the working poor and lower middle class.
  • Charities are reporting that donations of used cars are down 20% since the start of the CARS program.
  • Already hurt by the economic downturn, used car lots are seeing an additional 20% drop in sales since the beginning of the program – these lots are more often owned by local businesspeople and not large corporations.
  • Some independent auto repair shops – precisely the kind that would service an older car – are reporting up to 25% decreases in their business.
  • Because of the increased demand for many models, car dealers are not discounting beyond the required manufacturer’s rebate. This means that all consumers are paying more for these models.
  • Economists blame the drop in overall July retail sales on the CARS program; arguing that consumers spent on new cars, but cut their spending elsewhere – deepening the recession the program was meant to help stop.
  • The top new model sold so far under the Cash for Clunkers program is an SUV – the Ford Escape – and two large trucks (Ford’s F-150 and Chevy’s Silverado) and a Jeep are among the Top 10 new models sold. (Hardly the pro-green movement for which the government was hoping.)
  • 750,000 working automobiles will be taken out of service and replaced with 750,000 new vehicles. The process of manufacturing each new car (when you account for the acquisition of all material required) is a much more polluting proposition than driving each old car until its natural demise.

It’s clear that Cash for Clunkers will do little, if anything, to stimulate the overall economy; but what about the nation’s car dealers and manufacturers? While dealers are making more per car sold and manufacturers are seeing their inventory backlogs shrink, both of these benefits will likely be short-lived.

The increased demand created by the CARS program cannot be sustained without better economic news. The dip in overall July retail sales signals to us that the end is not as near as we had all hoped. Instead of kick-starting the US Auto Industry, Cash for Clunkers likely pulled ahead many consumers who would have purchased later this year and in 2010. This means many dealers should look for softer than expected new car sales from September through the end of the year.

For the manufacturers, it seems they never learn. Ford announced this week that as a result of the “success” of the program they are ramping up production in the US. While this should be good news for the economy, it likely signals that Ford will be cutting production more than usual this November and December. Rather than enjoying the higher prices brought on by the momentary (and sure to be short-lived) spike in demand, Ford plans to run with the standard Detroit playbook and chase demand by building more cars, trucks and SUVs in the next couple of months. It’s as if Ford is proclaiming “Forecasters be damned, the recession is over.”

The leadership lesson in all of this is that the world is always more complex than it seems on the surface. Whether we’re talking about the US Economy or the five people in your workgroup, there is an equilibrium that must be considered before major changes are enacted. Understanding how these changes will affect all stakeholders is an important first step towards reaching your goals; but it is only a first step.

It is equally important to make assumptions about the unintended consequences that will inevitably define the success or failure of any major project, program or transformation. While you’ll be wrong more often than you’re right, just knowing that unforeseen outcomes are expected will make you a better leader – if for no other reason than you’ll be better prepared to manage the unanticipated results.