Summary

Retailers now face competition from what Europeans call "Crown Corporations", i.e.,  companies that are controlled by the government, like General Motors and Chrysler.  Here's why retailers are likely to be the losers.    

Analysis

Many retailers like Kohl's and Walmart reported disappointing sales and quarterly earnings only weeks after the US government pumped another $2 billion into the largest car sales subsidy in US history. The rationale, artificially prop up auto sales using tax payer money to encourage consumers to buy new cars rather than other products like homes, apparel, CE goods, and of course jewelry. Analysts say the average car buyer will take on an extra $400/month in debt payments in the process. 

As usual, there are other underlying reasons for subsidizing car sales. For instance, fuel efficiency, new car purchases have to achieve at least 1 mpg more than the car they are trading in and be on a government’s list of approved models.   Moreover, the cars traded in must be scrapped so they can’t reenter the market.  The result, consumers get a deal on cars they wouldn’t otherwise buy, car companies build more cars, and the US car fleet uses less fossil fuels. Sounds too good to be true right, but, there is a catch, the plan probably won’t accomplish any of those lofty goals and in the long run delay the recovery. In the interim, it will distort the whole supply-demand curve for discretionary income products and that’s bad news for retailers this fall.
 
Realistically, any time big government interferes in America’s free market system it gets it wrong and usually makes things worse. For instance, according to one critic’s article, it remains to be seen if the program will actually create any new wealth, but rather redistribute sales from one retail sector to another.   Second, critics say the destruction of all the “clunkers” will reduce the availability of used cars by at least 5%, which is enough to increase materially the price of remaining used car inventory. Of course, that diminishes the discretionary buying power of lower income consumers that usually buy used cars and have the most to lose from higher prices.  Effectively, a bill from the government, that isn’t a tax, even though it has the same effect of decreasing disposable income.
 
Whether manufacturers will actually produce more cars is problematic too. No one wants to rehire laid off workers and reopen factories only to start the shuttering process again several months later when demand crashes. Pragmatically, auto sales will decline when the subsidy is depleted and what’s worse; the decline will be even more severe because future month’s demand will have been cannibalized by the “cash for clunkers” subvention.  
 
Moreover, US car manufacturers may actually lose more market share to foreign car companies because of the government subsidy. That’s because General Motors and Chrysler shut down existing factories during the bankruptcy process, while foreign car company’s plants remained open. Add foreign dealers have more high mileage models on government lists and its clear non-American car companies may be the big winners in this contrived gambit to game consumer demand.   However, the subsidy’s failure doesn't stop there.
 
For instance, there was the hypothetical benefit from higher fuel efficiency that “cash for clunkers” framers said would decrease fuel consumption. That’s the theory anyway. But, the experts disagree, saying that instead of reducing fuel consumption, research shows buyers of subsidized cars will drive twice as many miles than they drove in their old “clunkers”. So unless the car substitutes are twice as efficient as their “clunkers”, more, not less, fossil fuel irritants will end up in the air.  

So much for public perception, what’s next as this policy disaster unwinds? It will be touted as just another example of the “Law of Unintended Consequences”. Still, the gap between what politician’s say will happen and the practical realities of what actually happens are growing larger daily. At best, this suggests the consequences are less unintended that many imagine, at worse, they are well known to politicians who are indifferent provided their version of a greater good can be achieved without diminishing electability.
 
Another equally insidious reason could be legislators is gaming their own system. For instance, the failure to read the TARP legislation, Stimulus 787, or the various health care bills (there are at least two) provide “plausible deniability” for legislators, while, tens of thousands of pages of regulations that are the substance of all legislation are left to hundreds of party ideologues and department level assistants to write. Little surprise the results often bear no resemblance to public perceptions. 
 
The point, despite public assurances that government’s pervasive interference in our free market system is benign, choices are being made that will influence which industries survive and eventually, maybe who will live and who will die. It’s no coincidence Bear Stearns and Lehman Bros went out of business, while Goldman Sachs prospered. The fact is governing is about making choices about who will prosper and who won’t.   It’s about allocation of resources, which ultimately determines who will win and lose. It’s also about creating political capital, which means once the ruling party has “skin in the game”; it can’t afford to lose, even if’s its policies hinder recovery. Why? Because, notwithstanding lofty ideals, eventually it’s not about the better good for all, but the singular good for some, which by definition means staying in power. 
 
Coming full circle, retailers have to ask what’s next, because there will be a next and that will most certainly mean even more “unintended consequences” too, if government has its way. 
 

Analyses are solely the work of the authors and have not been edited or endorsed by GLG.