Another Painful "Reality Bites" Issue

Ah yes! The Cash for Clunkers issue just keeps giving...sorry about that...but this program provides such a wonderful learning tool.

Today, let's speak to an economic principle we call "consumer conditioning."

This principle tells us that consumers, like you and I, are actually able to learn and to adjust their buying habits to their own interests. Pretty shocking concept...we do what we feel is best for us...not best for producers or government.

Cash for Clunkers is a perfect example of how to condition consumers. First off, the bait is pretty darn good...up to $4,500 given as a virtual gift to entice one to buy a new car. This is not the sort of gift we take for granted, or just shrug off. WE WANT THE MONEY! AND WE WILL CONTINUE TO WANT THE MONEY!

Therein lies the problem. Car companies and dealers wanted this program to help "kick start" car sales. It did that for the first 4 days until the money ran out. What happened then? Did sales continue? We're they "kick started"?

Well...duh...no! Shoppers came in...found out there was no more money...then went home to wait until more funds were allocated to the program.

Should this have surprised anyone with about a week's worth of business experience?

Of course not! The prospective buyers came in the door wanting their $4,500. When the money wasn't there, they went home. Then sure enough...a week later the funds came through...twice the amount as in the first package.

Oh joy! The dealers are excited...the buyers are again showing up...but this time the dealers are sharing an uneasy feeling. They have begun to realize that consumers are now getting conditioned. In other words...when this money runs out...no one will be coming in the doors. Prospective buyers will sit at home and wait for more money to come in.

It won't matter how adamently the government, or the dealers, or the car makers, insist and advertise that the money is never going to be coming...the consumers will stubbornly wait.

So the government might cave in again...consumer behavior will then be set in concrete. It could be years before folks give up and figure they will just have to pay full price for their new cars. Car sales, in the meantime, will hit all-time lows and will devastate the industry.

The short burst of sales enjoyed by the industry will be just that...a slim ray of sunshine before the industry collapses under this shortsighted promotional gimmick. It's easy to believe government people thinking up this program...it's hard to understand why industry personnel would not have tried to stop the madness before it began. Of course, that lack of awareness could help explain why the industry was having problems in the first place.

But to replace those original sales figures, which were down by a few percentage points, with this uncertain future, shows a lack of business acumen normally seen only in government agencies, and particularly in this administration.

The Professor