China Grew Auto Sales 25% Last Month so Why Can't We?

I sat down at the dinner table last week with my wife and told her that I plan to do exactly what the government incents me to do in this recession. Which at this point so far in 2009, is to put over 20% of our income, including retirement contributions, into FDIC insured savings account and CDs. I fear our behavior is probably similar to every other family that has been lucky enough to keep their jobs -- our own personal savings rate is up and our consumption is down. We're eating out less, cutting back on buying clothes and electronics, using airline miles vs. buying tickets for both unreimbursable business and personal trips, etc.

Still, being the consumer that I am at heart, I told Lisa, my wife, that I'd love nothing more than to buy a new car or two for the businesses this year (we currently make do with one personal vehicle that we expense miles on). But why should we spend a penny if we're not incented to do so and would rather save given the precarious state of the economy? Seriously, refunding the sales tax on the purchase, which does not even apply to us because the profit from our businesses takes our personal income up to a level where we're not considered "working Americans", is not a stimulus. Rather, If Obama really wanted to spur demand for new car purchases, he'd follow China's lead by providing a massive tax incentive to purchase vehicles.

According to the above-linked Bloomberg article, China's "vehicle sales surged 25 percent in February, the first gain in four months, after the government cut ... retail taxes on small cars and [drew] up plans to give out vehicle subsidies in rural areas to revive demand after auto sales rose at the slowest pace in a decade last year". Compare an overall "two month 2.7%" year-over-year gain with the US which saw a "39 percent decline" over the same period. If Obama followed the Chinese strategy directly, or let businesses like ours expense or depreciate an entire vehicle cost in a single year, we'd probably spend $60 grand for two new cars this year. But instead, we plan to make do with what we have.

Of course you could argue that married couples like Lisa and me do not need business or personal tax incentives. We should just spend for the sake of it. And the government should fund entitlement programs, job re-training, etc. for those who need it most. But this type of thinking is exactly what is going to prolong the mess we're in. If you take couples like us who are willing to pull the trigger on spending over $50K on two new cars if given a tax incentive to do so, think about the potential impact on the overall economy. We would keep workers in their jobs at OEMs. We would keep parts suppliers in business. We would keep raw material producers from cutting shifts. We would keep mines from shuttering capacity.

The impact is huge and the overall tax receipt impact is minimal. I roughly calculate that on a $30K car or truck, the government loses a few thousands bucks in tax revenue on an NPV basis over 4-5 years if I could expense the cost in a single year instead of depreciating it over its useful life with a small initial write-down (the current business tax treatment). Contrast that with the lost tax revenue from losing only a single job in Detroit. There are hundreds of thousands of small businesses like ours in America. Think about the potential impact if only 25% of people like us accelerated a significant purchase of a vehicle.

The concept of infusing working and non-working, poor, lower and middle income Americans with an extra few hundred dollars as a way to stimulate the economy has been proven to not work. When Bush did it, most recipients wisely paid down credit debt or put the cash into savings. Word came out late last week that the Obama Administration shut House Speaker Pelosi down on her recent call for a repeat performance. Now, if they'll just get smart around incenting those who do have some real cash to spend to do so -- which could potentially keep many people directly employed through only a handful of purchases -- perhaps we can compress a recovery and staunch some of the deficit spending, not to mention preserving union and non-union jobs alike. Maybe I'll see you at the car dealer in a few months. Otherwise, it will be at the repair shop. Either way, I'll continue to look at China as the country that wisely took the first chance to bring automotive spending back through the right set of incentives.

Jason Busch

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