Financial Planning Blog

I have to admit a warm feeling of vindication at the end of last month when Edmunds.com reported the findings of their team of "PhDs and statisticians" who reviewed the recent Cash for Clunkers program. I was critical of CARS (the Car Allowance Rebate System was the official name of the federal giveaway program) when it was first announced, but felt a little overwhelmed by the positive media hoopla during the summer. The Edmunds analysis showed that of the almost 690,000 new autos sold during the program only an estimated 125,000 were truly incremental sales. In other words, the other approximately 565,000 autos would have been sold anyway, either during the summer or in the months to follow. When you apply the $3 billion cost of the rebate program over these 125,000 incremental sales, they arrived at an average cost of $24,000 per new auto.

This analysis certainly didn't cast a favorable light upon this poster child of the federal stimulus program. The White House was quick to respond, and other economists have criticized the Edmunds report. This Planet Money podcast gives you both sides of the story. It just goes to prove the old adage, that for every two economists you'll have three different opinions.

Besides the general problem of adding to the huge budget deficit with arguably inefficient program designed to help a small subset of the population, I thought the program was particularly wasteful in requiring the demolition of the vehicles traded in. (There was an environmental argument for this--just not a good enough one to convince me.) Now we see the impact of shredding hundreds of thousands of functional used vehicles in higher used car prices. Basically, we use taxpayer money to prop up prices in the auto industry, making it more difficult (i.e. expensive) for consumers to find good used cars.

The criticism of the government's attempt to stimulate the economy certainly doesn't stop with Cash for Clunkers. Read this economist's critique of the tax credit for home purchases (now extended beyond first time homebuyers) that appeared in the Washington Post. They claim the tax credit is an inefficient stimulus, and cite costs of $43,000 to maybe $80,000 per incremental home sale. The tax credit, along with other favorable tax treatment of property ownership, effectively keeps housing prices artificially high. If you are a homeowner artificially high prices may sound good, but it does have negative consequences to others and the economy in general.

Which gets me to my main point--if we are going to borrow money to fuel the auto and housing industry, along with bailing out big banks and insurance companies who took imprudent risks, can't we find a more beneficial way to stimulate the economy? You may laugh at the idea of subsidizing financial planners, but none other than Robert J. Shiller (the famous Yale economics professor and author of Irrational Exuberance and other books) proposed this back in January in a New York Times editorial. Of course, I'm thinking this is a pretty good idea--especially for my personal economy. However, even though the idea is wacky and isn't going anywhere, Shiller made some worthwhile points that speak to the value of objective, financial advice and education. He cites recent studies about consumer financial literacy and how many are exploited by lenders or other financial service providers.

But in some areas, notably personal finance, it is important to recognize that a good share of Americans have difficulty figuring things out. Most people get financial advice only from sales representatives of one sort or another: real estate agents, mortgage brokers, sellers of financial products. Some of these providers could use their sophistication to exploit people's tendency to behave irrationally, and to manipulate the judgment errors that consumers typically make. And competitive pressures tend to make providers promote products that exploit those errors to the hilt, unless, of course, we offer consumers real financial advice.

He goes on to explain how a subsidy for quality financial advice, provided by practitioners who are loyal to the client (i.e. fiduciaries) and whose objectivity is not tainted by commissions or kickbacks, could have helped many and reduced the severity of the housing bubble. He ended with this observation:

Professional financial advice is now generally accessible only by the relatively wealthy. Changing this would be an important corrective step. Giving the general public access to trained advisers would be a boon for the nation in this time of doubt and distrust.

This sounds like a commercial for the Garrett Planning Network and Table Rock Financial Planning--dedicated to making competent, objective financial advice accessible to everyone.