My friends in the trust and estate business refer to it as OPM, that is, Other People’s Money. How well do people spend other people’s money? The pat answer is “not as well as if they earned it themselves.” Thus, many of my friends believe that it is not a good idea for wealthy parents to give heavy doses of economic outpatient care to their adult children. However, the wealthiest parent of all, Uncle Sam, evidently doesn’t feel the same way about the downside of doling out OPM. Take, for example, the results of the recent Cash for Clunkers program. According to an article published in USA Today (11/9/09), “Breakdown of clunker swaps,” “the single most common swap: an old Ford F-150 pickup for a new F-150. Owners of that pickup were 17 times more likely to buy a new F-150 than, say, a Toyota Prius. The new pickups’ EPA combined city/highway mileage ratings ranged from 15 mpg to 17 mpg, depending on the powertrain and other factors, up 1 mpg to 3 mpg over the old ones.”
Uncle Sam had good intentions; he wanted his nieces and nephews to give up their gas guzzlers for highly efficient subcompacts. But many people who received this OPM merely went out and purchased a new vehicle which was nearly as inefficient as their clunker. Perhaps they are all thinking how clever they were and how stupid Uncle Sam was to entrust OPM to them! They did not violate the strict parameters of the program, but certainly did not adhere to the spirit of what the program was designed to accomplish. As interesting as this may be, there is much more to the Cash for Clunkers story.
When was the last time you paid full or near sticker price for a new car? Perhaps never! If the answer is never then I am betting that you did not participate in the Cash for Clunker program. According to an article written by Mark Rechtin “Clunker shoppers didn’t play hardball; margins soared,” published in Automotive News (9/14/09), “dealership profit margins for several brands more than doubled during cash for clunkers because many shoppers weren’t bargaining as hard as shoppers did before the program…. Consumers were convinced that a $3,500 to $4,500 incentive to trade in their clunker was a steal…so they didn’t seek to drive a harder bargain on their new vehicle purchase and left thousands of dollars on the table as a result….”
My interpretation is that many people who participated in the Cash for Clunkers program didn’t understand that they could still aggressively negotiate a significant price reduction on the car independent of the OPM from Uncle Sam. Others, and perhaps the majority, “left a lot of money on the table” because they felt that Uncle Sam was heavily subsidizing their purchase. So why waste time and energy negotiating a few more thousand dollars off the list? The gift of Other People’s Money in this case appears to have desensitized the recipients to the significant variations in price that were surely available at the time they made their purchase. Heavy doses of OPM often make recipients act in ways that are detrimental even to themselves, especially to their economic well being.