STRONGBRANDS    Professor Tim Calkins, Kellogg School of Management

Anyone who has run a business knows two things about short term discounts.  First, big discounts feel great.  Nothing buoys the spirits like a quick and dramatic jump in sales. Second, this happy feeling rarely lasts.  Once the discount ends sales inevitably slump, often for a prolonged period of time.  The only way to get things moving quickly is to do another round of discounting.

The Cash for Clunkers program was a classic bit of short term discounting.  People who bought a new car received up to $4,500 from the government.   While it ran this program felt great; people rushed to dealers and bought cars.  They did exactly what one would expect them to do.  The program had a rather impressive impact on the entire U.S. economy, contributing to the rebounding economic indicators and a rising stock market.  Everything looked great.

But ultimately Cash for Clunkers had to end; it was a costly and unsustainable program.  And now sales are falling.  The monthly auto sales results released last weeek were shockingly bad.  General Motors sales were down 45% versus year ago.  Chrysler sales were off by 42%.  These are simply stunning declines.

Cash for Clunkers didn’t fix the economy and it didn’t fix General Motors or Chrysler.  Sales at GM and Chrysler will only rebound when people feel confident enough to invest in new cars and believe that the GM and Chrysler brands are the best ones for them.  Last week’s sales results show that we are a long way from that point.