Wednesday, August 25, 2010
Did Cash for Clunkers Succeed?
Well, I guess it depends on your definition of "succeed." I theorized in earlier posts that the main impact would be to push demand forward, but not increase demand for cars as a whole; that would only happen when the economy as a whole improved and employment began to increase. The chart above seems to confirm my theory. As the seasonally adjusted annualized home sales come in, I think we will see the same phenomenon. The astute might ask why we spent all that money on cash for clunkers if it had such little impact on overall demand for cars; I think it was to make the politicians feel good about taking action and doing what they could to help salvage the taxpayer's investments in GM and Chrysler. Burton Abrams and George Parsons of the University of Delaware added up the total benefits from reduced gas consumption, environmental improvements and the benefit to car buyers and companies, minus the overall cost of cash for clunkers, and found a net cost of roughly $2,000 per vehicle. Rather than stimulating the economy, the program made the nation as a whole $1.4 billion poorer. A report on Edmunds Daily, a car shopping advice service website, states that used car buyers are paying on average $1,800 more on their purchases. On larger-sized autos it’s even higher. So lower-income folks have been hurt by the cash for clunkers program as well. It's too bad we destroyed all those used cars that still had a lot of life left in them. The perceptive will recognize this program as a real world example of the Broken Window Fallacy.