The Impact of Cash for Clunkers Simplified

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.

The Economic Costs of Cash for Clunkers

The Wall Street Journal has consistently lambasted the Cash for Clunkers program the politicians love to crow about. Edmunds.com reports that each new car sold cost the taxpayers approximately $24,000 apiece, a pretty hefty price. In addition, Edmunds estimates that of the 690,000 cars sold the Cash for Clunkers program shifted 125,000 vehicles worth of future demand into the 4th quarter of 2009, and that the remainder of the cars would have been purchased anyway. The WSJ estimates the annual gas savings of the higher mileage cars to be roughly $350M for the "investment" of $3B. What is much harder to estimate is the economic costs of destroying all the productive vehicles that were traded in and the impact to the used car market.

After my oldest son totaled one of our old vehicles, I got some first hand knowledge on used vehicle prices. Cash for Clunkers dramatically reduced the inventory of used vehicles available for sale.  The Manheim Used Vehicle Index shows the steep rise in used car prices.  While part of the explanation for the rise is the stabilization of the economy over the past year, the other major factor is the reduction of supply.  Anecdotally, the used car dealer told me he was paying $1500--$2000 more for the same types of cars he was buying one to two years ago, and ad walked away from a number of actions with no vehicles because the retail marketplace wouldn't bear that prices he'd have to charge to make a profit.

At a macro level Cash for Clunkers was a redistribution of wealth from the US taxpayer to the car companies and the few citizens who purchased an auto under this program.   For those now in the market for a used car, the unintended side effect was to increase prices for some of the very people who can least afford it.

Relooking at Cash for Clunkers

This from today's Wall Street Journal editorial page:

Remember "cash for clunkers," the program that subsidized Americans to the tune of nearly $3 billion to buy a new car and destroy an old one? Transportation Secretary Ray LaHood declared in August that, "This is the one stimulus program that seems to be working better than just about any other program."

If that's true, heaven help the other programs. Last week U.S. automakers reported that new car sales for September, the first month since the clunker program expired, sank by 25% from a year earlier. Sales at GM and Chrysler fell by 45% and 42%, respectively. Ford was down about 5%. Some 700,000 cars were sold in the summer under the program as buyers received up to $4,500 to buy a new car they would probably have purchased anyway, so all the program seems to have done is steal those sales from the future. Exactly as critics predicted.

Cash for clunkers had two objectives: help the environment by increasing fuel efficiency, and boost car sales to help Detroit and the economy. It achieved neither. According to Hudson Institute economist Irwin Stelzer, at best "the reduction in gasoline consumption will cut our oil consumption by 0.2 percent per year, or less than a single day's gasoline use." 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.

The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, "Economics in One Lesson," you can't raise living standards by breaking windows so some people can get jobs repairing them.

In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.

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Couldn't agree more.... a tremendous waste of money and resources. Amazing that this is being touted by the pols as the most successful of the stimulus programs.... makes you wonder what the true negative economic impacts of the other stimulus programs are.

Projected Troubled Asset Relief Program funding of GM, Chrysler, GMAC and Chrysler Financial through June 2009: $79.3 billion.  (Source: Statement of Neil Barofsky, Inspector General of TARP, of July 21, 2009. )

 

GM ownership today:  US Government, 60.8%; United Auto Workers Union, 17.5%; Government of Canada, 11.7%.  (Source:  Edmunds AutoObserver.)

 

 

Cash for Clunkers Recharges US Auto Sales; Does Hangover Await?

Automakers received a boost in August sales fueled by the Cash for Clunkers program. Hyundai (+47%) and Ford (+17%) led the pack, while GM stalled out with a decline of 20%. The net impact of the program was to accelerate future demand into the current quarter, while increasing consumer debt. No question this was a sweet deal for those looking to purchase a car, but how detrimental will this be to sales in succeeding quarters?

For the $3B of taxpayer money spent on this program, the year over year sales comparisons are:

Hyundai: +47%
Ford: +17%
Honda: +10%
Toyota: +6%
Chrysler: -15%
GM: -20%

Interestingly enough, the two largely government owned enterprises performed the worst.

Now let's watch some perfectly good vehicles being destroyed:


Chevy Truck


Corvette


Volvo


Painful to watch, isn't it? I don't think this is what Schumpeter meant by "creative destruction."

Dr. Feelgood: My Take on the Cash for Clunkers Program

While the news media is celebrating the “success” of the Cash for Clunkers program and leading the cheer for additional funding, and it is hard not to argue that this buying spree is good for the car companies and on the surface a good deal for the car buyers, a deeper look at the program is required. I find it to be another shining example of short term gain for long term pain, the kind of stuff that politicians of all parties specialize in.

What on earth am I talking about, you ask? Your representatives in the government have decided that it is a good idea to borrow money in your name and against your future earnings to gift your neighbor as much 25% of the price of a new car and help the car companies companies, at least momentarily, rise from the ashes of the current recession. Whether you call it another bailout for the car companies or a subtle redistribution of wealth, the impact is the same: the government increases the national debt; purchasers are encourage to take on more personal debt; and car companies get a temporary lift in sales and postpone the painful, but necessary, decisions to streamline their businesses. All at a time when both the government and the citizens need to deleverage their balance sheets. In addition, viable, productive assets that are paid for are being taken off of the road in exchange for more debt. Isn't this the kind of artificial stimulus that got us into economic trouble in the first place? Where does it all stop and why are the auto dealers and manufacturers more deserving than home-builders, appliance companies furniture companies, technology companies, etc.?

The Senate may seem like they are waffling on extending the plan at the moment, but don't kid yourself: they will approve it, even if economic good sense says it should be rejected. This is actually one of the few stimulus programs that Congress has enacted that seems to be having the desired result of stimulating at least part of the economy. Think of how much money the taxpayers could have saved if the original stimulus bill had been better focused on actually stimulating something other than government.

Personally, I have no plans to buy any cars right now since mine are paid for and are still productive assets with many miles in front of them. I refuse to take on any new debt. I think the Cash for Clunkers program achieved its purpose of temporary political gain, but this bubble will pop like all bubbles pop and auto sales will fall back to levels dictated by market demand.