Framing the Dialogue

Update – Cash For Clunkers

Cash For ClunkersMuch has been written about the notorious Cash For Clunkers program.  Supporters relished in the fact that it was very popular and spurred automobile sales.  It should not be a surprise that a program that gives money away will be popular (at least to those getting the money) and should increase sales.  Opponents claimed that the program was a waste of money and rewarded people who probably did not really need the money and eliminated thousands of serviceable cars from the secondary market.

Here were are several months after the program and some of the results are in.  Nearly 700,000 claims were submitted under the program totaling nearly $3 billion.  Two American cars were in the top ten and both were Ford models.  Isn’t Ford the only American-based auto company that DID NOT take government money?  The top ten cars purchased were:

  1. Toyota Corolla
  2. Honda Civic
  3. Toyota Camry
  4. Ford Focus FWD
  5. Hyundai Elantra
  6. Nissan Versa
  7. Toyota Prius
  8. Honda Accord
  9. Honda Fit
  10. Ford Escape FWD

So what “clunkers” were taken off of the road?  It might not surprise you to learn that all of the clunkers were American made(Ford Explorer 4WD, Ford F150 Pickup 2WD, Jeep Grand Cherokee 4WD, Ford Explorer 2WD, Dodge Caravan/Grand Caravan 2WD, Jeep Cherokee 4WD, Chevrolet Blazer 4WD, Chevrolet C1500 Pickup 2WD, Ford F150 Pickup 4WD, Ford Windstar FWD Van).  Sounds like this was a program that stimulated the economy…in Japan.

No word on how the used car market was affected when the 700,000 used cars were destroyed and not available for purchase by folks looking for lower priced used cars.  It should be noted that these people are usually comprised of lower income folks who cannot afford new cars (even with incentives) and young, first-time car buyers.  Any guess what happens to prices when you decrease supply and there still is a demand?

key_art_edmundsRecently the automotive company, Edmunds, evaluated the clunkers program and their findings were not very complementary.  Edmunds calculated that each clunker actually cost taxpayers $24,000 which is much higher that the $4,500 figure often used in the media.  The basis of this conclusion was that the clunkers program only increased automotive sales by 125,000 vehicles and that the other sales would have happened anyway.  This is supported by the lull in automotive sales since the program ended.  David Tompkins, PhD, Senior Analyst for Edmunds.com was quoted, “Our research indicates that without the Cash for Clunkers program, many customers would not have traded in an old vehicle when making a new purchase.  That may give some credence to the environmental claims, but unfortunately the economic claims have been rendered quite weak.”

In a related story, the country celebrated in an announcement of a 3.5 percent growth in Growth Domestic Product (“GDP”) for the third quarter.  Stocks prices rose and the White House patted themselves on their backs.  This story is tied to the clunker program because nearly half of the jump was directly due to the clunker program and the future outlook may not be as rosey as reported by the Wall Street Journal

The White House of course attacked Edmunds.com for daring to criticize one of its programs.  In a statement by Bill Adams, spokesman for the Department of Transportation; “It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program that sold nearly 250,000 cars in its first four days alone.  There can be no doubt that CARS drummed up more business for car dealers at a time when they needed help the most.”

I find it funny when a bunch of government folks figure that they know so much that they can feel comfortable blasting Edmunds, an acknowledged expert organization in the automotive industry.  It should be enough to take exception to the study and analysis, but the White House seems to relish taking pot shots and critics.  Maybe it strengthens their arguements to use invectives.  It seems rather childish to me.

In their roles as adults in the dialogue, Edmunds.com, responded with a press release of their own.   Here are some highlights:

  • 1370665001_8c3329d0afAt issue is one point of the analysis showing the taxpayer cost for every incremental vehicle sold was $24,000. To be clear, Edmunds.com is not disputing the government’s statements regarding total voucher applications, vehicles sold or voucher values. The key question is how many of these sales would have occurred anyway.  Apparently, the $24,000 figure caught many by surprise. It shouldn’t have. The truth is that consumer incentive programs are always hugely expensive when calculated by incremental sales — always in the tens of thousands of dollars. Cash for Clunkers was no exception.
  • The White House claims that our analysis was based on car sales on Mars and that on Earth, the marketplace is connected. We agree the marketplace is connected. In fact, that is exactly the basis of our analysis. [that Mars/Earth barb tossed by the White House was really witty and by witty, I mean silly and childish]
  • It is also claimed we missed the possibility that Cash for Clunkers generated excitement and consumers bought vehicles even if they didn’t qualify for the program — a claim that has been widely supported by anecdote but by little analysis. It does, after all, seem a bit odd that masses of consumers would elect to buy a vehicle because of a program for which they don’t qualify — doubly so when you add in the fact that prices shot up during Cash for Clunkers, creating a disincentive to buy.
  • The White House claims that the increase in fourth-quarter production reported by the car manufacturers can be attributed to Cash for Clunkers. But here is a better reason: the economy is recovering accompanied by improved car sales. No manufacturer increases production — a decision with long-term consequences — based on the 30-day sales blip triggered by an event like Cash for Clunkers.

obama-cash-for-clunkers-cartoonIn a related story, economists Simon Johnson and James Kwak released the results of a study on the government’s Cash For Shacks program (actually called the first time homebuyer tax credit).  Unfortunately for the White House the results were the same with limited incremental sales (sales that would not have happened) and the program actually caused home prices to increase. 

So the knowledge to take away from these incentive programs is that when the government offers more money to pay for something, the prices actuallg goes up.  That sounds an awful lot like what happens with higher education tuition costs.

You can read the original post here.

One CommentsLeave one

  1. Kevin says:

    That is why the government shouldn’t pick winners or losers. I’m sure if the government gave a 20% cash back discount on everything, sales would skyrocket… at least until the taxes caught up to us and we’d be paying that 20% discount back in addition to the cost of the bureaucratic formalities.

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