Cash for Clunkers: An Analysis

The CARS legislation, popularly known as "Cash for Clunkers," now appears certain to get additional funding. The program provides an excellent example of a typical public policy question and the dilemma for decision makers.

Any new program has a range of impacts. Some of these are obvious to all. It is easy to trace cause and effect for these highly visible results.

The professional policy analyst has a more extensive tool kit. The range of questions is wider and the analysis is much more sophisticated. The average person may not find the results of this analysis to be persuasive.

A simple example is policy to expand free trade. Jobs put at risk from foreign competition are highly visible. Anyone can understand the consequences for domestic workers. Jobs gained from increased exports and an improved economy cannot be "proved" to the satisfaction of the lay observer. It is an issue where there is a great discrepancy between the views of professional economists, who overwhelmingly favor free trade, and the average citizen.

Cash for Clunkers

The CARS legislation provides an incentive payment to people who trade in a vehicle that gets poor gas mileage for one that is better. This might still be a 15 MPG SUV, but it is better than the trade-in vehicle. To make sure that the old vehicle is taken off of the road, the engine must be destroyed. The incentive ranges from $3500 to $4500.

From a policy analysis perspective the CARS program seems dubious, involving many significant questions.

• Does it really help the environment? Nina Shen Rastogi, writing for Slate, suggests that the cost is ten times too much, when one considers the environmental impact of building the new car.

Was spending $1 billion a particularly cost-effective way to achieve those CO₂ reductions? Probably not. Assuming the above calculations are correct and that each consumer keeps his or her car for 10 years, then the total savings should be a little less than 5.7 million tons of carbon dioxide. That means each ton of carbon dioxide would be worth about $175.53 to the U.S. government. As the Washington Policy Center pointed out on its blog in June, a ton of CO₂ currently goes for about $17.50 on the European Climate Exchange.

• Does the program really add new sales? How many? Avery Goodman suggests that the program cost is actually more than $45,000 per vehicle. Citing data from the online auto service Edmunds.com, Goodman makes a key point. The program pays off even for those who would have bought a car anyway, not just for the incremental buyer. If you look at the "counterfactual", what would have happened in the absence of the program, the net gain in sales is much smaller.
• The overall program is small. Doug Kass suggests that this is a minor and temporary stimulus to the economy, although the psychological effect might be important.
• James Hamilton laments the waste from destroying the old engines.

One of the more embarrassing features of the New Deal was the Agricultural Adjustment Act of 1933, which paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier. And yet here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy.

• Bob McTeer says it best: "What was the evidence of success? What lesson was learned? Well, apparently, if the government offers to give people money, quite a few of them will take it."

The Popular Viewpoint

If one looks only at the highly visible policy results the story is different. The program created a buzz in dealerships, including traffic from those who might not qualify for the program. The plan is working in a way that is more obvious than other "shovel-ready" programs.

There are highly visible benefits for consumers, car makers, auto workers, parts makers, and the local economies in the auto states.

These stories are easy to present in the media, and easy for political leaders to embrace. It is no surprise that the GOP leadership is going along with the extension and expansion of the program.

Our Take

We cite this as an example of how public policy decisions are reached. While the program has many flaws, it illustrates the reality of the policy-making process -- a compromise where there are obvious beneficiaries.

Comments

[http://www....:]

People say it is a good idea to negotiate the new car price before you tell the dealer that you have a clunker!


Jhenry
Blogger
cashforclunkersfacts.info
www.cashforclunkersfac...

Aug 05 06:36 AM

[Schweizer:]

Not to mention that 99% of these cars required the buyers to go further into debt. Souldn't we be encouraged to reduce our debt?

This has the same smell as subprime. A program that appears to be great but puts the owners further into debt in an asset that immediately starts depreciating in value plus cost far more to own (insurance, taxes, interest) than the one they were forced to destroy.

Now that is just stupid.

Aug 05 07:11 AM

[logicalthought:]

The #1 selling new car in this program has been the Ford Focus. Supposedly (according to an article last year in "Business Week"), Ford LOSES several thousand dollars on each one of these it builds. I wonder if the recent buyers for its stock are thinking about this?

Aug 05 07:44 AM

[pockyclips ...:]

This program seems to be the only part of the stimulus package that seems to be working. Yes, it smacks of "socialism", but when you consider that $32 billion of our stimulus went to the same financial
gangstas that caused the meltdown, 2 billion looks cheap.

We could always end the war in Iraq 2 days early. Or:
Quit sending the Chinese $2 billion/day.
Quit sending the terrorists in the mid east $1 billion/day.
Make Congress pay for their own health care through a PPO/HMO
like most of the rest of us do! (my favorite)

Aug 05 08:03 AM

[Ned Williams:]

Bastait described the fallacy of destroying property in his broken windows parable. In it he described the unrecognized economic loss of economic activity caused when an object that has been destroyed must be replaced. Money spent could have gone to a more worthy endeavor which would add to well being rather than just maintaining status quo.

Regarding the green aspect of the clunkers, no consideration has been given to the additional carbon released in the manufacture of new cars and in the transportation and destruction old cars, before their time.

While it is true that new cars get better mileage, is not also true that owners will show off their new cars by driving them more, especially since better mileage lightens the apparent cost of driving.

Finally, we have gotten into this financial crisis because of the debt piled up by consumers. The purchase of a new car will add significantly to outstanding credit balances. Since few wealthy people have clunkers, those at lower income levels will be the ones buried in debt.

Aug 05 08:40 AM

[casey00001:]

Recent sales figures show Ford Focus number one, followed by four imports. Three Toyotas and one Honda. So this just put the American Taxpayer further in the hole for $4,500 each car and it does nothing for GM and Chrysler. So how is this program a sucess?

Aug 05 09:41 AM

[Larry Harts:]

no one has mentioned that in order to get the $4500 you got to spend $23,000 that's about five times the one billion that goes into the economy

Aug 05 10:58 AM

[Ernesto Gom...:]

@ Ned Williams -

Those who complain that the Clunkers deal puts people in worse debt are simply mistaken. The two top clunkers cars are Ford Focus and Toyota Corolla - both very economical cars and most buyers of these are coming away with less than a $10,000 loan as they (like me) put some $$ down along with the clunker. But now you sa "Aha - $10,000 loan - SEE IT'S DEBT"...

But, you fail to take into account that my clunker was constantly needing expensive service and I am now free of that. In essence, I've traded the repair "debt" of the clunker - which was about $100 a month for the actual debt of the new loan.

All things considered and counting my gas savings, my ne Corolla costs me about $50 a month.

But... my clunker was 15 years old and in poor shape. Had I kept it, I'd have soon been on the hook for about $5,000 for another decent used car.

You may disagree, but the math tells me that my clunker deal is a winner,

Aug 05 03:10 PM

[ArbyH:]

This is a gravy train program that I don't care for at all.

The relatively well off people who own decent cars already will go scronge for a clunker to trade in because they are due for a new car anyway.

The poor that really need a decent car that runs better can not participate, but their taxes too will pay for those who could take advantage.

Plus Bottom line: There is no advantage given to American companies and autos.
It is time that our Country and its people buy American again, even if it costs a little more.
Assembled doesn't mean manufactured...where were the parts made and where do the profits go?

Aug 05 06:01 PM

[ArbyH:]

Historically, repeatedly in the rise and decline of all of the great economic powers there were 6 things that always occurred:
1. One country secured and economic advantage, rather product or trade route, and applied that advantage to become a major economic power.
2. A second country learned (diffusion of technology) what that advantage was and copied it, becoming even more competitive then the economic power.
3. The second country, now being the more competitive, imported their product into the major economic power's markets. The people bought the import because it was good quality and cost less. The citizen's purchases of imports over domestic products led directly to their own country's economic decline.
4. The governments of the economic power were rigid, hamstrung and unable to respond to protect their own markets.
5. Once on the decline the armies of the economic power were always fully deployed in the furthest reaches of the empire.
6. There was always a moral decline in the people's behavior in the economic power. Decadence...perversion whatever.

Buy American!!! GM is American. Ford is American.
The military industrial complex is a perversion of what we have become great at producing.
We have given away almost all of the domestic industries we were great in. It is time we reclaimed some of them and bought American even if we pay a little more. It is either that, or collectively become poorer until the dollar collapses and the importers move on to other markets and we are forced to produce for ourselves anyway.

Aug 05 06:08 PM

[fishluvrain:]

Personally I see this program as ridiculous. I can see the advantage of getting low mileage vehicles off the road, but a plain giveaway like this is wrong. I agree you help the ailing car dealer and manufactures (and support structure). But this help is only short term. As a means to help individuals it helps only the few. Even were it to cost some delay it is my feeling that additional tax should have been included in the sponsorship of the bill. Additional tax should have been (or should be) applied to all the vehicles (on the road now, and yet to be built/sold) that do not have some meaningful fuel efficiency. I am talking a surcharge. Without incentive the complacency that keeps continuing this problem of poor gas mileage vehicles will continue. Car makers will produce the cars the public wants to buy. Were the public to see a meaningful surcharge on vehicles of low MPG vehicles (sold or yet to be built) we would begin to see some real movement in the MPG vehicles both on the road and in the showrooms.

Aug 05 10:06 PM

[Hmm?!:]

No one should pay more for anything...inefficiency is inefficiency and that is the problem that should be corrected.

If you want to talk about interesting history. Rome fell after more than a thousand years because of taxes, government spending and corruption.... it was another thousand years before the world got back to running water. So yes it could happen to America in some form.

Later in history the Weimar republic bankrupted Germany with their money printing ways......enter Hitler into the desperate situation and......

Now today it is a new adminstration ignoring economic knowledge, printing and borrowing like crazy to cover congress's tracks...300 hundred economists put out a full page in the Wall Street journal basically saying NO STIMULUS PLAN...PLEASE! And the media ignores it the next day, like it never happened. Just as hundreds of economists signed a paper saying don't do it before the last depression was created.


On Aug 05 06:08 PM ArbyH wrote:

> Historically, repeatedly in the rise and decline of all of the great
> economic powers there were 6 things that always occurred:
> 1. One country secured and economic advantage, rather product or
> trade route, and applied that advantage to become a major economic
> power.
> 2. A second country learned (diffusion of technology) what that advantage
> was and copied it, becoming even more competitive then the economic
> power.
> 3. The second country, now being the more competitive, imported their
> product into the major economic power's markets. The people bought
> the import because it was good quality and cost less. The citizen's
> purchases of imports over domestic products led directly to their
> own country's economic decline.
> 4. The governments of the economic power were rigid, hamstrung and
> unable to respond to protect their own markets.
> 5. Once on the decline the armies of the economic power were always
> fully deployed in the furthest reaches of the empire.
> 6. There was always a moral decline in the people's behavior in the
> economic power. Decadence...perversion whatever.
>
> Buy American!!! GM is American. Ford is American.
> The military industrial complex is a perversion of what we have become
> great at producing.
> We have given away almost all of the domestic industries we were
> great in. It is time we reclaimed some of them and bought American
> even if we pay a little more. It is either that, or collectively
> become poorer until the dollar collapses and the importers move on
> to other markets and we are forced to produce for ourselves anyway.

Aug 06 12:28 AM