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One thing the government's CARS program -- a.k.a. "cash for clunkers" -- has clearly stimulated is commentary. For a policy involving a shade under $3 billion in federal spending, it has enjoyed no shortage of media coverage.
In part this is because the program looks like a big success, and certainly congressional leaders and the White House have not been bashful about touting it as such. The original $1 billion allocation for the program was exhausted within days, and as sales data for August begins to emerge it is clear that car sales experienced a banner month.
Was CARS a good policy, all things considered? Let's look at a few of the latest numbers on the program.
There were approximately 1.17 million vehicle sales in August, which works out to a seasonally adjusted annual rate of about 14 million vehicles. June's sales rate was under 10 million and near the recession low, while last August's rate was also about 14 million. Meanwhile, the August norm in good times was about 16 million.
What does that say about the value of the program? Well, let's say that August sales would have matched June's sales in the absence of CARS. They almost certainly would have been higher given economic improvements between June and August, but for argument's sake, let's say they were the same. We can then estimate how many additional sales CARS produced and the actual subsidy per new sale.
Here's economics blogger Calculated Risk:
If Edmonds.com is correct, and total sales were 1.17 million...in August, then the tax credit only generated about 320 thousand extra sales. Of course some regular car buyers might have put off a purchase to avoid the rush in August, so this isn't perfect, but instead of costing taxpayers $4,170 per car (as announced by DOT), the cost to taxpayers per additional car sold was close to $7,200.
In other words, CARS just didn't generate that many new sales. Much of the subsidy went to buyers who would have purchased anyway.
As it turns out, much of the subsidy also went to people who weren't interested in purchasing GM or Chrysler vehicles. While year-over-year sales figures rose in August for Ford (F), Honda (HMC), and Toyota (TM), sales declined by 15 percent and 20 percent respectively for Chrysler and GM. To the extent that CARS was designed to help struggling American automakers, it doesn't seem to have had the desired effect.
Particularly worrisome is today's report that sales fell precipitously in the last week of August -- after the CARS program ended. Rather than generate momentum for the automobile industry, CARS may have primarily moved sales around. To a certain extent, it might also have been counterproductive. How so?
Given fixed supply, a purchase subsidy will often just lead to an increase in price:
Jeremy Anwyl, CEO of the auto Web site Edmunds.com, said dealers and automakers clearly gained from the big boost in sales. But while the incentives helped consumers, average prices for vehicles went up as buyers less concerned about prices rushed to take advantage of the rebates.
Inventory shortages from the popular program could keep prices high and drive down new vehicle sales. "We have created a sales bubble and now that bubble has burst," Anwyl said.
And while Transportation Secretary Ray LaHood claimed that CARS saved jobs and the the inventory draw-down would lead to increased production, automakers are likely to be cautious in building new vehicles if demand appears unsustainable. The White House's claim that CARS will boost third quarter output by 0.3 percent to 0.4 percent will not prove accurate if September sales fall back below trend.
And then there's the environmental effect of the plan. Much attention has been paid to the fact that purchased vehicles were some 9 miles per gallon more efficient than traded-in vehicles. As I've noted before, much of that gain would likely have taken place without the program, based solely on the fact that oil prices rose steadily over the past decade.
One pair of economists estimated that the carbon savings from the CARS program worked out to roughly $596 per vehicle -- well below the voucher values of $3,500 or $4,500 per new vehicle. Another economist estimated that the implied cost of carbon under the program was somewhere between $237 and $500, much higher than what is assumed to be an efficient carbon price.
No matter how you cut it, CARS was an expensive means to reduce emissions.
That doesn't mean that it was a total waste. There was almost certainly some positive economic and environmental impact from the policy.
But that $3 billion could have been used elsewhere. Other potential programs -- restoring heavily used transit services trimmed by budget cuts or funding weatherization programs, for instance -- would almost certainly have been greener and more stimulative.
In the end, "cash for clunkers" should be understood as a missed opportunity, politically attractive but far from ideal as policy.
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It was a huge success! Of course the program didn't make economic sense. Name one government program that does.
*1 barrel oil ~= 19.5 gallons gasoline (depending on heaviness of oil)
** The US imports 62% of its oil
benefits to detroit are temporary, 'feel-good'.
we borrowed against future sales.
of course leasing as presently conducted by car dealers borrows against future sales too.
> jack
What the cost-per-sale analyses usually fail to factor in is the debt cost. Half of the welfare money wasted buying up good used cars and destroying them was BORROWED. (Who knows if it will EVER be paid back)
When you calculate the interest cost on $1.5 Billion and spread it across the mostly foreign FWD wimpmobiles sold under the CARS program, the true cost is going to be a lot more than ~ $7,800 per unit.
Cash for clunkers was more wasteful than the infamous "$800 toilet seat"
> Here's another way of looking at it: CfC sold 690k cars with an average
> fuel economy improvement of 9.1mpg. Using an average annual vehicle
> mileage of 12k miles/year and $70/barrel oil*, these vehicle trade-ins
> will keep roughly $2.0B annually onshore**. Obviously, some of this
> is just pull through from sales that would have occurred without
> CfC, but it's hard to make a set of assumptions starting with that
> $2.0B figure that result in this not being a cashflow positive for
> the US economy. I very seldom defend government programs, but this
> one could have gone a whole lot worse.
>
>
> *1 barrel oil ~= 19.5 gallons gasoline (depending on heaviness of
> oil)
> ** The US imports 62% of its oil
This analysis is speculative and probably flawed:
1. The average fuel economy improvement assumed seems too high (given that less than 10% of the C4C welfare "deals" have been funded, it's premature to project the fuel economy effects. Some $3,500 "clunker" deals could have yielded minimal real fuel economy improvements).
2. Ignores that higher M.P.G. cars tend to be driven more, which reduces their net decrease in fuel consumption (Makes sense because the "opportunity cost" of driving goes down and consumers already have a "budget line" for fuel).
3. Ignores the effects on the used car market -- some of the "clunkers" would have undoubtedly went in the used car market to replace less fuel efficient older vehicles or as donors to improve the efficiency of older vehicles (i.e. "hot rods"). Now these replacements will not necessarily occur.
4. Assumption on the "clunker" miles driven may be too high. A number of the "clunkers" traded were undoubtedly seldom-driven second and third cars, while their replacements will likely become primary cars -- often for the children of the welfare voucher recipients (at least until some of the drivers tire of motoring in tiny, imported FWD deathtraps or die in crashes that would have been surviable in a larger vehicle)
5. Ignores the offshoring of perhaps as much as 50 percent of the profits, 60-70% of the fixed production and development costs, and a huge percentage of the interest on the 50% of C4C funds that were borrowed.
6. Ignores the percentage of diesel powered vehicles traded and purchased. There are only approximately 9 gallons of diesel per barrel of imported oil, so any reduction effects should be adjusted accordingly.
Clearly, there would have been more efficient ways to reduce oil imports. There is no way this program allocates resources more efficiently than the not-so-free market otherwise would have.
if the avg car went from 16mpg to 25.1 mpg at 12k miles a year is a savings of 271.91 gallons a year or 13.94 barrels. 690k cars at $70 a barrel - comes to 673 million 62% we get a grand total of 417 million.
Which is great - until OPEC uses your figures to drive up the cost per barrel... So great explanation to go long on OIL.
On Sep 03 09:04 AM Ben B. wrote:
> Here's another way of looking at it: CfC sold 690k cars with an average
> fuel economy improvement of 9.1mpg. Using an average annual vehicle
> mileage of 12k miles/year and $70/barrel oil*, these vehicle trade-ins
> will keep roughly $2.0B annually onshore**. Obviously, some of this
> is just pull through from sales that would have occurred without
> CfC, but it's hard to make a set of assumptions starting with that
> $2.0B figure that result in this not being a cashflow positive for
> the US economy. I very seldom defend government programs, but this
> one could have gone a whole lot worse.
>
>
> *1 barrel oil ~= 19.5 gallons gasoline (depending on heaviness of
> oil)
> ** The US imports 62% of its oil
> Why take my future tax money and spend it on my neighbor's new car
> and auto workers that I don't know so they can have temporary jobs?
> I say temporary because after this initial buying spree, nobody else
> will want to buy a new car. Anyone thinking about a new car would
> have bought one during this program or forgot about it.
-------------------------
Maybe not. There are still a LOT of folks currently locked into 2, 3, and 4 year leases that will be expiring in the coming months. They can either buy these millions of automobiles currently on the road outright, or they must turn them in - most likely trading them in for something new or lightly used (perhaps someone else's former lease car).
But most of the "clunkers" were older cars, long since paid off, and worth much less in trade and Blue Book value than the CfC cash. These were most likely automobiles that were being retained for occasional use (perhaps by a young driver in the family), or were "daily drivers" that were used for commuting, school, chores, etc., but had essentially zero trade in value relative to a new replacement.
Interestingly most of these "Clunkers" were probably minimally insured for "liability only", while the Replacements will be fully insured with "comprehensive" coverage, to protect the lien holders. One might even predict a bump in Insurance Company profits - or at least higher receivables.