How Much Did Cash-for-Clunkers Boost Auto Sales?

The busy folks at the Council of Economic Advisers (CEA) released a quartet of studies yesteray, covering the economic impacts of:

• The stimulus act.
• The state assistance in the stimulus act.
• Stimulus efforts in other countries.
• The Cash-for-Clunkers program.

I suspect that other bloggers (not to mention the regular media) will have lots to say on the stimulus analyses, so I started my reading with the clunkers piece, which I found quite interesting.

News accounts often describe the program as a success because almost 700,000 people participated in it in just a few weeks. But, as CEA emphasizes in their new study, the fact that someone participated in the program does not necessarily mean that they bought a car because of it. Indeed, CEA estimates that the 690,000 auto sales under the program boosted 2009 auto sales by only 330,000:

What about the other 360,000?

• Some would have happened anyway. People trade in clunkers and buy new cars all the time. CEA estimates that about 200,000 such new car sales would have happened in July and August without the program.

• Some people held off on purchases in order to participate in the program. If you were going to trade in a clunker in June, the creation of the Cash-for-Clunkers program gave you a big incentive to delay your purchase until July or August. CEA estimates that 50,000 sales were delayed for that reason.

• Some people accelerated purchases they were going to make later in the year. If you were planning to buy a new car in the fall, for example, you might have decided to go to the showroom a few months early in order to get in on this deal. CEA estimates that 90,000 sales were shifted forward from September, and another 20,000 were shifted from October through December (so the total forward shift in 2009 was 110,000).

Putting those factors together, CEA estimates the net effect of the program was to lift 2009 auto sales by 330,000, less than half of total participation in the program.

The Cash-for-Clunkers program cost about $2.88 billion, so one way to slice the numbers is to say that each additional auto sale cost taxpayers about $8,700 (=$2.88 billion divided by 330,000).

Was that money well spent? That’s a hard question I leave for another day. A careful answer would require analyzing a host of factors including the short-term boost to GDP from the program (which CEA analyzes), the longer-term reduction in GDP from the program (due to lower auto sales over the next few years), the cost of paying off the $2.88 billion borrowed to finance the program, the environmental benefits of getting newer cars on the road, and the wealth loss from euthanizing the clunkers rather than moving them into the used car market.

Note: CEA is careful to note that there are lots of uncertainties around each of its baseline estimates. It also reports a more pessimistic estimate (only 210,000 net new sales in 2009) and a more optimistic one (560,000).

Comments

[elcopone]

It's interesting that the CEA does not estimate how many sales were pulled forward from 2010 as well. Nor does it estimate the economic impact of 700,000 people with fully paid off cars now taking on more debt and a car payment. It seems the real winners are the banks and finance companies who just got a lift from all those new loans.

2009 Sep 11 08:29 AM

[conceptwizard]

Nice Post.Interesting.

I would have to add these to the cost of the program to taxpayers,

1. The cost of the increase to the person could not afford to paticipate in a new car sale, but found when they went to buy a used car it rose in price from 50 to 75%. Say a $3000 perfectly good car is now $4500.

2. The full cost to the Charity who would have normally received a used car as a donation for them to sell in order to help real people in need. This cost is the hardest to take for it is one more example of the Government ignoring the true problems.

3. Used car inventory was reduced to the Used car people, thus reducing their incomes.

4. The parts manufacturers now have 500,000 less cars to service as these cars were crushed earlier than intended.

5. The calculation of the actual admin and legal costs to the taxpayer seems to be missing in these numbers. I would estimate another billion for these costs.

All and all, it would take some convincing to me to think that it was not a direct full blown cost and did not help anything. The average persons salary that used this program was $100,000, fully employed and in terrible need it seems.

The other issue is the fact that Toyota, which sold 37% of all the cars in the CFC program, closed off worldwide production by 10% and laid off 1500 workers to compensate for reduced future sales volumes. Another point is the fact the 27% of the models sold were imports actually built in Japan not the USA.

This is a direct subsidy to Japan not US automakers, if people only knew their tax money was subsidizing Japan.

2009 Sep 11 08:30 AM

[Paul Wilkinson]

And as Paul Atkins pointed out at yesterday's TARP hearing, creating moral hazard is also a real cost. He was discussing subsidizing banks and car manufacturers directly, but in this case, moral hazard arises when future consumers decide it's a good idea to postpone consumption, and more consumers do so at the margin based on hopes that if they continue to wait, the government might fund another incentive program. The clearer and more consistent the rules, the quicker the market gets you to a market clearing price. Government command and control activity only interferes with that mechanism.

2009 Sep 11 08:53 AM

[Tony Petroski]

I agree with elcopone: The analysis necessarily has to drop off somewhere, but surely there are folks who would have bought in 2010 who won't now. Those same folks may have bought a refrigerator this year and now won't due to the added debt they've taken on.

"Euthanizing" the clunkers is a great term. If those vehicles had any social utility (I maintain they had a lot of utility), then there is wealth destroyed as surely as if bombs had hit used-car lots.

As John Cleese said after his character, Dennis Moore, in a Monty Python sketch failed to satisfy the increasingly-demanding peasants: "Blimey, this redistribution thing is trickier than I thought!"

2009 Sep 11 09:10 AM

[JeffDB]

Thanks for pulling the studies together for us and posting it in a pretty nice executive summary.

2009 Sep 11 11:02 AM

[hhype]

conceptwizard, where did you get your number that the average persons salary that used this program was $100,000? Was it in one of the reports listed here? Can you give a page number? I would be interested in seeing it. If that is the case then perhaps the buyer didn't need it. On the other hand the point of the program was to increase the number of cars sold, and the reports suggest it did to a greater or lesser degrees depending on the estimates. If the issue is could a different program have accomplished the same goal of increasing car sales for less money, then have at it and suggest a different program.

2009 Sep 11 12:53 PM