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Follow Up: Well That Was a Clunker Of A Plan…

August 25th, 2009 · 13 Comments
Econ 101 · Follow Ups · Policy

(You can see the original post on “Cash for Clunkers” here.)

In case you haven’t heard, it was reported on Friday that the “Cash For Clunkers” program ended yesterday…hope you weren’t planning on taking advantage of the discount on a shiny new vehicle this weekend. Though that presupposes that there are any cars left on the dealer lots, so I suppose you shouldn’t really feel like you missed out on anything…

I’ll start with a cartoon…I had a number of these things backlogged since I was expecting to need clunker material for a while going forward, so you’re just going to get some interspersed here as awkward interjections:

I can’t really say that I am sad that this program is ending. I’m not sure who thought “Cash for Clunkers” (officially named Car Allowance Rebate System, or CARS for short) was going to be a good idea- maybe the proponents were just pleased by the existence of an apropos acronym. There appear to be so many unintended side effects that I find it hard to believe that “Cash for Clunkers” was really properly thought out or vetted in any substantial way. (Or rather, I choose to believe this because otherwise I would have to believe that people are stupid. Can I refer to CARS as the Sarah Palin of government policy? Attractive at the beginning but spins out of control very quickly…) I will go through a number of the side effects in turn as a “let’s learn from our mistakes” checklist:

  • Crowding Out Of Car Donations: Charitable organizations that rely on donations of “clunkers” are taking a hit as people are choosing to trade in the vehicles instead. This article estimates a drop of somewhere in the neighborhood of 12 to 25 percent in the number of donations. Can the charities turn in the clunkers that they do get for subsidized new vehicles? Just trying to make lemonade out of lemons here…
  • Reduced supply of cheap used cars: Who’s going to sell a crappy used car if he can get $4500 from the government toward the purchase of a new one? Granted, not all cheap cars neccessarily qualify for the clunkers program, and maybe not everyone is selling a used car because they are buying a new one. Nonetheless, the availability of the low-end used cars declines substantially because of the CARS program. I’ve drawn a picture for you to show why this is important:

    Okay, that diagram was wayyyy more complicated than it needed to be. Let me interpret: fewer cheap used cars looking to be sold means that those that are sold will be sold at a higher price. So, to a degree, the people looking for the cheap used cars are being hurt (and the old owners selling them helped) by the CARS program. USA Today seems to have caught on to this.

  • The Durable Goods Problem: Let’s be clear here- cars are not like yogurt. If you buy yogurt, it’s because you need yogurt sometime in the reasonably near future. (I think organic yogurt lasts longer in the fridge than regular yogurt, but that is not the point.) In economic terms, yogurt is a nondurable or a consumable good. Cars, on the other hand, are durable goods. This means that their consumption is spread out over a long-ish period of time rather than being consumed immediately. This property of cars is relevant to the subsidy program because it’s unclear how much of the increase in car sales is a true overall increase as opposed to just a shift. The NYT tries to be reassuring by giving the following quote:

    Though many dealers fear the clunkers effort has simply accelerated sales that would have taken place anyway, many buyers said they were not in the market for a new car until the program kicked in.

    What the reporter doesn’t realize is that, even if if these people weren’t going to otherwise buy a new car today, it’s now going to be longer before the next new car gets purchased for this household. In other words, it’s not like the household’s lifetime purchase of vehicles just went up by one. Furthermore, consumers are pretty loss averse, so who is going to want to buy a car now when they know that they could have gotten one last week for a lot less? I would find it perversely hilarious if this latter effect was strong enough that annual sales actually end up going down rather than up. (Not likely, but I can dream, can’t I?)

  • Foreign ownership concerns: People like to point out that the most popular car purchased under the clunkers program was the Toyota Corolla, and it was closely followed by the Honda Civic in second place. Most people use this information to make some point of the form “see, the extra sales are going to foreign companies, boooooo…” But I would like to take this point out of the list of clunkers problems, since we don’t know enough to judge. Why not? Let’s see…Toyota and Honda appear to be publicly traded companies (NYSE:TM, NYSE:HMC). Therefore, the owners of the companies are whoever hold their stock. I would have to imagine that at least some of the people who hold stock in Toyota and Honda do in fact reside in the US. Furthermore, I’m pretty sure that there are a decent number of Toyota and Honda employees in the US. On the flip side, Ford is also publicly traded (NYSE:F), so who’s to say it isn’t owned by a bunch of foreign people? At least we know that General Motors is owned by the government- maybe that means it’s making back some of the clunkers money that it’s paying out! :)

    Can we please stop getting our panties in a twist over foreign ownership concerns unless we are willing to actually assess where the dollars are going? Admittedly, The foreign ownership issue did cause a problem for the clunkers program, but in reality the problem is simply bad PR.

  • Administrative delay: Some dealerships pulled out of the clunkers program because it was taking too long to process the rebates and the dealers were on the hook in some cases to cover the $4500 during this time. Furthermore, it seems like it was pretty much a pain in the rear end to file for the rebates since the government didn’t put the proper technology capacity in place:

    Some dealers, CNN notes, have “described the submission process as challenging, with frequent problems and rejections.” Dealers submit the transactions through a government website, which has frequently been slow, overwhelmed with demand. Some dealerships learned to tap into the system late at night, when demand was lower, in order to process transactions more quickly. But that presented its own problems, as paying employees overtime ate away at the profit the program had generated.

    Not a whole lot more to say there, other than “oops.”

  • Questionable Environmental Friendliness: Yeah yeah, we have the whole “but it takes energy and landfill space to scrap the cars” argument, and I assume you are fairly familiar with that one by now. (See here for a thread on the issue.) But the problem goes deeper (or at least funnier) than that. For example, an article in the NYT details how people have been scrambling to get last minute “clunkers” deals due to the abrupt cancellation announcement. For example:

    Allison and Matthew Barton, both 28, with their black Labrador, Bailey, made an impromptu decision to drive all night from Baltimore to Jim Ellis Chevrolet in Chamblee, an Atlanta suburb, to make the deadline.

    According to Google Maps, Chamblee is 673 miles from Baltimore. So, by a conservative estimate, this couple drove 1350 miles to trade in their clunker for a new vehicle. If you assume an average gas mileage between the two vehicles of about 20 miles per gallon, this means that the couple used somewhere in the neighborhood of 70 gallons of gas just to make the trip. I am pretty sure that that is a couple month’s worth of gasoline in my world. To be fair, however, the increased fuel efficiency could lead to an overall win, but if the old car was really such a clunker the couple probably would have bought a new one within a year anyway. (The article said that the couple was trading in a 1997 Ford Tahoe, which if it’s the 4WD version gets an average fuel efficiency of 15 mpg. It’s also rated pretty poorly in terms of greenhouse gas emissions. If you factor in the statistic that the new cars purchased get an average 25 mpg, it only takes 2500 or so miles of driving to make up for the trip. Before you start doing cartwheels, however, factor in the likely alternative that the new car would have been purchased by someone local to Atlanta if the couple from Baltimore hadn’t taken it.)

I could go on and on here…but instead I will present you with a video, courtesy of Antony Davies (via the Economists Do It With Models group on Facebook):

Here are a couple more good overviews of the problems with the CARS program, in case you really need more reading material after all this:
http://www2.dailyprogress.com/cdp/business/local/article/cbj_cash_for_clunkers_a_bad_idea/44110/
http://blogs.harvardbusiness.org/quelch/2009/08/how_cash_for_clunkers_failed_a.html

Hopefully we can now go back to our regularly scheduled programming. Don’t worry about me not having anything to write about though- apparently “Cash for Clunkers” was such a hit (*cough cough*) that now there is a “Cash for Refrigerators” plan in the works. Hm, I had no idea that the Maytag and Whirlpool lobbyists were so good at their jobs. I kid, but I am in reality a tad concerned about the government taking such an active role in using subsidies to direct consumption, especially when it doesn’t seem to fully consider the follow-on effects that spread throughout the economy. (Dare we call them trickle-down effects?) How does it know that cars and refrigerators are really the things that we need more of than we think we do on our own? I get that there is a benefit to subsidizing those items that generate positive externalities, but shouldn’t we perhaps be more careful in doing our homework to make sure that the externality is actually there? (In case you’re wondering, I personally vote for puppy subsidies. Positive externalities galore.)

Tags: Econ 101 · Follow Ups · Policy

13 responses so far ↓

  • 1 Marc // Aug 25, 2009 at 3:58 pm

    A few points:

    -I can’t access the Automotive News article which is the source of the claims that Cash for Clunkers has hurt automobile donations, but there doesn’t seem to be any clear indication of whether the drop in donations is actually due to Cash for Clunkers or that in a recession people are holding on to their old cars, rather than buying new ones and turning the old ones over for charity.

    -Cheap used cars isn’t a universal market. Cash for Clunkers will reduce the number of cheap, used low-gas mileage automobiles and inflate their price, not cheap used cars generally. Because of last years gas price spikes Trucks and SUVs had already flooded the used car market and were basically unsellable. You could pick up an SUV for 1/3 of the bluebook price of 3 or 4 years ago. By taking so many of these low gas mileage cars off the market, they’ll have raised the price for them, and dissuade people from buying used environmentally unfriendly cars.

    -As you said, consumers are pretty loss averse. When gas prices spike again (which they will) people are going to buy more fuel efficient cars than what they have, whether or not they missed on the program. The only way consumer loss aversion keeps people from buying these cars is if they expect the program to happen again, and there’s really no clear indication that will happen.

    -Totally agree on the adminsitrative delays and foreign ownership issues.

    - I agree that in the future we should be generally more careful when planning these kinds of direct subsidies programs and launching into universal incentive programs like Cash for Fridges, lest we start glutting numerous markets just to see a slack period afterwards. However, from an environmental standpoint, until any sort of legislation is passed that incorporates the negative externalities from pollution into the market system, direct incentive programs are going to be the best way we have to stimulate innovation towards greener products. Also the best way to change consumer habits.

  • 2 Larry // Aug 25, 2009 at 4:18 pm

    So love the Article!!! I have a lot of homework so I skimmed it rather quickly. The only thing I missed was a reference to the destruction of capitol. You covered the durable good problem, the loss of inferior good choices (cheap cars more expensive for poor people in bad economy… nice) and lots of other good points but it seems like two home run easy lobbed almost too easy ideas where missed… maybe you covered them in another post I missed but the 2 that hit me in the face are these
    1. Broken window theory… we are destroying good capitol to replace it today at a high cost…
    2. Encouraging consumption at debt.. ie present consumption when we can’t afford it and will have to pay back with interest tomorrow… which you covered pretty well in the durable good issue I suppose but there is broader application… I mean the same basic idea is what caused the housing bubble… everyone needs a new house to call their own so lets make it cheaper by lowering credit standards and reducing interest rates… isn’t that the same thing we are doing here? Inducing capitol spending when we should use the current capitol until it dies?

    Anyway I love the analysis just had to through in that 2 bits lol ;)

  • 3 Carl Peter Klapper // Aug 25, 2009 at 5:54 pm

    My dear Jodi,

    It is far worse than what you described. The CARS program fails to achieve even its alleged goal of reducing emissions under the most conservative, local-purchase assumptions. The clunker-owner is faced with poor gas mileage and has good reasons to have not already traded in their old car for a more efficient new car such as driving for not enough miles to have the new car pay for itself without CARS. Such a person would also consider adopting a pedestrian lifestyle, say by moving into town and junking the car. Or it may be a couple that could easily do without the second car. Or maybe the clunker is up on cement blocks next to their mobile home and Uncle Roy, who stays with them, usually stumbles back from the bar somewhat on his own two feet after a night of hard drinking.

    In any case, without the CARS program, these folks are on the verge of junking the clunker, having decided that it would be fine with at least one of the family walking and not driving. Their auto emissions are about to be zero, but along comes CARS and bribes them to stay out in Sprawlsville where you have to drive to brush your teeth or get that second car to drive three blocks to the closest job or get a new car and give Uncle Roy the older model to drive drunk home outside of Atlanta by way of Alabama wondering why it took so long.

    CARS, like its non-acronym namesakes, is a thoroughly anti-pedestrian program. As such it will increase auto emissions, as well as obesity and medical expenditures.

    Regards,
    Carl Peter “Montreal is looking mighty good right now” Klapper

  • 4 Jason // Aug 25, 2009 at 6:43 pm

    Has anyone seen any data regarding the effects CARS has had on the credit markets? “Getting lenders to lend”, while not front page news any more, is still an issue that policy makers are trying to deal with. I would assume that a program like CARS would have a substantial loosening effect. Having a relatively large, sudden influx of credit applicants would give lenders a little bit of incentive to loosen up and make some loans that they’ve been notably reluctant to make. Especially since a portion of the purchase price is essentially government subsidized. In essence, the program had a lubricative (yeah, I make words up sometimes) effect on credit markets. And for the low, low price of $3 Billion. Not bad, all things considered.

  • 5 BradyDale // Aug 26, 2009 at 9:50 am

    I feel like you’re a bit guilty of one of the mistakes that economists always chastise other people for making: including mutually exclusive goals. For example, maintaining an ample stock of used cars is mutually exclusive with the goal of getting gas guzzlers off the road for good.

    If we take gas guzzlers off the road for good, we have to accept the fact that there’s going to be a shortage in used cars.

    Your points about foreign ownership, durable goods and charitable contributions are all fine (okay, I’m not so sure I care much about the last one and I work for a non-profit), but those two are mutually exclusive.

    It seems like the goals of this program were
    A) to stimulate new car sales now
    &
    B) improve the fuel efficiency of the US fleet.

    Hasn’t it done both of those things? I’m a little flummoxed that everyone has mocked it so badly for running out of cash so quickly, because all that seems to mean is that it was an even better idea than the Dems thought. Wasn’t that kind of the goal?

    You’re totally right that there is a very real worry that over time this will actually put a damper on new car scales, but the US Car industry is hemorrhaging right now so I understand why the US Government took this risk (I wouldn’t have tried to save them, but if that’s what they wanted it wasn’t a bad play).

    And I personally think we might be surprised about how good it was for the environment.

    P.S. That story of the couple driving to Atlanta was just silly. That’s such an outlier it’s hardly worth mentioning. A kajillion more miles-per-gallon across the country will make up for that one drive many, many, many times over. Even lots of drives like that. Lots and lots.

  • 6 econgirl // Aug 26, 2009 at 12:24 pm

    Let me clarify an important point: I am not trying to say that something like Cash for Clunkers should not have been tried. Instead, I am trying to point out that all costs and benefits should be taken into account when deciding whether a policy is worthwhile, not just the ones immediately in front or our noses. (Obviously “all” is a pie in the sky goal, but a move in that direction wouldn’t kill anyone.) Furthermore, if a program is going to be put in place, a lot of thought should be given as to how to implement it in a smart way. To be smart about implementation, however, it is important to be clear (and honest) about what the specific goals of the program are, among other things.

    BradyDale: I didn’t mean to imply that the program *should* have mutually exclusive goals. In pointing out the effect on the used car market, I was merely showing that CARS was not a win for everyone, even though it got touted as such at the outset. I am fine if the thought process was “This will help the new car market at the expense of the used car market, but that’s an okay tradeoff.” I am not fine if the thought process was “Whee, we’ve found the magic bullet! Piles of cash for everyone!” That is the important distinction here.

  • 7 Tom // Aug 26, 2009 at 12:30 pm

    While I agree that the price of used cars will increase due to a reduction in the supply of used cars, I would like you to think about the demand for certain used cars – those clunkers models that have been destroyed vs the non-clunker model used cars. I would expect that the cost of owning a “clunker” model used car will be much more than owning a non-”clunker” model used car. This is because if you own a “clunker” model the supply of used parts for your car has been reduced. So if you need a replacement part for your “clunker”, it is going to cost a lot more to replace than if you owned a non-”clunker” used car. This being the case, the demand for “clunker” model used cars will fall and the demand for non-”clunker” model used cars will rise.

  • 8 Carl Peter Klapper // Aug 26, 2009 at 6:09 pm

    Brady,
    The explicit goal was to reduce auto emissions. Improving the fuel efficiency of the fleet of cars was supposed to help with this. However, that would be the case if inner product of the array of the reciprocal of car fuel efficiencies with the array of their respective annual mileages was less after “Cash for Clunkers” than before. Given the prior incentives, the changes would be primarily among those for whom a new fuel-efficient car was not an economically rational decision. As such, the effect of “Cash for Clunkers” would be predominantly an increase in mileage via an increase in the number in the fleet from the shifting of the pedestrian/motorist decision towards the motorist. Also, conservation in making smaller trips would decline as former clunker owners drive more confidently out of town with their newer model cars and as it becomes driving greater distances becomes more affordable because of the fuel efficiency.

    The increase in car sales was a side benefit that was treated as a poor cousin when politicians talked to those outside the automobile industry. Envy might ensue if they strayed from the environmental script. Programmers might insist on a “Cash for Obsolete Code” federal subsidy, etc.

    Carl Peter

  • 9 josh frank // Aug 26, 2009 at 7:05 pm

    2 things: this was touched on by Larry above (and me on another topic) but in addition to all the problems , Cash for Clunkers was encouraging people (many of whom held on to a “clunker” because they could not afford to get a decent low mileage used car even) to overextend themselves during a financial crisis (and during a time when the average auto loan had negative equity). It actually required people of limited means to buy a new car as the only way to take advantage of a government subsidy. If you don’t believe me, here’s an industry article (apologize for the huge URL) about the unusually high level of buyer’s remorse:
    http://www.autoremarketing.com/ar/news/story.html?id=9963&wt.mc_id=Email-UCMW&utm_source=Listrak&utm_medium=Email&utm_term=%2far%2fnews%2fstory.html%3fid%3d9963%26wt.mc_id%3dEmail-UCMW&utm_content=josh.frank%40self-help.org&utm_campaign=CARS+Buyers+Showing+Regret%3f

    Perhaps even worse, lots of the dealer submissions are getting rejected, and many auto dealers decided to put a contingency clause in the contract that says that the CONSUMER is on the hook if the $4,500 rebate doesn’t happen. So then they have to come up with $4,500 or go back to the dealer and return the car (still paying a “reasonable fee” for use of the new car in the interim), but worst of all, their old car HAS BEEN DESTROYED. And they get no compensation. Talk about perverse incentives: the buyer relies on the dealer to qualify them for the rebate, the dealer has an incentive to overextend themselves in qualifying people if they want to maximize sales and the buyer is the one on the hook….
    Here is a little bit about it on one site:
    http://www.smartmoney.com/spending/autos/4-clunker-traps-car-buyers-should-avoid/

  • 10 holmegm // Aug 27, 2009 at 10:52 am

    >Can I refer to CARS as the Sarah Palin of
    >government policy?

    You could, if you were going for heavy irony.

    The insipid Palin-haters are, after all, the ones who devised and implemented CARS.

  • 11 Jim Welke // Aug 30, 2009 at 3:16 pm

    Overall, I did not agree with the program. It did have a couple of positive effects. A. It Moved some iron. & B. Put more fuel effecient, cleaner burning cars on the road. It was a shot in the arm to get the economy moving.

    Some car dealerships made deals before the program started so the number of deals waiting to be done on the first day overloaded the systems. Not the governments fault. The web site could have been developed & hosted by a company able to handle thousands of multiple users, like US Based Yahoo or Google. Enough blame to go around.

    The program only lasted a couple of weeks. Don’t tell me the dealerships thought they would get their money overnight. The dealers shouldn’t expect to get paid for at least thirty days. Anybody out there doing business with the federal government and expecting to get paid overnight is living in a dream world. Course, many people in the car business have been living in fantasyland for some time.

    There are four things that bothered my about the article. Being in a rough economic period, usual thing to boost the economy have to be tried. This was like a hail mary pass. Overall, when the dust settles, watch for a revival of this program next September, just before the fall elections.

    First of all, Tahoe is built by Chevy – “the couple was trading in a 1997 Ford Tahoe”.

    Second, people donate cars for the tax deduction. People needing a tax deduction don’t normally drive ten year old cars worth less than $4,500.

    Third, the program got some sales made today. It got cars off dealers lots, so they pay less interest.

    Fourth, it made room for cars from the factory. It got people back to work, and some places, workers were offered overtime to make up for the bump in car sales.

    Could the program have gone smoother? Yes. Are the new cars more fuel efficient and cleaner burning? Yes.
    Was it a drop in the bucket for what needs to be done to clean the air? Yes.
    Will we see this program revived next year, just before the election? Probably not, but it will come up for a vote.

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