(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:
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.)