Wow, Who Would Have Predicted This?
The answer is: Just about everyone who was not in the tank for the Obama Administration predicted this (from my Princeton classmate Henry Payne):
When Congress gave away $3 billion for buyers to trade in their "clunkers" and buy new cars in August, lawmakers thrilled as buyers swamped showrooms to take advantage of the big discounts. "Cash for clunkers has captured the public's attention . . . (it) has the possibility to truly jumpstart our economy," said Rep. Candice Miller (R., Mich.). Other, more sober analysts, warned that the clunkers program was only stealing from future sales.
September sales are in, and sobriety can take a bow.
Edmunds.com reports that "September's light-vehicle sales rate will fall to 8.8 million units . . . the lowest rate in nearly 28 years, tying the worst demand on record. After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once -- in December 1981 -- with records stretching back to January 1976."
The real popularity of the program was always due to the fact that the government was throwing money away and people rushed to pick it up. Edwards.com estimated the Feds purchased vehicles with average blue book values of just under $1500 for $3500 to $4500. That means that the government purchased cars that blue booked at just over a billion dollars for three billion. I you suddenly offered to buy all of your neighbors' cars for three times what they were worth, you'd be popular too. It was a $2 billion giveaway, and people rushed to pick the cash up like one of those money drops in the outfield of a minor league baseball game. In doing so, the government made a trivial change in the overall fleet fuel economy, in the process overpaying for Co2 reduction by a factor of 20.
Update: The study linked above shows the government paying over $400 per ton of Co2 reduced in the Clunkers program. The 20x factor cited was based on an estimated clearing price of a tone of Co2 in a future cap and trade system. This is hypothetical, as currently a ton of Co2 offsets trades right now in the US at 20 cents. At this price, the program overpaid by a factor of 2000. To be fair, this reflects both estimated pricing as well as a discount for the likelihood of a cap and trade bill passing.
Kevin Jackson:
I've seen Cash for Clunkers described as subsidy for automakers. But it really wasn't, and now we're seeing why. It was a subsidy for car buyers, and that's who's getting the benefit.
September 19, 2009, 10:31 amElamBend:
Just wait until the first time home-buyer credit expires (if they don't extend it).
September 19, 2009, 10:48 amilovebenefits:
Not so hard to figure out. Many business at the end of their fiscal year try to accelerate sales. The impact is that the first month of their new year is often very light. This forces them to do this year after year otherwise the revenue and profit year over year suffers.
September 19, 2009, 12:49 pmilovebenefits:
Not so hard to figure out. Many businesses at the end of their fiscal year try to accelerate sales. The impact is that the first month of their new year is often very light. This forces them to do this year after year otherwise the revenue and profit year over year suffers.
September 19, 2009, 12:49 pmhedberg:
There are three possible groups of beneficiaries of the subsidies resulting from cash for clunkers: buyers, dealers, and manufacturers. It's difficult to figure out which group received how much of the subsidies. The apparent winners are the car buyers who received much more than trade in value for their cars. But, the increased demand caused by c4c no doubt decreased the amount of incentives that had to be offered by manufacturers to induce people to buy their cars. In other words, manufacturers received more for the cars they sold than they would have without c4c. Then there are the auto dealers whose talent for making the financial aspects of the car buying experience as opaque as possible is truly awe inspiring. There can be little doubt that a good portion of the c4c subsidy ended up in the dealers' pockets in the form of increased mark up. It would not be surprising to learn that in many cases the dealer and manufacturer were able to increase prices to such an extent as to suck up more than the entire subsidy.
September 19, 2009, 1:49 pmJonathan:
Let me point one more thing out, KBB values of cars are not anything like the real value of a car. It's usually over a $1,000 off (over most likely) the price you might actually pay, or more in some cases. So using real prices the government got an even lousier deal.
September 19, 2009, 7:13 pmwinshjd:
You are absolutely right, as usual. However, I think there may be one flaw in your logic. The actual price the government paid was the full price of cars purchased, or the full $3b, not $2B. I think you assume that there is some value to the cars purchased, which could only be realized if the government resold the cars.
Instead the destroyed every single one of the cars purchased, so there was no offset to the purchase price from the resale value that I think you assumed. So they paid $3B. The purchasers only benefited to the tune of $2B. So, in one sense the government did even worse than you computed. It paid $3b to bestow only $2B of benefit on the purchasers.
September 19, 2009, 7:14 pmm:
I'm not sure why you call this a subsidy for the automakers. Even they got screwed. All the government did was accelerate the sales they would have made in the latter part of this year and maybe next.
Normally, that would be a good thing. Who wouldn't want their money now vs. later. Unless you don't realize that's what's happening. Then, like the farmer who spends all his money in October, you'll find yourself unable to afford enough seeds to plant.
It's so funny how everything the government tries to help ends up getting screwed (right, unions?)
September 19, 2009, 7:43 pmMike Walsh:
@hedberg:
There's another beneficiary that was intended: state sales tax revenues....
September 19, 2009, 7:45 pmTim:
There are a couple of thoughts to the falling SAAR. One is that dealer inventories are at an all time low; actually under optimum. So people who want to take delivery out of stock, rather than wait for one to be built, defer their purchase. Another is the pull ahead, those people who made purchases earlier than planned. Last are the people who are holding out -- waiting for the next round of scrappage.
As a side note, Edmond's has an interesting analysis of cash for clunkers. It turns out that the government gamed the sales figures; counting each drivetrain variant under the same model separately. For example, the 2wd Escape 4wd Escape sales were counted as different nameplates. The same applied for different engine displacements. Nobody has *ever* counted this way in the industry, ever.
Why does this matter? Here's the DOTs top 5 trade ins: Corolla, Civic, Camry, Focus (FWD), Elantra. Here's Edmond's top 5 trade ins: Focus, Escape, Civic, F150(!), Corolla. Coming in at #8 was the Chevy Silverado 1500(!).
And, somehow, the Government can't add. The DOT got 690,114 applications, scrapped 685,201 vehicles under the program, and claims that 684,941 vehicles were purchased under the program.
See http://www.autoobserver.com/2009/09/new-math-cash-for-clunkers-numbers-dont-add-up.html for the details.
September 19, 2009, 8:20 pmJohn Hitchcock:
I don't see any aspect of c4c intentions where it benefits dealers. Dealers will only benefit from unintended results. The primary c4c action required dealers to front the money for the government and then wait in line to get the fronted money back. The books show "accounts receivable" money from the fed. The bank accounts show huge holes where money used to be.
At best, the dealerships are missing out on interest or investment income from the money they used to front the fed. And they are less able to buy stock. At worst, the dealerships had to take out loans to front the fed, so they're paying interest on the money they used to front the fed.
So when the fed gets around to paying, if it doesn't disqualify, the dealerships get less than their front in return. So the dealerships lose.
Where the dealerships can get back some of their money is in the used car business. With so many perfectly resellable (sp) cars destroyed, the supply side of the supply-and-demand curve has shrunk, so the demand side will have to pay a higher premium for the lower supply. So dealers who bought used cars before c4c will be able to mark up the prices on those used cars now that c4c is over.
And that means the consumer base as a whole loses out on the c4c deal.
So, the consumers lose, the taxpayers lose, the dealerships lose, the manufacturers break even at best, and big sugar daddy gains or saves a few votes.
September 19, 2009, 9:32 pmJohn Hitchcock:
I should point out that it would've been economically unwise for any dealership to opt-out of the c4c program. While opting in would make them lose money (in my belief), opting out would've made them lose even more money as the buyers would drive on by. And the dealerships would still face the same bad end-of-program market.
September 19, 2009, 10:18 pmfeeblemind:
Via the government subsidy, the price of new cars is cut by $4500 and demand surges. Does c4c not show that cars are perhaps priced 5k too high? If the price of new cars could be reduced by that amount, would sales pick up?
September 20, 2009, 7:12 amNot a Chemist, but:
Actually, Co is Cobalt. The molecule you were referring to is CO2, that is, one Carbon atom and two Oxygen atoms.
September 20, 2009, 7:38 amDon Lloyd:
Mostly restating some unintended effects of the program :
1. The limited time program drives up unit demand vs inventory supply, driving up negotiated pre-subsidy market new car prices by part or all of the subsidy.
2. The market distortion destroys the signal of unit sales, leaving the automakers unable to make low risk future production decisions.
3. At the end of the program, new car prices will remain abnormally high as inventory exhaustion will keep unsubsidized prices high even in the face of reduced demand.
Regards, Don
September 20, 2009, 9:32 pmhedberg:
How does the dealer get part of the subsidy? By selling the car for a higher price than the car would bring but for the c4c subsidy.
September 20, 2009, 10:13 pmCars4Charities:
Cash for clunkers did virtually nothing for either new car sales or the environment. What it did do was take 700,000 RUNNING vehicles and destroy them. Many of these vehicles were in decent shape. As a result, used car prices have gone up sharply and much revenue has been lost by repair shops, parts stores and car donation charities.
September 21, 2009, 8:41 ammarkm:
By the program rules, all pre-existing rebates, price cuts, and other sales incentives were supposed to remain in place. Hence the manufacturers could not immediately bump the real price up to get part of the give-away. (If the program had lasted longer, they could have let limited time offers expire...)
But dealers got part of the give-away. They have never sold cars at a fixed price, instead they start with an unrealistically high list price and let the buyer haggle them down a few hundred or even a few thousand. With the government kicking in 3 grand or so more than the trade-in was worth, the dealers would know they didn't need to give up so much to make the sale.
Of course, against that you have to figure whatever extra costs the dealers incurred in scrambling around to complete these sales in a hurry, the cost of paperwork, and the loans they have to carry while they're waiting for the government check. Probably for months.
September 21, 2009, 7:05 pm