Stimulus Was a Clunker
I have written a lot about the Cash for Clunkers law, and the fact that it was a hit with its beneficiaries because it bought cars that blue-booked for just under $1500 for two or three times that amount. Other studies have shown that the program did abate some CO2, but at ridiculously high prices per ton.
But I have found a reason to love the Cash for Clunkers program: it is a fabulous demonstration project for just how utterly pointless government stimulus programs can be. Stimulus programs tend to be hard to evaluate in our complex economy -- sort of like trying to calculate the effect of a butterfly flapping its wings on world climate. But since cash for clunkers only lasted a few weeks and hit only one industry, we can learn a lot about the effectiveness of government stimulus.
Here is the US Census data for auto dealer sales (source). Thanks to my friend Scott who first pointed me to the analysis:
The dotted line simply averages the sales for the month of the clunkers program and the month after. I think it is pretty clear that we spent a few billion dollars making some used car owners happy (by overpaying for their vehicles) but did absolutely nothing to move the trend line in auto sales, as the program appears to have just pulled forward purchases rather than stimulated new ones.
Update: Welcome Instapundit readers. This is all in the family blogging day, as my son just started up his own blog with a post ranking baseball players. Feel free to give him grief for being a Yankees homer.
perlhaqr:
And worse, now it's harder to find parts for other cars that might otherwise have been continued to be used, instead of being scrapped and all the energy costs associated with new cars added in.
June 1, 2010, 5:19 pmIronman:
The folks at Edmunds found that about 125,000 additional vehicles were purchased during the weeks that Cash for Clunkers ran than might have been purchased otherwise, but it's pretty clear that it all was due to sales being pulled ahead in time without any real stimulus to the new car market, which this latest data would seem to confirm.
Still, while the sustained gain to the U.S. automobile market might be, at best, exactly zero, the one thing Cash for Clunkers did truly deliver was a pretty impressive deadweight loss for taxpayers from the subsidies it took to seriously disrupt regular sales patterns.
June 1, 2010, 8:10 pmhanmeng:
It's bad enough the politicians could've done this. But what about the media? Have I missed something, or have they reported anything about this?
June 1, 2010, 8:33 pmjeff:
It did have one additional impact beyond pulling sales forward. Cash for Clunkers removed low end used cars from the resale market, forcing potential buyers to not buy a car, or spend more than they wanted to. This supply problem trickled up and sold a few more new cars.
But it was still a ridiculous waste of tax money.
June 2, 2010, 6:40 amFred Z the worst of it.:
"removed low end used cars from the resale market"
It did that, but few grasp all of the implications. Once again, the poor got the worst of it. My handyman wants a new van. Can't get one at a reasonable price.
I too frequently buy vans for hauling people, tools and materials and have tracked the price of used Chevy Astro vans for years. Those prices are up a lot, even up here in Canada.
The gigantic sucking sound was used clunkers leaving Canada for the USA.
So Cash for Clunkers, another hopeless attempt to manipulate supply and demand curves, had some international badness too.
June 2, 2010, 6:59 amJeff:
"It did that, but few grasp all of the implications. Once again, the poor got the worst of it. My handyman wants a new van. Can’t get one at a reasonable price."
In the end, it doesn't help auto dealers either. Removing used cars from the re-sale market increased the cost of replacing their inventory, and decreased sales volume. New car dealers make more money on used cars than new cars.
June 2, 2010, 9:18 amTim:
I could have told you this would happen. In fact, I may have told you this would happen.
This is one of the fundamental problem with sales incentives -- they pull ahead purchases as people take advantage of the bonus cash. Left as an exercise to the more economically minded, the two other major effects:
June 2, 2010, 9:40 am- Post incentive sales depression as people wait out for the next round of incentives.
- Decline in residual value. Example: If you bought a new car 6 months before CfC was announced, the residual value of that car is potentially some fraction less because of the incentive. (That's one reason why domestic cars decline in value more quickly -- the repeated pattern of sales incentives changes the new vs. used calculation.)
SBABG:
We did a full analysis of this when the program was announced in Aug 2009 and said this would happen, explaining that it was a modern day version of the Broken Window Fallacy. It was so predictable, but only if you have common sense, which our "enlightened leaders" do not possess. We need to educate others about the BWF - you can use the link below to help educate co-workers.
http://www.sbabg.org/2009/08/03/cash-for-clunkers-is-a-modern-day-version-of-the-broken-window-fallacy/
June 2, 2010, 9:44 amphblj:
While I'm not by any means a fan of the clunker program, it astounds me that seemingly intelligent people can draw a dotted line on a graph and draw conclusions.
There are reasonable rebuttals abound. There's also plenty of data worthy of analysis. Don't mistake drawing a line on a graph with evidence, and please don't come to grand conclusions about economics-at-large from it. If my sixth-grade child can refute your argument, it's probably not terribly sound.
June 2, 2010, 7:19 pmRyan Haber:
Hanmeng,
The Media? Oh, you mean the Ministry of Propaganda. Nope, no word from them. They of course only produce news stories with the explicit or implied consent of agents of the Comrade-in-Chief. I would only expect politically expedient truths to emerge from their offices.
June 3, 2010, 6:30 amPatrick:
BRILLIANT! That chart is awesome. Shows how people DO respond to incentives, but 'stimulus' doesnt create wealth, it just shifts buying decisions.
"The folks at Edmunds found that about 125,000 additional vehicles were purchased during the weeks that Cash for Clunkers ran than might have been purchased otherwise, but it’s pretty clear that it all was due to sales being pulled ahead in time without any real stimulus to the new car market, which this latest data would seem to confirm."
June 3, 2010, 9:06 amHogarth:
waiting for phblj to bring his sixth-grade level refutations to the table.
June 3, 2010, 3:21 pmFool:
No, No - you have it all wrong; we just need to extend the program and spend more dollars - then we'll see the benefits...
This comment has been brought to you by the Democrats in Congress.
June 3, 2010, 3:21 pmBrian Epps:
Cutting a foot off the top of the blanket and sewing it to the bottom doesn't make it longer, it makes it shorter (You lose a little in the cut and overlap.) Keynesians never quite get that.
June 3, 2010, 3:24 pmMartin L. Shoemaker:
Hogarth, you'll be waiting a long time. That looked like a "nothing to see here, move along" argument if I ever saw one.
June 3, 2010, 3:59 pmByron:
A more productive use of the money: To have taken it in small bills, mulched it, soaked up the oil spill with the mulch, then burned it.
June 3, 2010, 4:00 pmRay R.:
I think too the purchase of a new car during times of austerity is, on a grand scale, foolish. A nations wealth lies within the general population. To hell with GM.
June 3, 2010, 4:28 pmthree chord sloth:
Hogarth:
waiting for phblj to bring his sixth-grade level refutations to the table.
Heh. You're gonna have a long wait...
June 3, 2010, 4:53 pmDrew:
My wife and I are too poor to buy a new car. We know that quite soon we'll be forced by necessity to buy a quality used car, and thanks to Cash for Clunkers, there are fewer used cars in the market for us to purchase. And yet, my tax money helped those who were already wealthy enough to buy a new car do just that. So if you bought a *new* car with Cash for Clunkers, my poor family who barely scrapes by helped you do it.
You're fucking welcome.
June 3, 2010, 4:56 pmCaptain Midnight:
Nothing is so wrong that the government won't try it again and again. The graph shows how the government's stimulus only moved the purchases ahead in time; it didn't create new purchases. Likewise, the housing stimulus lapsed in April, and the May numbers are -- surprise, surprise -- down by 40%. So what is the next thing that government will try to "stimulate" with our money?
June 3, 2010, 5:05 pmUsed:
We are in used car sales, and the commenters are correct. Our inventory replacement cost is higher and our customers are having a harder time buying cars. Not only has the recession hit, but the artificial inflation of supply that clunkers caused a double hit. The used supply was already down because of slow car sales. The row upon row of vehicles in the new dealers back lots waiting to be crushed was sickening to see.
Cash for clunkers was a redistribution of wealth from the poorer to the richer.
June 3, 2010, 5:22 pmUsed:
I should have made it clearer that the inflation was in the cost of replacing inventory.
Also, a lot of people supposedly got large tax refunds, but what we noticed is that either they didn't in our area, or used some to pay off other bills. It seemed people were looking for lower priced vehicles than last year at tax time.
June 3, 2010, 5:25 pmCharlos:
Cash for Clunkers was ALMOST as insane as the federal government program Robert A. Heinlein invented as a satire of government waste in "The Door Into Summer." Granted, the cars crushed in that program were brand new and never driven, but at least that fictional program wasn't aimed straight at the poor and lower middle class just trying to get by.
June 3, 2010, 5:51 pmLouis:
A car salesman here. You have to imagine what it was like at the bottom end of that graph, too: we lost so many good salesmen, who couldn't wait for things to get back to normal. Old hands - guys who'd been in the business for 30 years - were freaking out, dumbfounded, because they'd never seen anything like it. New guys just came and went.
(I saw guys crying.) Those who didn't come from affluent backgrounds were pissed, because a lot of decent cars, that could be sold later to poor folks, got destroyed, and now those customers are priced out of the market.
The talk about Obama has taken a turn: he's now seen as a problem, where, before, many had high hopes. I was never a fan, and paid a price for that, socially, at the beginning. Now they all ask me what's going on because they don't trust the media.
Drew: check out Kia's. Low prices - S.U.Vs start at $20,000 - good quality, high safety ratings, more standard features than everybody else (like USB connections) and generous incentives - for now: because of the effect of CfC, raising the price of used cars, they're disappearing. Make that move soon.
June 3, 2010, 5:52 pmLinc:
As one person who took advantage of the Cash for Clunkers program, I have to confess that my trade-in provided virtually no environmental value. It was a van that I kept licensed and insured in case we needed to haul something around. I used it for about 100 miles per year, maybe 200, and with 170,000 miles on it, it had very little value.
I got my $3500 benefit, bought a new Honda Accord, sold my old Honda Accord, which actually got better mileage.
I don't know how many others were in a similar situation, but my trade-in provided no environmental benefit. I probably did buy a car several years early, but my purchase probably was offset by a number who bought a new car only months earlier.
June 3, 2010, 5:55 pmkanu:
I personally know five people who took advantage of C4C. Two of them had never before bought a new car, and certainly would not have bought one last summer without the C4C subsidy.
That's the good news for the folks who came up with this scheme. Here's the not-so-good news for them: ALL FIVE of those car buyers were conservative Republicans!
That's not because I don't know any Democrats. But think about it. To take advantage of C4C, you had to be living below your means, i.e., driving an old junker even though you could afford a new car. People who are conservative in their personal finances tend to be conservative in their politics as well.
Democrats, on the other hand, generally fall into two categories of car owners: (a) too poor to afford a new car or (b) too politically correct to drive an old gas-guzzler. Either way, not eligible to take advantage of C4C.
I assume Obama would not have pushed this through if he had realized that the beneficiaries would mostly be people who would never consider voting for him.
June 3, 2010, 6:54 pmA Friend:
kanu, now that made me laugh.
June 3, 2010, 9:13 pmbandit:
Kanu - exactly right - I traded a 2000 Ford Ranger for a 2010 Toyota Tacoma and got $3500 from the taxpayers. What a country!!
June 4, 2010, 4:44 ameon:
Here in Ohio, one interesting effect of C4C is now rearing its head. Namely, a climbing car repossession rate.
A lot of the people who were driving "clunkers" and traded them in for the money abided by the rule that said they had to use the money to help buy a new "fuel-efficient" vehicle. Few of those are genuinely inexpensive, which means that after the DP, they had to make monthly payments. A lot of them just couldn't afford it, especially with rising prices on food, utilities, etc.
Result; a lot of those "fuel-efficient" cars were repo'ed, and are now sitting back on the dealers' lots they came from. Except now, they are "used" cars, which the dealers have to sell at a depreciated price. In the middle of a recession.
Needless to say, the dealers aren't thrilled at this double-whammy. If I were a dealer, I wouldn't be.
clear ether
eon
June 4, 2010, 5:29 amnb:
I'm not fan of cars, but what phblj eludes to is correct.
This article and assessment are completely wrong at best, and dishonest at worst.
Take a look at the actual census data here : http://www.census.gov/retail/#mrts
The trend that is described as a "pull[ing] forward purchases" indicated by a lull in sales on the graph after the program ended was a completely reasonable expectation considering that people hesitated in the hopes that the program would be restarted. However, even more likely is that that the program ended at the end of August which is the typical time of year when car sales drop. It's the model year change and people wait for the new model year or wait for price reductions in the late model cars. Take a look at the data for other years. Car sales nose dive every year, starting in September.
FWIW, at no point in 2009 do ADJUSTED car sales even drop to 47 million dollars like that chart indicates. I think our bro was looking at non-adjusted sales.
You can be anti-car and still be honest when assessing the success of the program. Besides, there are far better arguments to make if you're trying to point out the failure of that program.
Anyway, check out the cars people traded in and the cars purchased:
http://en.wikipedia.org/wiki/Car_Allowance_Rebate_System#Economic_effects
Why is no one pointing out the positive trend of compact car purchasing?
June 4, 2010, 7:45 amRoux:
C4C wasn't good for anyone. I spoke with a car dealer and he said that one of the things that hurt was when a C4C customer had a gov't lien the rebate went to the gov't instead of the dealer. They lost money on a lot of the deals.
June 4, 2010, 7:56 amnb:
Roux, I'm not sure what you're talking about. All liens had to be cleared before the government would offer a rebate on the car. This just makes sense.
June 4, 2010, 8:11 amA Friend:
nb, I looked at the source data as you suggested. The chart Coyote showed is of the adjusted numbers. Most of the other years look very different. Your argument that people were deferring sales hoping the program would come back is interesting, but basically supports the same point coyote is making: sales were shifted in time, mostly.
June 4, 2010, 10:27 amWild Bill Ohio:
I traded my old Ford van during the program for a new Subaru. I look at it as a tax refund, even if darn little of the hundreds of thousands I've paid over the years.
June 4, 2010, 10:36 amDerHahn:
The 'people bought compacts with C4C cash' meme is a joke. Rather than aggregating the data by base model, the government reported data is slivered into illogical segements divided by trim line and engine/transmission type. Since compacts generally aren't sold with multipe engine sizes the way trucks and SUVs are, this (probably deliberately) obscures what base models were the most often purchased. IIRC Edmunds aggregated the data and reported the F150 as the vehicle most often purchased with C4C cash.
June 4, 2010, 1:58 pmsportutegirl:
Ordinarily when a car is traded in on a newer, more efficient model, the older car is sold to someone with an even less fuel efficient car. Perhaps this car is then sold to someone with an even worse beater, thus continuing a line that ends when a truly awful, polluting, inefficient, oil burning piece of muck is finally removed from the road. This means that a truly awful car was removed and 'replaced' with a new fuel efficient one. CFC stopped this efficient chain of events at the first link.
June 4, 2010, 3:18 pmandrej:
It's a sad sad world where an leftist economy ignorants can rule. The same car scrap madness went through all Europe too.
June 4, 2010, 3:34 pmDave G.:
I don't see how you get that graph from the data quoted. http://www.census.gov/retail/mrts/www/data/excel/mrtssales92-present.xls seems to be the source, but it just doesn't match.
Also interesting - if you look at the data in excel since 1992, September appears to frequently be about 10,000 M less than August, and August is very frequently the top month of the year.
I'm not saying the program was great or even good, but the chart appears to be inaccurate and the analysis is flawed.
June 4, 2010, 4:20 pmA Friend:
Dave G., the data is from line 81, Automobile and other motor vehicle dealers, seasonally adjusted, from the website you link to. As you point out, if you don't use seasonally adjusted data, the trend is useless. If you graph the data from 2009, you get the chart Coyote presented, so the chart is certainly accurate. The analysis of course, is a guess. Supporters of C4C say it stimulated the economy. Detractors say it just moved sales around to capture a temporary incentive. Looking at the other years, to me it certainly seems to have had an effect, and that effect seems to be merely moving sales around. I guess the other intrepretation you could make is that it had no effect. Neither looks good for the program. It certainly didn't net increase the production of cars over a longer term, which was it's stated goal.
June 4, 2010, 4:57 pmBarbara M:
And another follow-up to the outcome of the Cash for Clunkers program is; the assessment on your old car has gone up, for tax purposes. They claim due to the program, used cars are at a premium, so now your estimated value on your vehicle, has increased, mine went from $18,800 to 22,500, which increased my annual property tax by $130. Since when, in history, did a vehicle GAIN value, unless it became a classic, after 20+years? I guess the government didn't think about the rest of us who kept our used cars!
June 29, 2010, 5:17 am