Musical Stimulus: Cash-for-Clunker

The “cash-for-clunkers” program was such a stunning success that it proved the wisdom of stimulus spending, right? Indeed, it was the perfect plan. By offering Americans $4,500 to trade in their “worthless” clunkers on brand new cars, the cash-for-clunkers program could stimulate demand, increasing the numbers of cars sold, stave off recession, save Detroit, and protect the environment all in one swoop. And according to the media, it was a stunning success. . . except that it wasn’t.

The Stimulus That Wasn't

Many argued that the cash-for-clunkers program would not actually stimulate consumer demand. They argued that this program would only cause consumers to hold off buying new cars, or would convince consumers to move forward purchases that were already planned to take advantage of the program. Never fear, a succession of experts assured us on CNBC and the other networks, such fears are unfounded.

And when the program quickly blew through the billion dollars allocated to the program, the experts were even more adamant that this was new demand. “We are seeing people come into our store who never would have bought a new car,” said dealer after dealer on CNBC, as they demanded another two billion dollars to keep the program running. Ford Motor Co. was so optimistic about these “eye-poppingly high” sales (compared to the year before -- the worst in company history), that they announced plans to increase third-quarter production by 18%! Indeed, Ford estimates that 700,000 cars will be purchased under the program (though only 157,000 have been purchased so far).

So Congress dutifully added another two billion dollars to the program and a funny thing happened. Sales started fading, fast. According to Joshua Shapiro, chief US Economist at MFR, this meant that the sales in July had been borrowed from the future. In other words, this program did not stimulate demand, so much as it shifted demand from 2010 to July 2009. “Anyone thinking about buying cars in the next several months might as well do it now when the government is giving away $4,500.” Edmunds.com Senior Analyst Michelle Krebs likewise notes that “we see that interest dying down.”

It remains to be seen how these numbers turn out, but right now it appears that the program has only given some benefit to July at the expense of 2010.

Collateral Damage On Consumer Spending

But robbing 2010 to pay July is not the only harm this program has done. Several economists have warned that the cash-for-clunkers program would draw money from other consumer purchases. This complaint seems to have been confirmed, when retail sales fell unexpectedly in July. Many now attribute this drop to the increase in car sales. Observed economist Shapiro of MFR, “with income flows very constrained and household balance sheets over-leveraged, any incremental increase is likely to weigh on non-automotive sales.” In English, that means with consumers being so strapped, they had to stop spending on other items so they could afford these new cars.

Ford, of course, rejected this suggestion, saying that the cash-for-clunkers scheme was “a drop in the bucket compared to overall purchases of goods and services.” But that doesn’t explain where consumers got the money to purchase the cars. That also makes one wonder how this could have stimulated the economy if it was a drop in the bucket?

Collateral Damage On Charities

The cash-for-clunkers program had another victim that has only recently been identified: charities. Under the program, these “worthless” clunkers must be scrapped. But in the past, these cars would have been donated to charities. Not coincidentally, donations of vehicles to charity have fallen 12 percent already and may fall as much as 25 percent -- which could cost charities well over $100 million this year.

One car donation program director, who states that the types of cars being turned in under the program “are absolutely the typical donation to us,” estimates that this will cost charities approximately 175,000 cars, if the program’s estimates prove true. He notes that the result will be “devastating.”

I Shoot A Stimulus In The Air, It Fell To Earth. . . In Japan

Finally, while the program was implemented with the idea of helping Detroit automakers, the top beneficiaries of the program have been Japanese. Indeed, while the Ford Focus is the most purchased car under the program, the other four top cars are all Japanese. Moreover, General Motors, Ford and Chrysler accounted for only 47% of the 157,000 new vehicles sold under the clunkers program so far. Fortunately, many of the Japanese models acquired are made in the United States, just not in places like Michigan.

Interestingly, the Detroit automakers did dominate the list of the clunkers that were turned in, securing all ten of the top ten spots.

A Mitigated Success

So this program that we are told was an unmitigated success, finds it's success quite mitigated. It appears that the program simply convinced people to move forward already-planned purchases, which will harm the economy in the future. It harmed retail sales, which harms the economy in the present. It harms charities, who are most needed in bad economic times. And it seems to have wildly missed its target, despite all the talk about being so well targeted.

Let us hope that Detroit saves their pennies from these sales, because they may need them in 2010.