Monday, August 17, 2009

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.” 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.


Tennessee Jed said...

Andrew - boy do you have this one right. This always struck me as an attempt to try and help the newly created Government Union Motors, a company that deserved to fail. The law of unintended consequence should play out just as you describe. Liberal Incorporated is really trying to 1) gain more control of the former private sector, 2) further entrench their power, and 3) reward their base.

AndrewPrice said...

Jed, That was exactly the goal. At one point they even thought about requiring that the new car be American, with the idea being that it would have to be GM, Ford or Chrysler. But then they realized that would start a trade war with places like Canada, and it wouldn't stop people from buying Japanese cars, which are more American that much of what comes out of Detroit now.

I'm always amazed how hard it is for Democrats to understand the law of unintended consequences. I guess that comes with static thinking.

CrispyRice said...

Just wait 'til you see the housing numbers in October and November. There is a 1st time home owners tax credit for $8k that expires 11/30. The Great Crispy predicts a huge bump coming and then a huge drop-off in home sales in December.

Oh, and my personal favorite re the Cash for Clunkers? You can buy a Hummer. The H3 apparently qualifies for a new purchase. That must've thrown the environmentalists for a loop.

And you know who else has been harmed by it, Andrew? The used car parts market. Since they're not allowed even to salvage the parts of the engines, there are a lot fewer parts available and people who are looking to repair their cars are facing a shortage.

Writer X said...

And what happens in six months when people can't suddenly pay the loans on their new cars? It reminds me of the real estate investor scenario all over again. And are the car companies the only companies worth saving? Why not give everyone a tax break of $4500 and let us decide where we want to spend our own money.

AndrewPrice said...

Crispy, Good points. Destroying these cars is amazingly wasteful. You're right about the housing numbers too. I can't wait to hear how we've been "saved" because the housing numbers are up. And then they "unexpectedly" crash at the end of the year.

Writer X, The people can't be trusted to spend their own money... they might not use it to save democratic constituents.

Writer X said...

If I didn't need a new car, I would have seriously considered the Hummer. There would be some poetic justice in that. Although I'd have a hard time fitting it in my garage.

AndrewPrice said...

Sounds like you need a bigger garage! :-)

Actually, I've been in a couple Hummers and they strike me as junk.

Writer X said...

I do like riding up high to see the road better. But I plan to keep my Acura SUV until I run it into the ground. Even though it's only a few years old, I guess it would still qualify as a "clunker."

AndrewPrice said...

Acuras are good cars. And if it's not a clunker, there are websites telling you how to make it into one.

StanH said...

“Cash for Clunkers,” is a glaring example of government mind think. Or as was stated up-thread the result of unintended consequences producing a false echo in the market place giving the sycophants in the MSM something “positive” to report. This from a group of eggheads that know nothing of Free Market economics. IMO this is a minnie Fannie-Mae, Freddie-Mac in the making. People are purchasing cars that have no business purchasing new cars. You can just imagine the headlines in six months to a year, car ownership is a right we must help these poor, poor people stay in their vehicle’s. In Washington there will be much gnashing of teeth and tra-la… subsidize the Cash for Clunkers program again.

One of the funny little anecdotes from Obamanomics or Cash for Clunkers. A sharp business man in the area replaced his fleet of around thirty vehicles. He had to do it anyway and we the taxpayer subsidized his upgrade.

AndrewPrice said...

Stan, so right you are. When they renewed the program, several democrats suggested restricting the program to low-income people.

First, those aren't people who can afford new cars.

Second, if this is really stimulus, why would you only aim it at poor people?

I'm sure when people start defaulting on the loans -- and you know that some will, we'll start hearing how we need to bail them out because "we" put them into their position.

JG said...

I read this somewhere else, can't remember where (probably BH, all my good man-on-the-street quotes come from there!) but someone said, "It's amazing how some people think the same government that couldn't handle Cash for Clunkers was able to orchestrate the 9/11 conspiracy" or something like that.


AndrewPrice said...

JG, excellent point. None of the conspiracy theories are particularly logically consistent and that's one of the more common flaws in their thinking -- the government is seen as hopelessly incompetent, until it engages in the conspiracy at which point thousands of people become all-knowing, all-powerful, and fully capable of maintaining incredible secrets -- except from the one guy who solved the whole thing sitting in his basement.

CrispyRice said...

Well, WriterX, if you still need a car then, maybe you can pick up one of those trade-ins that these folks can't afford in 6 months!

I do have a good friend who has a real, honest-to-goodness clunker and is in serious need of a better car. But guess what? He can't afford a payment. (And he knows it, so he didn't try.) But now there is an even bigger dearth of used cars for him to choose from.

Like Stan said, the program didn't help anyone who actually needed help, and probably hurt them. But what do you expect from a typical liberal program. Ugh.

LawHawkSF said...

Andrew: "They" didn't discover the potential of a tariff-trade war comparable to Smoot-Hawley which would lead us even deeper into depression. The Republicans and Blue Dog Democrats figured that one out, and took a stand.

I put Cash-For-Clunkers on a par with I-Pods for Guns. Sounds good, won't work, is outrageously expensive and creates an all-new criminal underclass. Meanwhile, it allows the government to take something useful from us, and give us back something less-useful but controlled by government (e.g., Government Motors, formerly known as General Motors).

I intended to turn in an old car for an M1-A1 Abrams tank to drive around in Sodom by the Bay, but it didn't qualify and DOD started asking questions about my background.

DCAlleyKat said...

The most purchased car was manufactured by Ford...hmmm, the same Ford that didn't participate in the auto industry takeover/bailout...I hear a message in there somewhere from the people to the govt! The rest of the sales were to primarily Japanese autos, not the now govt run auto dealers...hmmm, I hear another message! It appears the people are speaking in many ways to their elected representatives, oh excuse me I mean the mob is speaking in many ways...:-)

AndrewPrice said...

Lawhawk, How about cash for taxpayers?

DCAlleyKat, it is interesting that Ford is the only one of the three to make the list.

LawHawkSF said...

DCAlleyKat: In a perverse sort of way, it also sounds like that old black magic, "the market," is interfering with the path to socialism. Message to Obama: "Be careful what you wish for, you might get something you didn't expect."

Andrew: Taxpayers are selfish, unpatriotic demagogues. They don't deserve any cash.

patti said...

one of my first thoughts on this program was it would encourage many folks to overextend themselves for $4500 in "free" money for a vehicle. just more of the same washington "we care about you" shenanigans...

AndrewPrice said...

Patti, getting people over-extended seems to be what the Congress does best!

Lawhawk, markets are pesky things.

DCAlleyKat said...

Lawhawk, markets are pesky things.

LOL, yes indeed they are! And there's more than one way to make ones point, eh?! Onward pesks.

Cars4Charities said...

C4c is hurting car donation charities, as well as used car dealers, auto repair shops, auto parts stores and the poor. When it was first proposed, we asked that the c4c cars go to charity with the charity determing their best use. Those in poor condition would be junked. Those in good shape would be sold or given to the poor. Under this plan, erveryone would see a benefit from c4c, not just the new car industry!

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