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Clunk:

"Cash for Clunkers" is an amazingly successful stimulus program, right? How else to explain its immense popularity? Not so fast.

Congress budgeted $1 billion to to provide car-buyers of rebates up to $4,500 when trading in a qualifying older vehicle for a new, more fuel-efficient one. The money was supposed to last into November, but it's already gone. Does this mean it worked? Not necessarily. As Jeremy Anwyl of Edmonds.com explains, it appears the program shoe-horned months worth of car sales into a week or two, and may not have increased overall car sales much at all.

I love a good sales surge as much as anyone. But it's not that simple. First, it's not clear that cash for clunkers actually increased sales. Edmunds.com noted recently that over 100,000 buyers put their purchases on hold waiting for the program to launch. Once consumers could start cashing in on July 24, showrooms were flooded and government servers were overwhelmed as the backlog of buyers finalized their purchases.

Secondly, on July 27, Edmunds.com published an analysis showing that in any given month 60,000 to 70,000 "clunker-like" deals happen with no government program in place. The 200,000-plus deals the government was originally prepared to fund through the program's Nov. 1 end date were about the "natural" clunker trade-in rate.

Clearly, cash for clunkers was underfunded from the start. Consumers quickly figured that out and rushed to take advantage before funding ran out.

This sales frenzy was inevitable. We have crammed three to four months of normal activity into just a few days.

While automakers may like the program, there's little reason to believe it will contribute to an economic recovery -- and even less reason to think the program needs another $2 billion, as approved by the House of Representatives. More from the WSJ and Derek Thompson.

ChrisLee (mail):
On the other hand, maybe there are people out there would have held on to their old cars for another 2 or 3 years (due to economic uncertainty or whatever other reason) but decided to trade them in now because of the program. One of the objectives of the program was to get money moving now rather then later.

I don't think we can conclusively say, yet, that the program worked or didn't work. I'm not sure if we will ever be able to say conclusively one way or another. It's like most other stimulus; we don't how bad or good things would have been without it because we don't know what that alternative reality looks like. All we have is kind of a gut feeling/common sense vibe backed up by whatever economic theory we subscribe to.
8.3.2009 5:33pm
LouW:
For example, I'd planned on buying a new car in October as part of a car swap with my parents. I had not yet decided whether I'd trade in my current SUV (Blue book ~$1200) or keep it as a weekend project car. Once Cash for Clunkers was announced and I found my SUV would be worth $4500 as a trade, the decision was easy. I'm now in the process of buying the new car, thus pulling in my purchase from October, but for no net gain in car sales. However, the program did convince me to destroy my old gas guzzler, so it had some beneficial impact...but not $3300 worth of tax money.
8.3.2009 5:40pm
Roguestage:
I find this analysis lacking, for a few reasons.

First, Anwyl says that 60-70,000 'clunker-like' deals happen every month. Even if that's true, what effect has the recession had? Have these deals tapered off? Were there fewer car sales over the past several months due to the recession? Well, just a week ago, the same newspaper printing Anwyl's op-ed
printed an article stating that GM's sales had fallen off by nearly 1/3 in the first half of 2009 as compared to the same period last year. This rise in sales should help offset some of their recent operating losses and keep a few more dealerships in the black.

Another source compiles a list of every major automaker, showing a 30-40% decline in sales during the first quarter of 2009 as compared to last year. I'm sure some will take this source with a grain of salt, seeing as the site is called "Green Car Congress", but its numbers are sourced with direct links to the auto manufacturers' own numbers.

Both of these reports suggest that Anywl's comparison to "any given month" simply doesn't hold water in the current climate.

Moreover, this is the time of year when model years switch over and dealerships are trying to get rid of inventory; again, with the recession, they were counting on having a much harder time doing that. Economics 101: excess inventory at the dealers means that the auto manufacturers can't sell the dealers as many cars, which means they manufacture and sell fewer cars, which means they cut back on production and jobs.

All this points to economic benefit from the program, and that's before we even get to the increased fuel economy.

And finally, just to get another authority stating precisely the opposite of Mr. Anwyl:


Mike Jackson, chief executive of AutoNation, the country's largest auto dealership chain, agreed that the program was bringing in customers that wouldn't have bought otherwise. AutoNation had booked 3,000 Clunker deals, he said, and the average customer had a higher credit rating than usual.

"They're frugal consumers," he said, "who have owned their vehicles for a long time, for hundreds of thousands of miles, and they were going to keep these vehicles forever."


(Link)
8.3.2009 5:40pm
josil (mail):
As I understand it, the clunkers will be crushed and scrapped. This is unlike the normal disposal of "dead" cars, where they are first stripped for parts that are then sold to people trying to keep their old cars running. Now, which approach serves the economy better?
8.3.2009 5:42pm
Ben P:
Since it's the CEO of Edmunds writing, I might excuse the shameless self promotion in exchange for more information in the survey. Is 60-70k deals a 1 year average? 5 year average? It seems the "deal flow" might well be considerably lower than average during a period when we already know consumer spending is being limited.
8.3.2009 5:49pm
Steve:
Yes, it's very hard for me to see how a flurry of economic activity and a clearing of dealer inventories could possibly contribute to an economic recovery.

One assumes that Edmunds.com's analysis of 60-70,000 transactions per month pertains to the level of activity which occurs during normal economic times, which pretty much answers the question of why the government would be interested in stimulating the economy to that level.

I guess the empirical test of this theory will involve waiting until the program expires and seeing if, in fact, there are virtually no "clunker-like" deals for several months after the fact because the program merely front-loaded them all. I have my doubts but I'm happy to let the scientific method play out either way.
8.3.2009 5:49pm
MCM (mail):
Wow. So apparently, if we dislike Obama enough, we'll actually argue that subsidizing the purchase of a product will not increase consumption of that product.

may not have increased overall car sales much at all.


Really. Other than basic economics, no reason to believe it did at all. This is just sad, Mr. Adler.
8.3.2009 5:56pm
Gabriel McCall (mail):
How many car windows are broken when Joe Bastiat's old clunker gets crushed?
8.3.2009 5:57pm
byomtov (mail):
So subsidizing a certain type of transaction doesn't increase the number of transactions of that type?

Hmm.
8.3.2009 5:58pm
Riley Still (mail):
What this program does is destroys real wealth. If "successful," the program will cause hundreds of thousands of vehicles, most of which provide utilitarian value to their owners, to be thrown down the rathole. To replace that utilitarian value, great quantities of natural resources and thousands of man years will have to be expended, in greater quantities and sooner (to manufacture new replacement vehicles) than if the clunkers had been allowed to reach the end of their economic life. The loss will be experienced by those, usually poorer, people who cannot afford to buy a vehicle that costs more than $3,500/$4,500. Reduced supply of these vehicles will push up prices of remaining guzzlers and their used repair parts.

After this program, the auto workers and suppliers will back on layoff. Better we let them find jobs creating real wealth where it's needed.

All in the name of saving the planet from CO2 (or in the name of creating jobs?)
8.3.2009 6:08pm
pct:
I will have to disagree with Anwyl and come down with Jackson (@Roguestage).

As much to the point, as pure Keynesian stimulus I find it hard to beat. My personal anecdote: I have a 1998 Mercury Sable with 140K on it. In the current climate, I was planning on nursing it along for several more months, and then possibly getting a 3-year old car coming off lease. I'll get $3500 from CARS; book value for my care is around $800. So for $2700, the government has bribed me to spend $27000 on a new car, a 10x Keynesian multiplier on me alone. Plus Massachusetts gets to collect higher excise and sales taxes. If the government had simply sent me a check for $2700, I would have banked it. Dan Ariely may think this behavior is really stupid, but it as stimulus it seems to be the best idea the Administration has come up with.
8.3.2009 6:09pm
MCM (mail):
After this program, the auto workers and suppliers will back on layoff.


Can you tell me if it's going to rain on Labor Day weekend? Trying to plan a camping trip in my new, wealth-destroying Ford.
8.3.2009 6:16pm
ShelbyC:

However, the program did convince me to destroy my old gas guzzler, so it had some beneficial impact



There's quite a bit of broken window fallacy accociated with this program. We're paying people to destroy perfectly good cars. Therefore any gains have to be offeset with the loss in value of the cars.
8.3.2009 6:17pm
Arkady:

As Jeremy Anwyl of Edmonds.com explains, it appears the program shoe-horned months worth of car sales into a week or two, and may not have increased overall car sales much at all.


But it did increase the velocity of purchases, and in a down economy, that increase in velocity ought to count for something -- and if the program is extended, count for even more, I'd hazard.
8.3.2009 6:19pm
rick.felt:
So for $2700, the government has bribed me to spend $27000 on a new car, a 10x Keynesian multiplier on me alone.

Would you like to hire me to come over and break all the windows in your house? If you're nearby, I'll do it for ten bucks. I promise you that the economic multiplier will be enormous.
8.3.2009 6:23pm
cirby (mail):
pct:

I have a 1998 Mercury Sable with 140K on it. In the current climate, I was planning on nursing it along for several more months, and then possibly getting a 3-year old car coming off lease. I'll get $3500 from CARS



No, you won't.

Under the "revised" fuel economy numbers, that car gets an official combined rating of 19 MPG, and is therefore not eligible for CARS.

Oops. You see, the Feds "recalculated" the MPG ratings for a LOT of older vehicles to bring them in line with the way they calculate the MPG for newer cars, and they dropped off of the CARS listing. Yours is one of them, and you don't get a dime. If a dealership does give you the credit for that car, they're likely to eat that $3500. Yeah, real good stimulus, there.

Some dealerships are still working off of the old numbers, and are going to get HAMMERED by the tens of thousands of dollars in cars that they're scrapping for no good reason.
8.3.2009 6:25pm
Mike& (mail):
I have a clunker that I intended on driving until it "died." It's an '01 Nissan, so it might have years left on it. I was going to upgrade to a new car.

I waited, thinking that deals would get better. Woe is I.

Anyhow, if Cash for Clunkers isn't renewed, I will not buy a new car.

I am but a sample of one. Still, am I really the only person who was incentivized to purchase a new car?

As an earlier commenter noted: You get more of what you subsidize. That is basic economics. Cash for Clunkers subsidized new car purchases. Therefore...

Come on, Adler: This is not tough stuff!

I hate Obama's policies, too, and think he is ruining the country. As a matter of policy, I don't think Cash for Clunkers is wise.

Suggesting, though, that it didn't increase new car sales? Again, man.... Come on! You're too smart for that.
8.3.2009 6:27pm
MCM (mail):
Would you like to hire me to come over and break all the windows in your house? If you're nearby, I'll do it for ten bucks. I promise you that the economic multiplier will be enormous.


Because new cars are identical replacements for old cars, right?
8.3.2009 6:31pm
Frecklerock:
It seems we have identified two instances of wealth that are being destroyed by this program, and both are receiving criticism both in this blog and more widely: (a) "gas guzzlers" taken out of the system (and their used parts, yes, and it is theorized that this will drive up the cost of spare parts for the remaining cars of these models, so there are plenty of "ills" flowing from this, in addition to somehow taking away our enjoyment of vehicles by purchasing them from us, which is a rather weak argument, I think), and (b) the up to $4500 in rebates the government is giving out to incentivize new sales from car companies that we now collectively own (amusingly, we are spending our tax dollars to incentivize ourselves to purchase cars from companies we already own). I propose a single solution to both problems. In an efficient world, shouldn't the government authorize car dealers to serve as sales agents for the traded in cars, perhaps for a slight commission, or with the "rebate" price going back to the government to repay us for our incentivizing tax dollars, with any earnings above that kept by the dealers?
8.3.2009 6:32pm
Jonathan H. Adler (mail) (www):
MCM, byomtov, et al. --

The question is not whether cash-for-clunkers has an effect on aggregate car sales, but on the size and nature of that effect. Specifically, the question is whether its primary effect was to increase the absolute number of car sales, or to shift the timing of car sales into a given window. Anwyl, and other who have looked at this, believe the primary effect is the latter -- and Anwyl clearly has a greater interest in car sales than most.

The next question is whether such sales have much of a stimulative effect, or are the equivalent of a "window breaking" program. I have yet to see a serious analysis suggesting it's a particularly effective form of stimulus and contributes to net wealth creation -- as or more effective than $1 billion spent in some other way -- but I'd be happy to see it.

JHA

P.S. MCM, I don't see how this is an "anti-Obama" post. I made no mention of Obama, and I did not think the Administration had requested a "cash-for-clunkers" fund in the stimulus. If I recall correctly, the original bill was introduced by Ohio Representative Betty Sutton, and had bi-partisan support.
8.3.2009 6:33pm
Roguestage:
@ShelbyC, @Riley Still:

This doesn't necessarily create a loss in value. As @pct and @LouW point out, at least some of the clunkers will have significantly less trade-in value than the $3500 or $4500 they'll bring in under CFC. Trade-in value for cars this old typically includes scrap value - in other words, if the book value for pct's old car was $800, a dealer would expect to get slightly more than $800 for the parts in the car, so he'd be willing to pay about $800 for it. Giving pct a larger sum for his old car doesn't destroy value, since it's actually putting more money into pct's pocket than it's taking out. And FYI, even scrapped cars have quite a bit of value. There are a significant number of U.S. steel mills that reprocess scrap steel from junkyards into new steel products. I also seriously doubt that there is enough of a shortage of old, beat-up, gas guzzling autos in the U.S. that this program will reduce demand to the point where those who want one (or can only afford one) will be unable to get one.

Another point, on the environmental end:


The Transportation Department said Monday afternoon that based on 80,500 cash-for-clunker applications — which officials believe is about a third of the total deals so far — average fuel economy of the new vehicles was 9.6 miles per gallon better than the old ones, 25.4 m.p.g. versus 15.8 m.p.g., an improvement of 60.8 percent. The improvement, the department pointed out, is much larger than the minimum required to be eligible for the government rebate: a gain of four miles per gallon for cars and two miles per gallon for trucks.

(Link)

This suggests that as far as the fuel economy end of the program, it will be even more successful than originally anticipated.

Ultimately, it's too early to say whether this program is definitely a success, but the early indicators suggest that it will be. And by the same token, it's too early to say that it's a failure, as Anwyl's analysis attempts to do.
8.3.2009 6:37pm
ShelbyC:

I have yet to see a serious analysis suggesting it's a particularly effective form of stimulus and contributes to net wealth creation -- as or more effective than $1 billion spent in some other way -- but I'd be happy to see it.


In Capitalism and Freedom, MF points out that there hasn't been any serious analysis that any stimulus contributes to net wealth creation. Has anything changed since 1968?
8.3.2009 6:38pm
MCM (mail):
I'm sorry, I should have been more clear: I don't think Jeremy Anwyl likes Obama very much, which is why he decided to quote Obama regarding the stimulus, when, as you said, Obama had little to do with it. Unlike some posters on volokh.com, I do make a habit of reading the actual articles.
8.3.2009 6:40pm
pct:
@JHA: The purpose of a Keynesian stimulus is not to contribute to effective wealth creation, so it makes little sense to judge it on that basis. Keynes famously suggested paying people to dig holes and then fill them in. He was making a point. Now you may not agree with the concept of a Keynesian stimulus; that's a different question.
8.3.2009 6:43pm
PeteP (mail):
Another government cluster-F.

Any dealer who's paying attention will realize 'Hey, here's 3,500 - 4,500 worth of incentive to bring in a buyer that ** I ** don't have to put on the table, and limit the incentives HE puts on the table accordingly.

In the meantime, the taxpayers are now the owners of a bunch of perfectly good cars in working order, and we are amndated to destroy them, instead of making any attempt whatsoever to get value out of them as working vehicles.

Now the program is broke, and today the House voted to give another 2 billion to it. More to come, doubtless.
8.3.2009 6:45pm
Joe Kowalski (mail):

Any dealer who's paying attention will realize 'Hey, here's 3,500 - 4,500 worth of incentive to bring in a buyer that ** I ** don't have to put on the table, and limit the incentives HE puts on the table accordingly.

As part of the rules for participating in the program, the dealers had to agree to keep available all of their existing incentives prior to getting in on the C4C manna from heaven. On some Chrysler models, one could get $9000 off the list price when combining the dealer/manufacturer incentives with the subsidized trade-in.
8.3.2009 6:48pm
Mike& (mail):
Specifically, the question is whether its primary effect was to increase the absolute number of car sales, or to shift the timing of car sales into a given window

Well, sure. On a micro level: I have 2001 Nissan Xterra 4WD that rates at 16mpg. A clunker. It has 73,000 miles on it. It will eventually need to be replaced.

When?

A year from now? Two years? Longer?

When it needs replaced, will I buy a new car? Or will I spend less money by purchasing a used car?

It is better that I not spend any money for the next 6 months to 3 years - or hopefully longer?

It is better that I spend less money, e.g., buying used, when I do purchase a "new" car?

The sentiment seems to be that we should get as much money moving right now as possible. Do you disagree with that sentiment? If so, why?
8.3.2009 6:51pm
pags (mail):
I guess I'm just too thick to understand the 'gas-guzzler' end of this deal. I own a 2003 3/4 ton Chevy Suburban. I think it qualifies as the poster-child for gas-guzzling, right? Well... uh.. It doesn't qualify under the program. Neither does my 1981 Mercedes - perhaps the poster-child for clunker at that age. Egad - what DOES qualify?
8.3.2009 6:55pm
ShelbyC:
Roguestage:

Giving pct a larger sum for his old car doesn't destroy value, since it's actually putting more money into pct's pocket than it's taking out.


Yuh-huh. Keep in mind that the $3500 is a direct transfer from somewhere else, so nothing gained nothing lost (except deadweight loss from taxation). pct doesn't scrap the car, so the car is worth > $800 to pct. But it's only worth $800 to the dealer. So yes, you basically have a window-breaking program.
8.3.2009 6:59pm
/:
Egad - what DOES qualify?

Limousine cadillacs.
8.3.2009 7:41pm
bski:

Because new cars are identical replacements for old cars, right?




You can go and buy triple pane windows to save on energy so it won't be an exact replacement.
8.3.2009 7:44pm
Roguestage:
ShelbyC:

Yuh-huh. Keep in mind that the $3500 is a direct transfer from somewhere else, so nothing gained nothing lost (except deadweight loss from taxation). pct doesn't scrap the car, so the car is worth > $800 to pct. But it's only worth $800 to the dealer. So yes, you basically have a window-breaking program.


Sure, assuming that the economic value of pct's having and using the new car is not at least $2700 greater than the economic value of pct's having and using the old car, taking into account the cost of purchasing spare parts to keep an old car running, the additional cost of gas to pct (remember that part of the program), the incremental economic benefits of fewer harmful emissions (even setting aside CO2, emissions of VOCs and HCs are directly linked to fuel economy), the incremental drop in gas prices for the rest of us due to diminished demand, and of course, assuming that the single 40-year old citation to a book claiming that stimulus never ever ever leads to wealth creation (ever) is accurate.

That's an awful lot of assumptions you're making. Got any facts to back them up? If even one of them is wrong - say, if pct ends up spending $3000 less on gas this year because he's getting another 10 mpg and there's another price spike - the argumentative house of cards comes tumbling down.

I'll reiterate what I said before: it's too soon to tell whether the program is a successful stimulus or a failure. The facts I've seen suggest that it will be a modest success. Libertarian economic ideology suggests that it will be a failure. When in doubt, I choose facts over ideology.
8.3.2009 8:13pm
SuperSkeptic (mail):
Keynes famously suggested paying people to dig holes and then fill them in.

If he said that, I can't fathom why anyone would ever listen to anything he had to say.
8.3.2009 8:34pm
ShelbyC:

assuming that the single 40-year old citation to a book claiming that stimulus never ever ever leads to wealth creation (ever) is accurate.


The cite (and the book) said that there was no empherical evidence of any, and I honestly don't know if that has changed since 1968. I believe you're grossly mischaracterizing what I claimed the book said.



Sure, assuming that the economic value of pct's having and using the new car is not at least $2700 greater than the economic value of pct's having and using the old car,


Why assuming that? The $2700 doesn't come out of thin air.


I choose facts over ideology.


Are the facts necessary to determine whether or not the stimulus is a success even knowable?

Thanks :-),

Shelby
8.3.2009 8:41pm
Ben P:

Would you like to hire me to come over and break all the windows in your house? If you're nearby, I'll do it for ten bucks. I promise you that the economic multiplier will be enormous.


That's not really accurate on either side of the equation.

From just my perspective, I'm getting $4500 to sell you my window. What you happen to do with them after you buy them from me is not my concern.


From the dealers perspective, I'm able to subsidize $4500 on a trade in. The question is whether or not the value of that trade in is substantially hurt by making the car inoperable. For a lot of true clunkers it's probably not being hurt that much because they would never be sold as operating used cars anyway.


Any dealer who's paying attention will realize 'Hey, here's 3,500 - 4,500 worth of incentive to bring in a buyer that ** I ** don't have to put on the table, and limit the incentives HE puts on the table accordingly.



Maybe if we assume no competition for dealers. But realistically, even without the government requirements Joe Kawalski mentioned above, dealers would probably reduce their incentives by something less than $4500 because it enables them to undercut while still doing the volume allowed by the lower price.
8.3.2009 8:44pm
byomtov (mail):
Specifically, the question is whether its primary effect was to increase the absolute number of car sales, or to shift the timing of car sales into a given window. Anwyl, and other who have looked at this, believe the primary effect is the latter -- and Anwyl clearly has a greater interest in car sales than most.

Jonathan,

First of all, the fact that Anwyl has a high level of interest in car sales tells us nothing about his ability to analyze the program's economic effects.

Did the program just shift car sales into a given window? Of course it did. Cars don't last forever. Any car that was sold and junked under the program was going to be sold and junked sometime.

The question is the amount of acceleration and whether it was beneficial. You obviously don't think so, though you provide no reasons. Do you simply disagree with Keynesian stimulus ideas, or do you think this was a poor way to spend the money?
8.3.2009 8:48pm
ShelbyC:

From just my perspective, I'm getting $4500 to sell you my window. What you happen to do with them after you buy them from me is not my concern.


From the dealers perspective, I'm able to subsidize $4500 on a trade in. The question is whether or not the value of that trade in is substantially hurt by making the car inoperable.


The delear (the glazier) gains $4500 from the dealer. The cobbler loses $4500 because you buy the window instead of fixing your shoes. (This is obscurred by the fact of the govt subsidy, so it's really some taxpayer that can't fix his shoes) So there's no gain of $4500. The net loss is the value of the vehicle.
8.3.2009 8:50pm
Ben P:

If he said that, I can't fathom why anyone would ever listen to anything he had to say.



He did say that, or something close to it.

The point is not the creation of value, but the acceleration of the money flow in the economy.

A very rough approximation of the theory and equations involved is basically this. WHen a recession/depression starts, people lose confidence in the economy, consequently, they cease to spend money and start saving it. This drop in spending causes oversupply (lower demand than supply), which (1) causes prices to fall, and (2) manufacturers to cut back supply(Ie layoffs and closed factories) The cut back in supply causes people to lose their jobs/income which leads to more cutbacks in spending.

The response is stimulus. Under the theories, even if it's through taxation or through deficit spending, and even if the work itself creates minimal value (digging holes and filling them back up), the government is putting money into peoples hands, which causes them to spend. Each dollar spent goes into someone elses hands and they spend it too and so on. (The Keyensian multiplier), and demand picks back up and supply rises to meet it.
8.3.2009 8:51pm
Ben P:

The net loss is the value of the vehicle.


You're still assuming making the vehicle inoperable is something akin to "breaking a window" when on average it's probably not. Most cars that fit the statutory definition of a clunker wouldn't be resold as used cars, they'd be sold off as scrap. There are certainly exceptions, but one typically doesn't get operational engine parts (pistons, cams and such) out of scrapped cars so the value of making the engine inoperable probably doesn't hurt the scrap value all that much.

Even if "scrapping" meant crushing the car (and it doesn't, dealers merely have to render the car undrivable) you'd still get metal scrap value, which even then may still be 50% or more of the value of the car.
8.3.2009 8:58pm
ShelbyC:

You're still assuming making the vehicle inoperable is something akin to "breaking a window" when on average it's probably not.


Pardon my imprecission. The net loss is the value of the vehicle (i.e. the amount you'd need to give the seller without the program) minus the salvage value ($800 in the above example).
8.3.2009 9:02pm
Christopher Cooke (mail):
Alan Greenspan seemed to think the program was having a stimulative effect. He said it wouldn't have worked 6 months ago, because we were in much worse shape. But, compared to Edmunds.com, he doesn't know anything, I suppose.
8.3.2009 9:34pm
Vermando (mail) (www):
And of course, breaking everyone's windows and making them buy new ones would be tremendously stimulative for the economy.

If you don't get that, ask yourself why WWII snapped us out of the Depression with such aplomb - we made a bunch of planes and tanks (think cars with guns) and sent them overseas to be destroyed. Yet, the economy boomed. It's the exact same principle.
8.3.2009 9:38pm
Siskiyahoo:
"When in doubt, I choose facts over ideology." Roguestage must not be in doubt very often. Try some assumed facts. 15 mpg versus 25 mpg. $3.00 gas. (Maybe that's a little high, but gas costs more than that here.) 15,000 miles per year. Does your math show a $3,000 annual difference?
8.3.2009 9:46pm
/:
If you don't get that, ask yourself why WWII snapped us out of the Depression with such aplomb - we made a bunch of planes and tanks (think cars with guns) and sent them overseas to be destroyed. Yet, the economy boomed.

I think this is a gross oversimplification. Large portions of the workforce and of industry were nationalized for a specific purpose whose success wasn't measured financially. Something of the like happened in Russia quite a bit earlier, and in the 1930s their stability through isolation was envied. But in neither case, one might posit, was there a boom until after the nationalization ended.

So, did the government prevent worsening, or did it simply fix by fiat the prevaling condition? If the latter, considering the toll of war and dictatorship, doesn't long-term inflexibility cost more than short-term volitility, especially when the former requires government to grow?
8.3.2009 10:01pm
Siskiyahoo:
No, it's not the exact same principle. There was a lot more to World War II than the destruction of planes and tanks. Our competitors' (that is to say, practically all of the industrial world aside from the US) production facilities were leveled and their labor forces more than decimated--every tenth one probablly does not begin to describe the situation. Peoples who now compete very successfully with us were starving. In some places, whole political structures were shattered. This is not a valid comparison.
8.3.2009 10:03pm
MCM (mail):
You can go and buy triple pane windows to save on energy so it won't be an exact replacement.


In which case the analogy completely fails and paying people to break single-paned windows might actually be worthwhile.
8.3.2009 10:10pm
Roguestage:
Siskiyahoo:

In your own hypothetical, the savings in gasoline costs alone are $1200 annually. So the CFC $3500 credit would pay for itself in just three years. And if gas goes back to $4/gallon, where it was not too long ago, $1600 annual savings for 15,000 miles of driving. That'd be sufficient to take care of the $4500 credit in three years.

That's to say nothing of the savings in spare parts. I have a 1999 Pontiac Grand Prix; I've already had to put $1000 in to it this year just to keep it running, and it will need another $1000 before the year's done (the brakes are getting soft, and one of the windows recently stuck all the way down - it's taped shut because the cost of the part to fix it is $650, and the blue book value of the car is less than $1500). New cars don't take that much upkeep.

Facts. Those are the benefits to the end user. On your own hypothetical, it sounds to me like it's not a very bad deal. All of those benefits are thus available to that user to put back into the economy - assuming, as many economists do (including Milton Friedman, I believe) that people are rational economic actors who will engage in beneficial economic activity when they have additional resources with which to do so. This money thereby frees the credit recipients' resources for other economic activities, which may be more beneficial to the economy as a whole than purchasing yet more gasoline or yet more spare parts for their clunker. Of course, determining which economic activities are a net benefit is something of a value judgment - for example, would we rather direct resources towards the manufacture of new cars or the manufacture of spare parts for old cars? But acknowledging that we have to make a value judgment only brings us back where we started, to evaluating CFC.

At the risk of sounding like a broken record: I do not believe that we have all the facts with which to evaluate the success or failure of this program at this time. I also believe that the facts we do have suggest that it is a successful economic stimulus, contrary to the assertion in the original article cited by Professor Adler. I remain unconvinced by ShelbyC's snide suggestions to the contrary.
8.3.2009 10:14pm
Roguestage:
@ShelbyC


In Capitalism and Freedom, MF points out that there hasn't been any serious analysis that any stimulus contributes to net wealth creation. Has anything changed since 1968?

assuming that the single 40-year old citation to a book claiming that stimulus never ever ever leads to wealth creation (ever) is accurate.

The cite (and the book) said that there was no empherical evidence of any, and I honestly don't know if that has changed since 1968. I believe you're grossly mischaracterizing what I claimed the book said.


Where I come from, saying "there's no empirical evidence that X leads to Y" is very similar to saying "X does not lead to Y." My apologies if you think the latter is a gross mischaracterization of the former.

Regardless, I still think that a single cite to a 40-year old authority is a thin reed with which to support an argument.

Particularly since the argument it claims to state is easily refuted by such examples as the Civilian Conservation Corps and the Public Works Administration. Just last month, I spent some time driving on the Blue Ridge Parkway, a CCC-built road. That road - and the easily accessible hiking trails and vistas adjacent to it - bring tourist dollars into the area to this day. Those dollars support local businesses and recreation areas. Sounds something like net wealth creation to me.
8.3.2009 10:26pm
markm (mail):
"Most cars that fit the statutory definition of a clunker wouldn't be resold as used cars, they'd be sold off as scrap."

No. To qualify, a car has to be driveable, and have been licensed and insured for the past year. And of course, the buyer has to be able to qualify for a loan on a new car. Someone poor enough to be driving a car that really should be scrapped won't qualify for the loan. Perhaps they can sell their clunker to someone richer for use as a trade-in, but only if they've been able to keep up their insurance, and can find all the paperwork. That certainly isn't a given at the bottom end of the economy even in normal times, let alone the last 12 monthes. Finally, if a poor family can pull things together and sell their clunker, what are they going to be able to get to replace it?
8.3.2009 10:56pm
David Chesler (mail) (www):
Just my random 2 cents. At the end of May I figured there were too many things wrong at the same time with my 2001 Windstar - newest vehicle I've ever owned when I bought it 3 years ago - that I wouldn't repair them. So I took a 1994 G20 van from someone who is out of the country for a while. (If he comes back and wants it I can give him $2k to keep it, or I can give it back and I'll to spend about the same on an adequate vehicle.) They're old cars, so I'm spending about $2k/year on maintenance, and an extra $1500/year in gas. I save a bunch on insurance and 2.5% (3.125%?) annual excise tax.

I might have turned in the Windstar for a new car (now I can't since I put the plates on the G20, so I don't have the continuous registration on the Windstar.) I have the income, cash, and credit to buy a new car if I chose to.

I can't understand why I would.

And I really can't understand how the kind of people that buy clunkers are suddenly the kind of people that buy new cars, unless it's a food-chain thing like LouW describes. I see where pct is getting an upgrade from a new-to-him 3-year-old to a brand new car.

My father also never owned a new car in his life, and I just don't get this new car thing.
8.3.2009 11:31pm
MartyA:
Me and Murtha and Dodd's kid and Biden's son are deeply, deeply involved in facilitating the paperwork on the clunkers delivered unto the Obama administration.
As we divert vehicles destined for destruction, working our usual document magic, we are looking for drivers willing to haul paid for clunkers to our friends, or "amoigos," in Mexico.
The clunkers cost little; the paperwork is "handled" by our ACORN and Obama friends and there is no threat from the program IGs.
If you want to share in our profits with almost no risk, contact the Chicago black racist obama rep or Bernie Madoff to signup for and invest in "Cash for Clunkers, Another democrat theft from America Program."
8.3.2009 11:46pm
Ben P:

No. To qualify, a car has to be driveable, and have been licensed and insured for the past year. And of course, the buyer has to be able to qualify for a loan on a new car. Someone poor enough to be driving a car that really should be scrapped won't qualify for the loan.


Go look at your average "pre-owned" car lot.

How many "Pre-2000" cars do you see? Heck, how many Pre-2004 cars do you see?

At normal car dealerships you just don't see used cars older than 6-7 years, even at small independent car dealerships you don't see many. The only place you find cars like that are in the newspaper or the online equivalents.

That's because they're worth so little that the margins on selling a 7 year old car just aren't worth reconditioning it for sale. If you go to any normal car dealership and trade in any car that's older than 5-6 years, the odds are the dealership isn't going to resell it as a working vehicle. They'll sell it to a junkyard. Even people who "don't do new cars" aren't buying 6 year old cars because frankly it's a bad investment, you'll spend more money keeping that car alive another 6 than you would buying 2 year old car.


Someone poor enough to be driving a car that really should be scrapped won't qualify for the loan.


Not that it's terribly relevant, but until 3 years ago I drove a 1986 Volvo, it was 23 years old and had 290k miles on it. When I finally decided to get rid of it, I didn't need financing to replace it.

There's lots of people who drive their cars until they get to be money pits or break in a way that's uneconomical to repair. Many of them are not poor.
8.4.2009 12:02am
Laurence Dale (mail):
The whole concept of cash for clunkers program seems a bit misguided, at least as encapsulated in this parody entitled "Billions of Dollars to Be Burned Under New 'Cash for Cash' Program": http://optoons.blogspot.com/ (August 4 entry)
8.4.2009 12:17am
Laurence Dale (mail):
The whole concept of cash for clunkers program seems a bit misguided, at least as encapsulated in this parody entitled "Billions of Dollars to Be Burned Under New 'Cash for Cash' Program": http://optoons.blogspot.com (August 4 entry)
8.4.2009 12:18am
Real American (mail):
the government is spending taxpayer money to help people buy cars. What a waste of money. What a waste of liberty. Bend over for the Union States of America.
8.4.2009 12:28am
BGates:
Sounds something like net wealth creation to me.

Is the word 'net' in there just for decoration?
8.4.2009 12:37am
Riley Still (mail):
@Vermando

"If you don't get that, ask yourself why WWII snapped us out of the Depression with such aplomb - we made a bunch of planes and tanks (think cars with guns) and sent them overseas to be destroyed. Yet, the economy boomed. It's the exact same principle."

It was a false boom. 12 million men were out of work. They were in the military. The only wealth they were producing was freedom.

Yes, civilians were fully employed. But they were producing stuff to be distroyed. Wages were low, and there was nothing to buy.

The only lasting wealth produced was technology, future productive capacity, and optimism.
8.4.2009 12:39am
Siskiyahoo:
Rogue: Of course, I did do the math and was just pointing out that your $3,000 in the first year was just a tad off, perhaps a little farther than a fact- oriented person would wish.

My actual experience is more like Ben's than yours: 1988 auto approaching 300,000 miles when I gave it to my daughter last year; not made by any company receiving bail out money; not made by an American manufacturer though I wish such cars had been; last I heard it was still getting 23 mpg. Turn in your Grand Prix. The question is whether you or the country will be better off as a result.
8.4.2009 12:43am
DiversityHire:

If you don't get that, ask yourself why WWII snapped us out of the Depression with such aplomb…


Don't give this congress any ideas… and props to W for his stimulatin' Iraq war.
8.4.2009 3:10am
guester (mail):
Correct me if I am wrong, but doesn't this simply replace brand and dealership "rebates' and other "discounts" with a government write-down? So the dealership essentially makes $4500 extra at the taxpayers' expense because the "discounts" come from Uncle Sam, not the mysterious "manager" in the back room. Typical of a chief executive with no real-world experience. I doubt if Obama or any of his cronies EVER sat in the little room negotiating a car deal. They were too busy going to urban meetings to commisserate about how whitey was ruining the world...
8.4.2009 3:13am
NickM (mail) (www):
Subsidizing purchase of a product causes purchases of non-subsidized substitutes for that product to decrease.
In this case, the leading substitute for new cars is used cars - even ones with significantly better mileage than the used cars being sold under CfC. Since you're now decreasing demand for non-clunker used cars, you're going to decrease their market value. That's wealth destruction. It has to be calculated in when you seek to determine whether the program is engaging in net wealth creation.

Nick
8.4.2009 7:52am
Floridan:
DC: My father also never owned a new car in his life, and I just don't get this new car thing.

It's a good thing someone does [get this new car thing], otherwise you would be hard pressed to find a used car.
8.4.2009 8:23am
A.C.:
I would love to get a subsidy to trade in my '93 clunker for a new car. I'll have to do it soon anyway. Unfortunately, it gets a lot better than 18 mpg. Those of us who are cheap all the time, rather than just in a recession, lose out on this.

As for the new car thing, I like to buy new and drive until the car is ready to be junked. I'd rather have my own 5-year-old car than a stranger's 5-year-old car that I don't know anything about. At least I know I've done the maintenance.
8.4.2009 9:23am
MCM (mail):
Correct me if I am wrong, but doesn't this simply replace brand and dealership "rebates' and other "discounts" with a government write-down? So the dealership essentially makes $4500 extra at the taxpayers' expense because the "discounts" come from Uncle Sam, not the mysterious "manager" in the back room. Typical of a chief executive with no real-world experience. I doubt if Obama or any of his cronies EVER sat in the little room negotiating a car deal. They were too busy going to urban meetings to commisserate about how whitey was ruining the world...


Try reading the other comments before posting, so that you don't look like an idiot for asking something that's already been asked and answered.
8.4.2009 9:26am
Curmudgeon:
I have to admit, I was a bit surprised at the number of people who could simultaneously meet: (i) the MPG requirements (my 10 your old, full-size GM boat has too high MPG score), (ii) the continuance insurance requirement (so no seasonal farm / cabin cars or recently purchased cars), (iii) the price requirement (can't be worth >$4500 or no net gain), and the (iv) in-the-market requirement (people driving 15 year old trucks normally?? upgrade to a 2-5 year old used truck, not a new econobox). Has someone found a loophole/scam in the program requirements? Or am I missing something?
8.4.2009 10:00am
ShelbyC:
Roguestage:

Where I come from, saying is very similar to saying "X does not lead to Y." My apologies if you think the latter is a gross mischaracterization of the former.


Well, communication must be pretty tough where your from, but I doubt saying "there's no empirical evidence that X leads to Y" is similar to "X never ever ever leads to Y (ever)". By your logic, a statment like, "There is no empherical evidence that math majors earn greater salaries than physics majors" would be equivilant to "math majors never ever ever earn more than physics majors (ever).

And the anecdote that you give isn't empherical evidence or analysis. It's like refuting the math major/physics major claim above by saying, "well I know a physics major that makes more than a math major".
8.4.2009 10:58am
rick.felt:
I have to admit, I was a bit surprised at the number of people who could simultaneously meet: (i) the MPG requirements (my 10 your old, full-size GM boat has too high MPG score), (ii) the continuance insurance requirement (so no seasonal farm / cabin cars or recently purchased cars), (iii) the price requirement (can't be worth >$4500 or no net gain), and the (iv) in-the-market requirement (people driving 15 year old trucks normally?? upgrade to a 2-5 year old used truck, not a new econobox). Has someone found a loophole/scam in the program requirements? Or am I missing something?

I must admit that I was somewhat surprised, too. Then again...

The money is exhausted after 222,222 cars. Given that in 2006 about 7.5 million cars were sold in the US, that comes out to about 3% of sales. Even if sales declined a lot this year, at most it's what, 5-6% of total car sales? So we're really not talking about that many cars.

I don't think these cars are necessarily econoboxes. Plenty of family cars get better than 25 mpg. My 250 hp Acura TL gets >26 highway if I don't redline it and I keep it around 70.

I imagine that people transition to different cars because of lifestyle changes. A pickup might be adequate when you're single, but when you've got a kid or two you need a family car. Or maybe you've always had a big SUV when you had kids to haul around, but now that they're out of the house you can move back to something smaller.
8.4.2009 11:44am
Dan Weber (www):
There are a lot of real, serious economists (and who aren't Obama-haters, either) who have doubts about the value of this program. Go check out Econbrowser or Calculated Risk for people who have seen these tricks many times.

As far as getting money "into the economy," this program is great. I'm not sure it's economically wise, although I can see a lot of intangibles coming into play: if we make consumers think the economy is better, then the economy will be better, and therefore the program is a success.
8.4.2009 12:31pm
Prof. S. (mail):


You can go and buy triple pane windows to save on energy so it won't be an exact replacement.



In which case the analogy completely fails and paying people to break single-paned windows might actually be worthwhile.



If it were truly worthwhile (i.e. the energy savings is greater than the cost of replacement), then the homeowner would have already replaced the windows.

The fact that the windows haven't already been replaced demonstrates that while the transaction "might" be worthwhile (as in within the realm of possibility), the set of circumstances where it actually is worth it is actually zero.
8.4.2009 12:32pm
Mark Buehner (mail):

If you don't get that, ask yourself why WWII snapped us out of the Depression with such aplomb - we made a bunch of planes and tanks (think cars with guns) and sent them overseas to be destroyed. Yet, the economy boomed.


We also thinned the employment pool by 500,000 if you want to look at it that way. I'm not sure that's a particularly helpful prism. Never before and never since has our entire nation dropped everything and conducted a near total war effort. When 130 million people are willing to work for nothing to win the war and forgo all sort of commercial goods, its easy to be productive. But the catch is they have to be willing.
8.4.2009 12:35pm
MarkField (mail):

If it were truly worthwhile (i.e. the energy savings is greater than the cost of replacement), then the homeowner would have already replaced the windows.


Yeah, and that $20 bill on the sidewalk? It's not really there, because if it were, someone else would have picked it up. Just keep walkin'.
8.4.2009 12:56pm
Sacastration (mail):
This is such a great idea we should extend it!! Just give people money for their old stuff, no matter what it is, as a little bit of incentive to buy new stuff. Brilliant! Why, my old fridge is a electricity guzzler, there must be more efficient fridges out there. Cash for Fridges! Why not? It's so simple, all you do is give people free money from the tree out back, and they'll buy new stuff, cause bad stuff is bad, especially cheap bad stuff that poor people can afford. Bad. We need newer better stuff. How bout homes!!!!! Yeah, I can finally stimulate the economy and housing market at the same time if the government just gives me $50k for my old house to buy a newer better one. It will save the planet cause the new stuff doesn't actually have to be built, it comes from the tree out back you see. If you don't see the genius in this you are just a racist Obama hater. Ha ha, he won.....suckers.
8.4.2009 12:57pm
ShelbyC:

Yeah, and that $20 bill on the sidewalk? It's not really there, because if it were, someone else would have picked it up. Just keep walkin'.


I'm looking at the sidwalk right now, and there's no $20 bill there. You're right, there are occaisionally sidewalks that have $20 bills on them, but the vast, vast majority of sidewalks don't.
8.4.2009 1:08pm
Mark Buehner (mail):
Wasn't incentivizing people marginally (or un)able to afford big ticket items what got us into this mess? Lets have the government force Best Buy to offer 24 months, no money down, no proof of credit loans on plasma screens. They will fly off the shelves. What could go wrong?
8.4.2009 1:10pm
Abdul Abulbul Amir (mail):

This suggests that as far as the fuel economy end of the program, it will be even more successful than originally anticipated.


This is based on the falacy that better mileage always means less fuel consumed. Not true.

We turned in an 1987 F150 4WD and an eight foot bed. No new 4WD or eight food bed vehicles qualified for the $4500. So we got a Ford Ranger with $4500 taxpayer cash and $3500 in Ford rebates. We only drove the F150 once or twice a month to haul firewood. The Ranger with its smaller load capacity will require at least twice as many trips and will probably use more fuel for the same work.

In addition, the lack of 4WD may mean we will need a second vehicle on runs when the earth is soft.
8.4.2009 1:16pm
MCM (mail):
This is based on the falacy that better mileage always means less fuel consumed. Not true.

We turned in an 1987 F150 4WD and an eight foot bed. No new 4WD or eight food bed vehicles qualified for the $4500. So we got a Ford Ranger with $4500 taxpayer cash and $3500 in Ford rebates. We only drove the F150 once or twice a month to haul firewood. The Ranger with its smaller load capacity will require at least twice as many trips and will probably use more fuel for the same work.


Except that if you gas mileage is low enough, it hardly takes any improvement at all to halve (or more) your fuel consumption. You didn't mention your engine size or transmission, but you probably got like, what, 12 mpg on that thing? When it was new? With no load?

Even assuming you still got 12 mpg (doubtful on a 22 year old truck anyway), you got just over double that if you got the 4-cylinder manual Ranger. So actually, you will use the same fuel to drive twice as much.
8.4.2009 2:03pm
MCM (mail):

If it were truly worthwhile (i.e. the energy savings is greater than the cost of replacement), then the homeowner would have already replaced the windows.


MarkField already replied better than anything I could come up with.


I'm looking at the sidwalk right now, and there's no $20 bill there. You're right, there are occaisionally sidewalks that have $20 bills on them, but the vast, vast majority of sidewalks don't.


On the other hand, I am looking at the road right now and I see plenty of cars that get less than 18 mpg. Funny how analogies don't really make good arguments.
8.4.2009 2:09pm
Dan Weber (www):
I think helping the environment and reducing fuel usage is an important goal, but I don't see any evidence that clunker program does that.

Europe has a lot more experience with these programs, and their environmentalists have long ago figured out that they aren't all that (link).

If you really want to encourage a sensible reduction in fuel usage, you want a gas tax.
8.4.2009 2:21pm
ShelbyC:

MarkField already replied better than anything I could come up with.

...

On the other hand, I am looking at the road right now and I see plenty of cars that get less than 18 mpg. Funny how analogies don't really make good arguments.


Uh, which is it?

Cars that get less than $18 mpg aren't necessarily a net negative (If they were, folks would have bought new ones anyway.)
8.4.2009 2:26pm
Mark Buehner (mail):

On the other hand, I am looking at the road right now and I see plenty of cars that get less than 18 mpg. Funny how analogies don't really make good arguments.


But that's beside the point- the question is whether consumers will save more in mileage by junking a car that still has value to it and taking on debt than by holding on to the paid for car and living with the mileage premium. Its an open question, and probably unanswerable.

That concerns me FAR less than this ongoing delusion that we can keep printing money and showering it on people with programs like this with basically no consequences. How much is that 2 billion (or whatever it ends up) ultimately end up costing- consumers aren't the only ones wracking up interest after all.

We need to address the point that transferring money from one part of the economy to another via government is NOT creating wealth. In fact we are in a situation where the markets are spooked by mounting debt and massive uncertainty over how the government will address it. Instead of a multiplier, government spending is acting like a parachute, with consumers and investors rationally concluding that every penny spent today will be confiscated via taxation tomorrow, with a vengeance.

So the question isn't whether this program helps out the auto-industry marginally for a few weeks, but whether this kind of spending is retarding the recovery as a whole as investors run and hide.
8.4.2009 2:31pm
Prof. S. (mail):

Yeah, and that $20 bill on the sidewalk? It's not really there, because if it were, someone else would have picked it up. Just keep walkin'.


Except, in that scenario, I am the first person to discover that $20 bill. In this case, it's well known that the windows will improve efficiency.

Now, if we're walking along and everyone sees that $20 bill, but refuses to pick it up, then I'll probably keep walking too because I'll assume there is something wrong with it that makes it worthless.

Your analogy has absolutely nothing to do with my scenario. One is about finding things and the other is about making sensible economic decisions.
8.4.2009 2:44pm
MarkField (mail):

In this case, it's well known that the windows will improve efficiency.


Except for the small fact that (a) it isn't "well known"; and (b) even if it were "well known", people still might fail to change their windows in the short run because market incentives are skewed; because changing windows involves a lot of factors outside (pun intended) the issue of efficiency; or because people are NOT rational economic actors.

In short, you spouted ideology as a means to cut off thinking, instead of actually examining the issue.
8.4.2009 3:57pm
MarkField (mail):

I'm looking at the sidwalk right now, and there's no $20 bill there. You're right, there are occaisionally sidewalks that have $20 bills on them, but the vast, vast majority of sidewalks don't.


The original claim (translating the analogy) was not that the $20 wasn't there now, it was that the $20 was NEVER there.

Says the guy who fed himself for 10 days in law school after finding $50 on the sidewalk.
8.4.2009 3:59pm
MCM (mail):
Uh, which is it?


Different responses to different posts.

Cars that get less than $18 mpg aren't necessarily a net negative (If they were, folks would have bought new ones anyway.).


They don't need to be net negatives. The new ones just need to be to more than $3500 or $4500 better. While the mileage increases might vary, it should only take a couple years for the gas savings to make up the difference.
8.4.2009 4:48pm
GatoRat:
The problem with the thesis that gas savings "will make up the difference" is that the interest payments and depreciation on the new vehicle will ensure you never realize any savings. You will lose money in exchange for reliability.
8.4.2009 11:24pm
Vader:
This program was never about saving the environment or stimulating th economy. It was about the $1 billion / $4,500 = about 220,000 voters who will now feel indebted to the present Administration for reducing the cost of their car by $4,500.
8.5.2009 12:36am

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