Cash For Clunkers - One Last Time

We've panned the Cash For Clunkers program in previous posts, insisting that it is an idiotic program that accomplishes very little, if anything, in the areas it supposedly helped. Now that the preliminary sales results are coming in for September, the month after the program ended, it is becoming very clear that this was another government disaster of an idea.

According to the Motor Trend magazine website, on a year over year basis, General Motor sales were down over 40% (September, 2009 vs. September, 2008), Chrysler sales were down over 40%, and Ford sales were down about 6%. Most other brand sales were down on a year over year basis although not as badly as the GM and Chrysler declines. The Motor Trend article points out that the economy was imploding in September, 2008, highlighted by the meltdown of Lehman Brothers and other financial institutions, so that last September sales were on the low side to begin with, making these 40% declines more drastic.

Why did this happen? According to the stltoday.com website, they quoted a Washington University (St. Louis) economist, Gerry MacDonald, at the onset of the program in August who predicted, "The total number of cars sold isn't going to go up an inch. You're just moving it around in time. You are going to sell more cars now and fewer cars later." Now that the low September sales levels are materializing, it seems Mr. MacDonald was pretty close in his prediction. The bigger question is why didn't the high powered DC economists and politicians see this coming? Or did they and the political class not want to see it coming? With the incentives being as rich ($4,500) as they were, it is a no brainer that sales volumes would not increase, just slide.

Given that the majority of the sales were probably not incremental, were there other benefits to offset the disappointing follow up car sales? Although I do not have firm numbers on many of the following points, logic and common sense would say that there were probably far reaching, and mostly negative impacts, throughout the economy as a result of this program:

• Since the incremental sales were probably very small, there was no economic stimulus from the program. In fact, you can make the case that other product categories theoretically suffered since tax dollars used for the program were not available to be used for other products and services.
• Some experts have said that the less wealthy citizens suffered on a number of fronts. First of all, most lower income people could not afford a new car, even with the rebate, since credit was tight (reducing attractive car loan options) which required many of them to have cash up front that they did not have. Even if they had the cash, would they have been able to afford the higher car insurance they would have had to pay for years? In essence, lower income citizen's tax dollars were used to support a rebate sale for middle and upper income people who did have cash and who could afford higher insurance rates.
• Second, since all of the cars traded in were destroyed, there is probably some price increase pressure on the used car market since demand for used cars did not change, just the supply. Classic economic theory says that if demand stays the same and your supply is reduced then prices will go up. And who is the biggest target market of typical used cars? Lower income groups.
• Although it was against the rules, I would bet that a good number of these sales were junkers that were hauled out of the junkyard and passed off as the family car. The money was just too good to pass up: buy a junker out of the junk yard for $50, do a wink wink with the car dealership and you bypass the rules (rules said you had to have been using the car for at least a year prior to the program). Do you really think that in a very depressed car market that every dealer went by the book and lost sales because of the rules? Do you really think the government had any kind of audit process in place to support the rules? If this happened, which it probably did, than some clunkers were not taken off of the road, they already had been off the road.
• I came across and interesting environmental argument against the program earlier today. The writer's view was that this program actually did more harm to the environment than good. Their logic involved the sale of new cars when old cars are traded in. Used cars are typically purchased by lower income people since they cannot afford a new car, cannot get credit for a new car, and/or can not afford the increase in insurance payments for a new car. The writer saw two damaging environmental scenarios. First, the lower income car driver would just hold on to their really old clunker longer since they could not afford to step up to a better, more fuel efficient used car since the government had destroyed a lot of them. Thus, they are burning more gas than if they had gotten a newer vintage used car. Second, what if some lower class people actually bit the bullet and somehow bought a new car vs. a more recent used car? Think of the incremental energy in manufacturing and transportation involved in delivering that new car to the lower income purchaser vs. having them purchase a used car already made and on the lot? The writer provided no hard facts or analysis but their logic seemed sound if unquantified.

Bottom line: this program was a disaster on many fronts. It diverted taxpayer dollars from one group of people to another, diverted taxpayer dollars from other product categories, did not incrementally increase car sales, made used cars more difficult to find and afford for lower income groups, and had negligible, if any, positive environmental impacts. Great program.

As we have said previously, this was a simple rebate program that the political class obviously did not think through. Do we really think they can efficiently and effectively remake the whole health care system in the country and understand all of the interrelated tentacles that are involved? I doubt it.

Follow up note - in yesterday's post we discussed President Obama's trip to Copenhagen to lobby for Chicago getting the 2016 Summer Olympics and how we thought he should be working on much bigger issues (wars, economy, unemployment, etc.) rather than helping his Chicago buddies get the Olympics and probably get rich in the process. Before his presentation to the Olympic Committee, it was widely believed that Chicago was neck and neck with Rio for getting the bid out of the four finalist cities. Unfortunately, or fortunately depending on your view of a Chicago Olympics, Chicago was the first city ousted in the voting. Thus, not only did the President ignore vital national issues for a few days, he did not even sway the Committee to give the bid to Chicago. We all lost.