9 months after the most economically atrocious piece of legislation in 2009 (Cash for Clunkers)

Thursday, March 18, 2010

Okay, I've seen a lot of whoppers in my time, but the Cash for Clunkers legislation (CFF, colloquial for Car Allowance Rebate System) takes the cake. And today's CPI report reiterates the net welfare-reducing impacts of CFF on the economy. I present my case in three parts, but skip on down to point three if you want to see the gist of it.

First, the cars that should have been scrapped were unlikely scrapped; better put: the bottom of the distribution of environmentally sound vehicles are still on the road. Why? The trade-in value for any given vehicle that qualifies for the program would be its scrap value, not the re-sale market value. And those that own used cars with market value close to the scrap value benefit the most from the program. However, those same people were very unlikely to participate in the program when the labor market was contracting...precipitously.

So what do you get? The cars that were scrapped were likely the ones that only marginally needed scrapping (compared to the cars that should have been scrapped but were not).

I would venture to say that the net-benefit on the environment was much lower than Congress had intended; but we'll never know because the environmental impact is essentially unobservable. estimates that each Cash for Clunker cost tax payers $20,000.

Second, the net impact on auto and parts sales was, according to the Census retail sales figures, negative. To date, retail sales by motor vehicles and parts dealers (part of the Census advanced retail sales report) is -0.6% spanning the period July 2009 to February 2010.

So, according to this measure, there has been NO additional auto sales created since CFF; no new jobs, no new spending, no aggregate benefit. There was some confusion about the CFF start date, so including July 2009 retail auto sales were up 1.1%. This is positive growth, but still nothing to call home about.

To be sure, consumer autos and trucks production has grown 23% since the program's initiation, but the growth was more than accounted for in the two months after the July CFF start. Basically, since September 2009, the industrial production numbers show essentially flat growth in new auto production.

Third - and this is the most deleterious side effect of the program - used car prices are up 13.7% since July 2009.

Used car prices are higher than they were when the recession started. One cannot blame the CFF in full for the growth in used car prices, but the ex post correlation is pretty striking. The government reports that 677,081 vehicles were traded in under the Cash for Clunkers program, which is code for dropping the supply of used cars by 677 thousand vehicles. What did Congress think was going to happen?

Now, try and tell those aged 16-19 years, the age category that is currently experiencing a 25% unemployment rate, that Cash for Clunkers was a successful piece of legislation.

Rebecca Wilder


Luis Katz March 18, 2010 at 6:23 PM  

From another  point of view, taking care the recuperation of the automotive industry, the CARS seems helped the recovery of the motor vehicle sales, especially the trucks where the American industry is a very important producer. Not only helped the recovery but also stopped the deep falling down automotive sector showed by those months.

aj March 18, 2010 at 7:28 PM  

One more sidelight on the clunkers: NONE of them were mined for usable parts that could have been resold to people like me and our mechanic. They were just destroyed. What a total waste! It was one more ill-thoughtout program that the government just loves (to make them look good). Thanks for nothing.

Rebecca March 19, 2010 at 2:53 AM  

Hi Jane, You come back to a point that I brought up above. Many of the cars (hence the parts) that were scrapped were useful and productive to be sure! Therefore, the government destroyed perfectly useful resources. Too bad. Inefficient allocation (destruction) of resources can certainly be a problem under certain government measures.


Rebecca March 19, 2010 at 3:01 AM  

Hi Luis,

In the chart that you reference, it looks like truck sales were stabilizing (at a very low rate) before the program was introduced. And I do not think that most "American trucks" would have qualified. Ay any rate, my sense is that the bottom was already forming - would have been better to introduce a broad-based tax break that would have stimulated the economy as a whole.


rjs March 19, 2010 at 3:24 AM  

you dont have to be still driving a car that should have been scrapped, and have another that should have been scrapped sitting in the driveway next to it, and have been unable to find a suitable replacement used car at a fair price since...

Rebecca March 19, 2010 at 3:31 AM  

There are a lot of supply issues happening simultaneously in this market - fleet sales, or lack of sales more precisely, has dropped the supply, too. Good luck shopping - perhaps Toyota is the only way to go in the secondary market.


rjs March 19, 2010 at 3:35 AM  

thats a thought...

rjs March 19, 2010 at 3:46 AM  

on environmental impacts: those useable cars that were scrapped had to be replaced by new cars, the production facilities for which were most often in the midwest, where most of the electricity used in manufacturing is from burning coal; moreover, recourses used in production are energy intensive, new cars had to be transported from the factory to the dealers, etc; the point being that all activity associated with the program contributed CO2 & other pollutants that would have not otherwise been added during that period of time..…

Luis Katz March 21, 2010 at 1:57 PM  

<span>In my point of view the automotive industry demand was  in free fall before CARS in the USA and in UE. The CARS programm was specially to improve the corresponding industrial sectors, the ecological side of the scheme was only an excuse to launch it.</span>

This kind of programm to scrap vehicles was also applied in other UE countries, Germany, UK, France, Italy. In each one the programms characteristics have to be with each country  problems. But in general terms this type of policy stopped the dangerous free fall in automotive demand that was severely damaging the motor car industry and putting in serious dificulties the compaies balancesheets.

Of course it was possible to launch a more general scheme. But this one by itself was alone expensive. In the case of the automotive sector the demand in the industry is extremelly depending of the macroeconomic situation. The plan helped a lot.

Edsel Finn March 23, 2010 at 12:18 AM  

I calculated that the amount of foreign product purchased in C4C was about 50% based on the number of US name plate cars sold which are about 21% foreign product, the number of foreign name plare cares that are assembled in the US which are about 63% foreign product, and foreign produced cars which are almost entirely foreign product. Korea did benefit from this Obama stimulus package.

Smack MacDougal March 24, 2010 at 12:57 PM  

Cash for Clunkers is another fine example of Keynsianism, a thoroughgoing failure of economic thought. Anyone who supports such foolery does not get economics.

Correlation is not causation.

Used car prices are up because automobile credit is down.  Since buyers can't get credit for new cars, they have switched to buying used cars where they can shell out more cash for the buy price.

Total Consumer Credit Outstanding peaked about September 2007 at $2.58 trillion and fell off a cliff about March 2009. [ see: ]

Even if drivers traded in 677,081 vehicles, it's unlikely that used inventory fell by that much since many vehicles were not scrapped. Also, how many households sold off a third car or a second car direct into the marketplace?

rjs April 8, 2010 at 4:48 AM  

as per Brad DeLong: Wow! Cash for Clunkers Worked!!

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