A victim of its own success?
One of the more embarrassing features of the New Deal was the Agricultural Adjustment Act of 1933, which paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier. And yet here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy. Economist Mom laments the tragedy and waste, as only an economist and mother could:
I don’t think I can do it…. I mean, look at all the time and money (and love) I’ve poured into the (already) old beagle I adopted almost two years ago. It just seems very wasteful (and somehow “heartless”, even with a car) to prematurely end a “life” that still could be valuable to someone– doesn’t it?
Bradford Plumer (via Free Exchange) has doubts about the environmental or energy benefits:
as we’ve noted before, the actual environmental benefits of this program may well prove modest. The fuel-economy requirements for the new car were, after all, fairly lax: You could in theory trade in a Hummer that got 14 mpg and get $3,500 toward a brand new 18 mpg SUV. That’s still an upgrade (and, in fact, that trade would actually save more gas than upgrading a 30 mpg sedan to a 35 mpg vehicle), but it’s a meager one. And if the upgrades are, in fact, all meager, they could end up being dwarfed by the energy required to manufacture new vehicles.
And yet, the chaos as dealers and consumers try to participate in the program is leading
some to describe the program as
among the most successful stimulus packages to come out of Washington since the start of the recession. The boom in car sales will give a much-needed bump not just to auto makers and dealers but also local government coffers that collect taxes on car transactions.
I’ve been suggesting, as has Calculated Risk, that there was a significant potential without the cash for clunkers program to see a strong rebound in auto sales. Perhaps that was about to get started in July of 2009, though doubtless the program has also helped move sales that would have taken place later in the year into July ([1], [2]). But I’m not going to be persuaded that destroying productive physical capital is a way to improve the welfare of the average American.
There’s not much we can do now for those 5 million piglets needlessly slaughtered in 1933. But I’m still hoping that glitches in the DOT computer system end up giving Economist Mom’s beloved beagle an accidental reprieve.
I completely agree. Further, with the money going out the door so quickly, it seems the program could have been designed to allocate money only to those who were willing to buy a replacement car providing substantial, rather than marginal, improvements in economy. The fuel economy thresholds seem overly strict on the clunker side (my own 1991 Buick does not qualify!), while far too lax on the new car side. I wonder if this was to increase the likelihood that domestic automakers, with their lower-economy product range, would benefit.
Couldn’t agree more. Here is my take that I posted on Economistmom’s site. http://learnecon.blogspot.com/2009/08/what-is-seen-and-what-is-not-seen.html This program is a classic error or reasoning, deliberately well intentioned, but harmful in the total effect once we consider what is not seen. Great reminder of the slaughter of the little pigs.
Prof. Hamilton,
“…as if destroying useful goods could somehow make the nation wealthier.”
Of course, the cash for clunkers program was not intended to make the nation wealthier (a stock variable), but was intended to juice the GDP numbers (a flow variable). I believe the gamble was that juiced up GDP numbers might contribute to consumer confidence. And apparently it also contributed to investor confidence because the stock market seemed to like the GDP news. Who knows, the increase equity wealth from this week’s news about better than expected (or at least not as bad as expected news) GDP growth may well be greater than the loss of wealth from clunkers gone to meet their maker.
Just talked about this yesterday with my son and pointed out that it’s much more environmentally damaging to make a new car than to drive an older one. This program is just a hand out to car dealers and manufacturers, really. Most dealers would have cut that much from a car’s price to sell it for a trade in anyway. This way they keep that money and the government pays them.
Something most people are missing is that the population of possible trade-ins is almost totally light trucks (pickups, SUV’s, vans and minivans) since the 18mpg EPA max on the trade-in eliminates most potentially eligible passenger vehicles (CAFE standard has never been lower than 26mpg for passenger cars in the last 25 years, even large sedans have achieved an CAFE average in excess of 18mpg for the entire 25 year period). Given the $4500 max, there are few vehicles in good shape less than 10 years old which will be taken off the road. Further, anything other than the engine and drive train may still be “parted-out” under this program.
This seems to be a recurring problem of politically-driven policy solutions–that there’s tendency for ‘two-fer’ policies intended to achieve not one, but two goals. In this case, it’s not clear to me whether the goal is energy efficiency or stimulation of auto sales. The same ambiguity applies, for example, to recent energy efficiency initiatives which, at least in New Jersey, are targeted at low income households.
As a consequence, neither goal may be particularly well-served, or resources may be inefficiently deployed in reaching a particular goal. And then we’re not even talking about the equity issues of who gets a subsidy and who doesn’t.
While I agree with 2slugbaits as to program purpose, I’m curious about the destruction of value here: I’d be the first to agree that the aggregate increase in the price of other used cars (probably on the same order of magnitude as the program cost) due to the reduction in supply is not creating real value, although I think some schools of economists would be very disinclined to grant me the difference between value and price here.
If we assume that $4500 is a good proxy for the lost productive value of each of these destroyed assets, then how much reduced maintenance and fuel is needed to make this value-neutral on a cost-benefit test (ignoring any value from the multiplier effects of the primary (stimulative) purpose of the program)? On gas alone, we’d need to save 1800 gallons at $2.50 per gallon (assuming none of the oil burning externalities which are the secondary point of the program). If we get an average 25% fuel economy improvement (say from 14 to 17.5mpg), it takes 126,000 miles (~10 years) to payback in simple fuel savings. Well, that probably is more miles/years than most of these vehicles have left before they’d have been scrapped anyway. I’d guess half of that is a bit more reasonable average. But it isn’t hard to see maintenance reductions saving half the $4500 dollars over a presumed 5 year additional life of the junked vehicle. If we saved just $450 bucks a year on maintenance of a 0-5 y.o. vehicle over a 10-15 year old vehicle, I’d say we broke even (given that the gubbmnt cost of money’s about zero, and especially given that they own a big chunk of the mfg’s).
Now, I’m definitely not claiming the buyer is saving money over this timeframe, but the consumption of new car would have happened even if we’d allowed the trade-in to be sold. So really, all we are doing is moving future consumption of consumables like gas, tires and car parts up from being distributed over the next five years into the present.
Are there things we could be doing with much higher NPV? Sure. Many of those things aren’t nearly as easy, though, and I’m pretty sure this has a higher stimulus bang/buck than cutting the capital gains tax and the estate tax. Pretty sure it’s higher than paying the living expenses of one set of potentially productive folks, preventing them from doing productive work, and paying another set of folks to sit around watching the first set, too. Guessing that producing goods and then blowing them up has limited long term value as well. Funny that this $1B is getting so much scrutiny as to its productive value when those several $Trillions are pretty much given a pass, eh?
Ironically, I wonder to what extent it’s helping foreign manufacturers over domestic.
One should consider the ever present unintended consequences. If the additional funds are approved, 750,000 usable cars that can be used by those who cannot afford a new one will be gone. How many additional people will be laid off from the auto replacement parts companies with a significant part of their customer base gone? Have an additional 750,000 people just taken on additional debt that they would not otherwise have done? How many additional foreclosures and cutbacks in spending in other areas will result? This crisis was caused by excessive leverage and this only intensifies the problem.
The point is to get those oil consuming gas hogs off the street………while giving the auto industry(and not just the domestic) a break hoping people will spend more money because they think things are getting better.
People actually think it is for the environment?
Wow, even I could read between the fine lines on this one.
So what would you say about the killing of productive cows? That’s going on today, not under a government initiative, but through Cooperatives Working Together. Google “dairy cooperative herd reduction”.
Cash for clunkers boils down to taxpayers paying $3 billion to destroy $2 billion of productive assets, on the premise that this $5 billion cost (the taxes can hardly be considered to be being spent “productively”) somehow will be good for the economy.
It’s another example of the Broken Window Fallacy in action, the belief that destroying assets is good for the economy because it causes income to be earned by those who replace the assets. (As opposed to being good for those who get paid to replace the assets, and bad for everyone else.)
As to the green fig leaf of environmentalism that’s being used to justify this handout to the car companies, it’s shamefully small and thin.
In Europe, where there is more experience with these programs, the environmentalists have seen right through them.
If you look at it from other angles, it’s just as bad.
Say you bring in a car with $4,000 trade-in value to get a $4,500 credit instead. After the dealer takes the first $4,000 to make up for the lost trade-in value, that leaves a net benefit of all of $500 in “credit” to be split between you and the dealer — at a cost to taxpayers of $4,500.
A $500 financial benefit for a tax cost of $4,500 … not so good for taxpayers.
Or take the “stimulative” effect. The European experience shows that, just as one would expect, the great majority of people who bring in old cars to get the credit would have traded them in anyway — so the initial surge in car sales comes at the expense of a later fall in sales. This is exactly what’s happened in Germany. I.e., just as with temporary investment credits, the main result is a shift in the timing of purchases, not an increase in the number of them.
Paying $4,500 each merely to shift the timing of sales that would occur anyhow … even less good for taxpayers.
That Congress and the White House are hailing this as such a great success says a lot about what their belief in “stimulus” amounts to — and maybe about how they’ve piled up that $64 trillion in explicit and implicit debt for us all to deal with in coming years.
donna,
That’s only true if the old cars would not have been replaced; otherwise there is no net change in the number of new cars produced. I think you can argue that making a new car would consume more net energy if the old clunker would not have been replaced when it finally hit the end of the road. And you can argue that the clunkers-for-cash program is pointless because consumers were on the verge of replacing their old cars. But you can’t make both arguments at the same time.
One clarification about my previous post. The clunkers-for-cash program would show up in 3rd qtr GDP numbers. If their is a blip in the GDP numbers due to the program, and if consumers and investors see this as a positive sign, then the effect on equity wealth could swamp the effect of lost wealth due to putting useful clunkers in the clinker. I think that’s the gamble that the Administration is counting on.
CARS is a real application of the Broken Window Fallacy. History doesn’t repeat itself but version 2.0 has the same bugs.
This is the democrat change America scheme to get rid of clunkers they also view Seniors in the same manner., Babyboomers are being viewed as old clunkers they want to get rid of also. I for one will not donate my organs when I die in protest if they want them they will have to steal them.
“Clunkers” is a mini feature of parts of Cap&Trade: Abandon (effectively destroy) existing and productive capital equipment based on coal and oil, scrap it all to put “us” to work starting from scratch using ineffective and/or unknown technology.
Also, my metaphor: punching holes in your lifeboat
—
http://www.deserveliberty.com/2009/08/01/lifeboats-with-holes/
You having an extra pig doesn’t make your neighbor’s pig any less tasty. But cars contend for the available roads and parking spaces, so the fewer cars your neighbors have, the faster traffic moves, the easier it is for you to find a spot, and the more valuable your car is to you. (Yes, “cash for clunkers” requires replacing the car, but the used car isn’t available to trickle down into the used market.) You can’t call this a “broken window fallacy” without adding in the gain that other drivers experience from a reduction in the total car count.
If you have a clunker then you can’t afford a new car. They’re creating another housing failure but with just cars.
I very much doubt that any car that will actually fetch $4000 from a dealer in trade is going to qualify for the program. The above example confuses the difference between Blue Book value and the pittance the dealer will offer you for trade in. Car dealers don’t make money giving you anything like real value for a trade in.
And I think the value of shifting the overall timing of sales is a good thing as investment rates get ever higher and we begin to experience the paradox of thrift on a national scale its going to take thinking of this variety to boost spending and re-invigorate consumer confidence.
i’m reminded of bill gross’ comments from a yr ago re housing…the best way to stimulate housing industry is for the gov’t to buy every unoccupied home and bulldoze it….the gov’t drops $787 billion that no one sees(Obama quantifies this as jobs saved)….then we put up $1 bill to destroy cars and public goes ballistic…why doesn’t gov’t just cut everyone some more checks??
I like the program. Traded in a 1991 ford explorer that was no longer road worthy for a 2010 pontiac vibe. I am almost 50 years old and this is my first
new car purchase. Without this program I never would
have purchased a new car.
“Cash for Clunkers” is an environmental disaster. Scraping cars years before the end of their useful life is the height of profligate and wasteful consumption. The thousands of pounds of energy-intensive, highly-processed materials and advanced engineering equipment in cars is an enormous investment based on massive inputs of energy, mining, water, labor and materials. It makes no energy, environmental or economic sense to destroy the cars engines and render the investment useless years before the end of their useful life. The premise that buying a new car to get better gas mileage than a scraped car will save energy and be good for the environment is myopic and false when applied to scraped cars that would have had years of useful life. “Cash for Clunkers” is a net energy waster, and a colossal waste of resources.
“Clunkers” is a terrible misnomer. By disabling the engines and scraping perfectly good used cars, the “Cash for Clunkers” program is hurting the used cars industry and the poor and moderate income folks who can only afford used cars. The “Cash for Clunkers” is largely benefitting the haves and hurting the have-nots.
The arrogant, ignorant environ-mentalmidgets in Congress and the Obama administration who concocted or supported “Cash for Clunkers” are a disgrace to the environmental movement.
Like a mind, a car is a terrible thing to waste.
The energy required to build more vehicles will dwarf the energy saved? Has this person taken a look at the inventories? There won’t need to be a lot of building for a long time. On the other hand a lower import bill means that money will be spent at home WITH a multiple. Sorry professor I love your blog but I disagree with you on this one.
Let’s concentrate on the debt factor here.
The federal gov’t puts up $3,500 to $4,500 (correct amounts???) of federal DEBT for each vehicle.
Will it create more PRIVATE DEBT on the lower and middle class?
Does it have a multiplier greater than 1?
Do fiscal multipliers greater than 1 depend on creating more private debt (usually on the lower and middle class)?
Bill,
The cooperatives are acting like a cartel, just like when OPEC agrees to reduce consumption. However, just like when some OPEC countries “cheat” and produce more, I have a feeling some dairy framers will cheat in a cartel to net more money.
Also, whoever gave the “car on the road” reason is an idiot. The demand for having a car, regardless of features, is pretty inelastic. People spend thousands of dollars on a car because they really need one. If “Cash for Clunkers” does take cars off the road through higher used car prices, then it has made some very poor person much more inconvient, like not having a job. Important stuff like that. If we need to price in externalities to reduce driving, raise the gas tax so all drivers, rich or poor. Don’t single out the poorest off the poor car buyers.
1) Has anyone been measuring the market for used cars over the past few years? Has used car sales been hampering new car sales?
2) Seems like all this is doing is indebting more and more Americans by encouraging them to get more car loans. I think the Autonation CEO said that the Cash For Clunkers program was great, not only because of the popularity, but because of the high credit scores of those who took advantage of it. Obviously, he wouldn’t know their credit scores if they weren’t applying for loans.
Great, so now the government has encouraged higher-credit individuals to invest in possibly the worst devaluing asset they could purchase, instead of saving it.
Regardless, this seems like a good opportunity for the government to have targeted American-made vehicles as opposed to import cars. I’d be curious to see what the ratio of domestic to foreign car sales were for the program. Wouldn’t it be funny if the vast majority of the money continued the trend of flowing out of the country?
“The chatter is that we are going to see motor vehicle sales improve to 10 million units (annualized) in July. Whoopee. The program is going to keep sales near 25-year lows.”
“What is important to focus on here is the ‘new normal’. The ‘new normal’ nearly a decade ago was that 0% financing would bring in 20 million in sales (and think of all the sales that were brought forward). Today’s ‘new normal’ is doing everything Washington can do to get to 10 million units. Has it dawned on them, or anyone else, that since 2000, the number of vehicles sold (net of replacement) rose nearly 30 million, doubling the 15 million increase in the number of licensed drivers? The over saturation of the auto market is unwinding, and this process will very likely take years.”
–David Rosenberg,
“Breakfast With Dave”
I am not an economist. However, we did take advantage of the “Cash for Clunkers” (aka CARS) program. I traded in our 1990 Astro Van with 183,000 miles for a new 2009 Dodge Caliber. Between the CARS credit, factory and dealer incentives, we were able to purchase the Dodge for about half its MSRP. We bought and paid cash for the Astro when it was new; and we paid cash for the new vehicle. The Dodge was manufactured in September 2008. Had the CARS credit and factory rebates not been available, we would have just kept the Astro Van. However, I could not pass up this “perfect storm” of savings. Our finances were not significantly affected by this purchase. Perhaps I am not the typical consumer in this program, but it worked for me!
Ford reports that the Explorer is the most traded in vehicle in July, while the focus is the most purchased. That is a switch from a 13-19 mpg vehicle to 35 mpg, somewhat better than the “oh, tut-tut” stuff from Plumber.
Since this worked so well for autos, how about a similar program for houses? With several billion dollars (maybe a trillion), I’m sure we can get the housing market rolling again in no time. Now if there was just a carbon-fee way to burn your house down…
with all of the money printing that the government is doing to fund all of these wasteful programs, I am surprised that the gold price is not up more, as shown here: http://www.kitco.com/ind/Trendsman/jul292009.html
Remember in 1933 when the government paid farmers not to produce that the cost of production was above the market price so the market was sending the exact same message to farmers to not produce as the government.
The 2009 Dodge Caliber, if its the 2.4L version, gets a measly 22 mpg combined EPA rated fuel economy, a mere 44% of the possible fuel economy of the best mileage gas vehicle sold in the US, which just happens to be a midsize four door family sedan with seating for 5, and ample and convenient hauling and storage with fold down flat split rear seats and a hatchback, quite similar overall to the Dodge Caliber, with about the same luggage room though with more leg and hip room than the Caliber. Sorry to Red Oscar, but I’m not impressed by the results of that trade on an efficiency basis, as the owner went from terrible to bad.
Right or wrong, one thing that I appreciate about the cash for clunkers program is how quickly and transparently the money has been spent. To date, there are very few stimulus related programs that one can actually identify where the money went and for how much.
To be sure I am a national debt hawk. If we were to convert the outstanding debt into a super jumbo mortage and pay it off over 30 years, it would cost nearly $60B+ a month for 30 years. This is insane and reason why our Congress needs to balance the budget now.
Comparing the outstanding debt to GDP this and GNP that is silly. We still owe the money and it eats into an ever growing share of the federal budget. Democrates and Republicans both like to spend money and raise taxes for that matter. So, the problem of the national debt is a shared responsibility.
The idea of paying to destroy “old” cars is a classic. People tend to hang on to old things long after they have finished their useful life. Lets pay also for destroying old houses and subsidizing new ones. And household goods like ovens, freezers, air conditioners, grandfather armchairs and so on. Out of fashion accessories, like my glasses. That would unclog and improve the circulation in the economy.
The Cash For Clunkers Program is nothing more than a Modern Day version of the Broken Window Fallacy. Big Government has been pushing this fallacy on us continuously and ruining our wealth.
http://www.sbabg.org/2009/08/03/cash-for-clunkers-is-a-modern-day-version-of-the-broken-window-fallacy/
SBABG.org
Here’s another issue with the Clunkers
program.
I suspect that ‘outdated’ appliances will be next.
‘Smart’ appliances for everybody!
The smart ones here are the bureaucrats.
Why should the government force anyone to make certain choices when a few dollars dangled in front of the public’s nose gets the desired results.
It’s pure Keynsian economics. It’s a brilliant plan if your objective is to dump helicopter money into the economy. But from a more rational view of true economic terms and not just short term effects, wealth is being destroyed in exchange for debt. Specifically, the wealth of “average Amercians” is being junked. Think about it, they’re paying you with your own money under terms that require payment of all of it and additional money to the place of their designation.
“Cash for clunkers” shows the best and the worst of government policy.
1. This is a clear example of tax cuts working. The people who are taking advantage of this program are getting back some of their own money that was confiscated. But there are problems with this tax cut. It is temporary so it will draw people into the program that would have been later consumers resulting in slower sales when the program ends. It simply rearranges the deck chairs. It is targeted so the only “stimulation” effect is on a very limited market actually distorting trading and creating malinvestment on a small level. Imagine what kind of recovery we would have had with a $500billion tax cut, and it would have reduced the deficit rather than ballooning it.
2. The government is not competent to run redistribution programs. Even though they imply they are omnicient those in government are unually less informed and educated than those who work in the business every day. Government officials are often blind-sided by things that businessmen take for granted. Government employees are professional bureaucrats but horrible businessmen.
3. As the professor states the administration is duplicating one the New Deal’s worst mistakes. Perfectly good cars are having chemicals poured into their gas tanks then run until the motors lock up. The cars are being crushed with no spare parts being salvaged. It is the classic fallacy of destruction of goods to increase the price; half a million perfectly good cars may be ultimately destroyed.
4.Politics hinders efficiently running programs. As I write this the program is still shut down no matter how much press was given to the House passing an additional $2billion. This is a program that the people want. Demand has proven that. Yet, the Senate still has to move. And there is a good chance that any bill that finally comes out will have its on pork riders. Yet, some are considering letting these people make life and death decisions for the rest of us.
5. This gives clear evidence that people do no want a Government Motors car. Ford is the largest user of the program followed by Toyota.
http://www.google.com/hostednews/ap/article/ALeqM5i_J2CDMBIZhobnHhGIYFCzqvR52wD99RH7S82
“One official said the average fuel economy of new vehicles purchased through the program was 25.4 miles per gallon.”
That’s worse than the generations old CAFE standard for cars and only half of what some practical midsize family sedans get.
This is news to me. I heard that the engines and drivetrains were being turned into scrap metal, but every other piece of the car could be salvaged and sold as spare parts.
Speaking for myself, I just traded in a 2000 Jeep Cherokee that I would *NOT* describe as “productive physical capital”. This was a *clunker* that, in addition to gulping down increasingly expensive fuel, had reached a point in its life where the vehicle required constant repairs. I have dumped an average of $400/month into that car for the last six months. Engine repair, 4wd drive repair, alternator, etc. Not to mention the things I could not afford to fix: the A/C didn’t work ($1200 repair), the driver side electric window was busted, stereo broken, etc. Finally, the engine light came back on a few weeks ago and my mechanic told me that both fuel injectors and the computer that controls them had gone. Another $1500 I didn’t have.
I would not have been able to buy a new car if not for the CARS program. As it was, I was able to drive my car (valued at $650) to the dealer with the engine light on, no spare tire, and got $3500 on trade for a fuel efficient hatchback.
The kicker, though: had I picked another SUV, I would have been eligible for a $4500 rebate. That’s government for you…
Ladies & Gentlemen of this blog,
forgive me, but this being a mainly an ECONOMICS blog, may I ask to all of you contributing to it: WHO do you think is paying for this Cash for Clunkers program? Santa Claus? The Martians?
Please, let us behave like decent economists.
For starters, a good read is today’s Wall Street Journal Editorial about this “program”.
“Nearly half the vehicles sold under the U.S. government’s “Cash for Clunkers” incentive program were made by General Motors Co, Ford Motor Co and Chrysler, according to preliminary data…
Passenger cars represented 60 percent of the estimated 80,500 sales reported to the government by retail dealers through Saturday, and the top-selling model has been the Ford Focus.”
Points:
40% of cash for clunkers sales were for trucks and SUVS, which mostly get terrible (Ford Escape Hybrid and Toyota Highlander Hybrid excepted) mileage compared to cars. Their use in commercial enterprise is dubious, given the state of the economy. Way to spend food stamps on beer and cigarettes.
The 2009 Ford Focus automatic gets 27 mpg combined EPA, not very good mileage relative to some larger family sedans.
The program has absolutely nothing to do with the envirornment. It’s just a stealth US carmaker bailout with Ford the primary beneficiary this time, since they pretended that their fingers weren’t in the pie the last few times.
The program is nothing like what was initially proposed, which at least was a micrstep in the right direction. I knew I could count on some folks in Congress to waste my hard earned green dollars. I’ll remember in November.
While this dispute goes on, You are missing the recovery that happens now, guys:)
I think this is a great example of how the government needs to sit back and watch. They estimated that the CARS 1 billion would last until November. What a joke! Now they are trying to get another 2 billion. I want to know how many people are going to be getting a visit from the repo man because of the CARS program. Gov’t is out of control, yet they have estimates on health care costs.
Let’s see:
You pay sales tax on the $4500 (most places)
You pay higher registration fees
You pay higher insurance.
You lose
“I was able to drive my car (valued at $650) to the dealer with the engine light on, no spare tire, and got $3500 on trade for a fuel efficient hatchback.”
First, there was no “trade”, taxpayers paid $3,500 to destroy your old car worth $650. In your role as a taxpayer, does that sound like a good deal for you?
Second, you didn’t get all the $3,500 either. You only got a credit for $3,500 against the purchase price you negotiated, after the dealer had a chance to move that price up to grab part of the credit for himself.
(One might note how cars that qualify for the hybrid car tax credit sell for a significantly higher price than comparable cars that don’t, because purchasers assume they are getting a price discount via the credit, which allows sellers to increase the price.)
Say that you wanted to buy a car with a market price of $25,000, the dealer could get that in cash for the car you want. With a $650 trade-in the price would be $24,350. To get back to there, stay whole relative to that, the dealer has to take the first $650 of the clunker credit. He’s not going to reduce what he gets to under $25,000 net.
Now say $24,350 isn’t low enough to motivate you to buy (or you already would have using a conventional trade-in). Well, courtesy of the taxpayer (you, in your other role in this deal) there’s another $2,850 to divvy up. He’ll offer you as much of that as it takes to close the sale, as long as it’s not more than he has to offer someone else to close another sale in its place. He has a finite number of sale opportunities and wants to keep the most money from them that he can.
So he’ll offer you some of the $2,850, but he’s sure not going to offer you all of it. How would a car salesman max his profit giving money away like that? (There’s a reason why car sellers love this credit — they are keeping a good part of it for themselves.)
How much of the credit will you get from the dealer? If he has a horde kicking down his door for clunker credit sales, you’re going to get very little and he’s going to keep the bulk. If he has only a few buyers, he’ll offer more to get sales. The law of supply-and-demand in action.
Either way, after purchase is closed the invoice will say “$3,500 credit against final sale price from the government”. But the amount by which the credit actually reduces the price you pay will be only $3,500 minus $650 minus the amount of the credit the dealer keeps for himself.
“The kicker, though: had I picked another SUV, I would have been eligible for a $4500 rebate. That’s government for you…”
Well, as another commenter said…
“40% of cash for clunkers sales were for trucks and SUVS … The program has absolutely nothing to do with the envirornment. It’s just a stealth US carmaker bailout”
bkm,
“…wealth is being destroyed in exchange for debt.”
Hmmmm….Ford’s share values increased 6 percent moments after Ford credited the cash-for-clunkers program with the uptick in their sales. That means the increase in equity wealth exceeded the cost of the program. Is that something that an Efficient Market Hypothesis would predict? Probably not, but there it is just the same.
Jim Glass,
“First, there was no “trade”, taxpayers paid $3,500 to destroy your old car worth $650. In your role as a taxpayer, does that sound like a good deal for you?”
So how is this any different than an accelerated depreciation allowance or an investment tax credit? Isn’t that what the cash-for-clunkers program really is? The government gives you an incentive to prematurely write down the value of an asset and gives you a reason to pull forward a planned future purchase to replace that asset.
Listen to Jim Glass…
“in a democracy, the people get the government they deserve.” – Alexis de Tocqueville
And now for something completely different…
http://opinion.latimes.com/opinionla/2009/07/la-city-council-considers-30-million-loan-for-cirque-du-soleil.html
Can you say ‘Banana Republic’?
One small problem with your assertion is that those same gas hogs are one of the primary reasons for being dependent on foreign oil. The new cars that are replacing the clunkers are 61% more fuel efficient.
I side with Dan Weber”s view on the matter. My wife drives a 99 Jeep Grand Cherokee,has over 200,000 miles on odmeter, Cost of repairs to keep it road worthy are $800-$1,000 a year.Not to mention the increased insurance cost. Now does anyone want to do the math? A 100 mi.round trip for work 5 days a week. plus trips and extra travel = 25,000 mi.a yr.(@17mpg).@ 2.50 a gallon. (we wont see that much longer)= $3,676 in fuel cost.Now @ 28 mpg, for our new little Nissan = $2,232 Thats a $1,400 per yr.savings. at 3.50 per gallon were talking $2,000 per. year .
So, as the way I see the benefits of “Cash for Clunkers” is not the same as a few on this blog.
One thing that is totally wrong,”its the tax payers money”. Hello THATS MY MONEY !So why cant I get a piece of that money? I pay taxes.
Does it help the Big Auto Unions, Im sure it does. Does it help the Auto Dealers, yep it does. Even the cheating crooked dealers that wanted to absorb the whole $4.500 of the credit for themselves. (not wanting to come off the msrp), not one dollar!.
There we go again,why should I benefit from tax payers money, or their needs are greater than mine.
I most likely would not of bought a new car without the incentive of the $4,500 CARS.
The 99 Jeeps retail value is around $1,500. With 200,000 miles on, where was I going?
A $320 a month payment is not a good thing.But 2/3rds of the payment is paid for by wasted fuel and repair monies.
I have some peace of mind that we have a reliable vechile for the next few years.
My final thought is , my idea, instead of billions of dollars to bail out auto makers, was to give vouchers to every driver to buy a new car.
Holy Cow! James, how can you be so disgustingly ignorant of the depression and the role the Ag economy played in it? The Depression started because of drastic overproduction by farmers who had been feeding Europe through the Great War and suddeny din’t need to. Farmers are always prone to over-produce and their instincts were their worst enemies. The need to slash production, as wasteful as it sounds (and sounded at the time,I’m sure) was nevertheless very much needed to raise the value of the crops; most of the country was employed through farming and “productivity” had ruined the farming sector and everything related to it. How can you call yourself an economist and not understand that history?
The clunker program has nothing to do with killing piglets. We need to get rid of old cars that burn too much gas and we need people to drive more efficient cars; and, what a coincidence: we need to stimulate the auto industry; and just about everyone agrees, we need to get cash moving in the economy. And the value of auto makers’ stock went up, too? And people are out from under the stress of nursing old cars? What’s not to love about this program?
The market place wouldn’t make it happen. So, the Government, working, for a change, for the American people, made it happen IN SERVICE OF THE MARKET. You’re welcome, Market.
This actually has little to no resemblance to the Broken Window Fallacy.
The baker is forced to buy a window or do without; no one is forced to get a new car.
The window is at full price; the car is significantly discounted.
The new window is presumably exactly the same as the old window; the new car gets better gas mileage (among other improvements, most likely).
The new window doesn’t offer any near- or long-term savings; the new car cuts down on fuel costs. Why, the baker could use that savings for a suit.
Duh.
What cars in good condition are really being traded in here? If the value of the car (even parted out) is over $4500, this program does gain you anything. With a few rare exceptions, this implies that most cars “killed” by this program are about to die on there own or will require big payouts for repairs to keep them on the road.
cheers,
adam
“So how is this any different than an accelerated depreciation allowance or an investment tax credit?”
An investment credit is an incentive to buy an item — not to destroy one. If a business uses an investment credit to buy a new truck, the old truck stays on the road operating as long as it is productive enough to have positive market value.
Deprecation is an expense deduction to reflect the decline in value of an item as the result of use. Accelerated depreciation is front-loaded but never exceeds 100% of the item’s cost. And again, it does not create any incentive to destroy a productive item with positive market value. After such an item is fully depreciated the owner will always be better off selling it or continuing to use it rather than destroying it.
One thing that is totally wrong,”its the tax payers money”. Hello THATS MY MONEY !So why cant I get a piece of that money? I pay taxes.
Right! It’s a good deal for you to get in your pocket $500 or $1,000 or whatever fraction of the $4,500 cost that taxpayers incur — as long as “other” taxpayers pick up most of that cost.
You’ve just explained the political dynamic by which the US gov’t has piled up $64 trillion in explicit and implicit debt. Every interest group in the country goes: “For every $1 of taxpayer money we get from this program our share of the tax cost is only 10 cents, so good for us! We win!”
Except everybody is doing it, and all the other groups are dropping 90% of the cost of their programs on you. It’s Bastiat’s “Government as the fiction by which everybody strives to live at everybody else’s expense”.
And you’re right — you are a taxpayer, and in the end you are on the hook for all of it. Do you know what your income tax cost will be just to pay the interest on that $64 trillion come 20 years from now? Click that link to see.
This actually has little to no resemblance to the Broken Window Fallacy … The new window doesn’t offer any near- or long-term savings; the new car cuts down on fuel costs. Why, the baker could use that savings for a suit.
It’s hard to think of anything more wasteful, more anti- conservation, than destroying productive goods prematurely — which is why even treehuggers loathe this program. (Putting a charge for it on the taxpayers’ bill only makes things worse).
Ford’s share values increased 6 percent moments after Ford credited the cash-for-clunkers program with the uptick in their sales. That means the increase in equity wealth exceeded the cost of the program.
Wow. You’re saying that Ford’s market cap went up $1.4 billion as the result of receiving just a small minority portion of the $1 billion it got after it was split among so many car makers, consumers, and Ford dealers (who are not part of Ford Inc.) as a one-time receipt. (Note that there was no flow of future income from this to capitalize.)
It’s financial majik! This while the S&P 500 was rising at the same time, 14% during the last three weeks. Coincidence, no doubt … or maybe not? Maybe the clunker credit moved the whole S&P!
Anyhow … anybody who really believes the clunker credit actually does produce a net benefit, by increasing national wealth or after counting environmental effects, should be peeved and upset that its application is far too tiny to have any real macro effect.
You should want to go for a real result: Apply it to all trade-ins for say the next year or two. Have taxpayers pay more than market value to crush 10 million or 20 million used cars out of the market (not allowing conventional trade-ins). Think of how car auto stocks would zoom up and gas mileage improve then! At a mere cost of around $100 billion or more to taxpayers, and significantly higher car prices to all consumers, especially buyer of used cars, who could complain? Why doesn’t Congress ever have the nerve to do the right thing on a scale that matters?
I am not sure how a car dealer can actually force a person to split the rent from the subsidy. Imagine this situation:
I walk into my ford dealer and negotiate a deal on a new Focus. At the last minute I say you know what I think I will trade in my clunker using the government program, please put that in the paperwork. Done.
Consumers aren’t stupid.
There is no such thing as a free lunch. Has impulse buying ever spurred an economic recovery?
By the way, it looks like the govt. companies aren’t doing so well in the race to use govt. money to spur sales.
Blue staters tend to buy more foreign, red staters more domestic. It will be intersting to see the demographics on the sales.
this is supposed to be an environmental program?
those new cars are being produced in plants that are the largest consumers of coal generated electricity in the region…
Matt wrote: ” If we need to price in externalities to reduce driving, raise the gas tax so all drivers, rich or poor. Don’t single out the poorest off the poor car buyers.”
GNP continues: Agreed. High fuel excise taxes are preferrable to more emission standards and a whole host of other programs that include killing children and grandparents in the Mid-East, ostensibly in the name of American energy security.
Jim writes:
I walk into my ford dealer and negotiate a deal on a new Focus. At the last minute I say you know what I think I will trade in my clunker using the government program, please put that in the paperwork. Done.”
If all consumers did that, it might work for them. But few do, and car dealers have historically profited by how consumers actually behave. I heard yesterday on the radio from a customer who tried that strategy, and had teh deal change before his very eyes, and evaporate, when he did…
If you evaluate this program as economists evaluate tax or subsidy programs–in terms of efficiency and equity–it is hard to come to the conclusion it is a good program. It clearly violates the norm of horizontal equity (treat equals equally) and it may violate vertical equity. Some of the benefit is shifted to the dealers, and there is no clear reason car dealers should be subsidized. By destroying cars that still have value, it violates the norm of efficiency. Its stimulus effects are minor if many of the purchases are just shifted in time.
Still, some of the anecdotes in the comments are interesting.
In today’s econcomy, in light of the HUNDREDS of billions of dollars the government has used to support mammoth corporations, what the heck is the total of $3 billion??!! It’s a drop in the bucket. The difference for this program is that the money actually gets to be used directly by people. And it helps to reduce American dependence on foreign oil exports. $1 billion in this program averages out to 250,000 cars, lowering fuel requirements by approximately 1,750,000 mpg (using an avg of 7 mpg per vehicle saved). And it contributes to helping out an ailing auto industry! How can this not be a positive step in the right direction? Or would you prefer to see the banks get an additional $100 billion so they can turn around and raise credit cards rates, etc., etc. One big reason why auto sales have stagnated is due to the restrictions financial institutions have placed on auto buyers, not to mention higher rates! Why isn’t anyone talking about how credit scores have significantly dropped without reason? Yeah, an “adjustment” that quite conveniently enables the bank to charge higher rates for individuals that have paid their obligations on time. Can you say Collusion?
Arthur, the question is how can this be a positive step.
Read the post and previous comments.
Cars are being destroyed that are still worth thousands of dollars. That means the price of car goes up for low income people. The fuel savings are negligible, most the of cars turned in likely aren’t used much and, on top of that, it is simply a slight shift forward in the replacement of the car, so any savings you see are really only over ~1-3 years. And it means that a person who buys a car now would have bought one in 3 years when fuel economy would be even better. Now he won’t be buying a better car and less people will be able to afford the better cars of the future.
The dealer/manufacturer and financers get a good portion of the credit because they simply don’t mark the vehicles prices down to what would be the market clearing price.
Ever thought about the CRASH that’s coming after all OUR money is used up in this program? Anybody that was even REMOTELY thinking of upgrading vehicles is doing so now. Dealers are ordering way too many new cars for the lots, but what happens when they don’t sell them all? Will the dealers fall victim? After every rush, no matter what, There is ALWAYS–ALWAYS a crash. Be prepared America, the worst is yet to come
Cash for clunkers is hurting charities because the tax deduction one receives when donating a car to charity is much less than the voucher. Traditionally charities assess each donated car to determine its best use. Those that are on their last leg are scrapped. Those that have significant life left are given to the needy or sold with the proceeds used to fund their programs. Doesn’t it make sense to give the c4c cars to charity and let them determine their fate?
Karen, that would make too much sense.
Simply run the program through charities and get rid of the scrapping requirement (that’s the part I have a big problem with). The donor gets the deduction the charity determines or the $3500 or $4500 deduction for when purchasing a qualifying car. Too damn easy.
I agree! My old “clunker” (an old rusty Geo Prizm) gets better gas mileage than the new cars being traded for!
well the goverment realy stepped into the STEAMIN PILE this time
here is what i think the damage will be worse than the help
1. revenue that will be lost by both state and federal government
lets add it up example
what i’ll call a junker “clunker” what ever
20 gallon tank filled once a week 52 times thats 1040 gallons a yea
take a look at this you”ll be sick to see how much the government charges you in taxes
government taxes on fuel
on the average you get charged an average of 50 cents a gallon lets do some math
1040 gallons x 47 cents each junker”clunker” will pay 488.80 in taxes
they want to get rid of 3 million cars DO THE MATH !
3 MILLION X 488.80
WHAT AND HOW AND WHERE ARE THE GOING TO GET THE REVENUE TO REPLACE IT
why didnt our polititions do some math,before jumping on the band wagon !
that’s not all that is going to hurt
there’s more damage to the economy
the parts store that sells the parts when these cars break down
the manufactures of these parts (american and imported )
the nieghborhood mechanic ( you know him as greasemonke joe)
the used car auctioneer (where your trade in car used to go)
the used car dealer ( who bought the best of the crop )
all generate revenue in taxes
MORE HURT MORE DAMAGE !
BIG OIL IS GOING TO LOSE TOO MORE TO COME MORE NO BRAINER FACTS
GEE CAN I HAVE A JOB WHERE I DO’T HAVE TO HAVE COMMON SENSE
NOT READ A PROPOSAL THAT MIGHT HURT MORE THAN HELP
GET FREE HIGH END HEALTH CARE
PAID A TON
Written by a friend…
Your town’s (pop. 1000) mayor owns the local car dealership. She sends her assistants door to door to tell you about her new program to stimulate the town’s economy. Each citizen will pay the town $45.00 ($45,000 in total) to purchase 10 used vehicles from the town’s fleet. The town will then take the 10 cars you purchased and send them to the local dump to be crushed.
You ask, “huh”? The young assistant then informs you the money will be used by the town and given to the local car dealership. The dealership in turn will give $4500 each to the first 10 buyers of new cars. The dealer will advertise this sale widely. You are also told by the Mayor’s assistant this program will help prevent global warming. And if you don’t pay you will be prosecuted for tax evasion.
The 10 cars sell out in 1 hour. The Mayor announces the program to be a great success. She announces that each citizen will now pay $90 more to purchase 20 more used vehicles to be crushed.
Do you think that “stimulated” the economy? Or do you think you were merely forced to give money to other people? What about the cars that were crushed? Is this program a net gain or loss for the town? What about the goods, services and investments of $135 that you now cannot purchase because of the Mayor’s “stimulus” program? Do you at least think the Mayor has a warped sense of humor?
http://rethinkit.typepad.com/madashell/2009/08/wasting-away-.html
Hey, enough of this talk about these “Clunkers” eliminating cars from the marketplace that poorer people could be buying. What you’re seeing come in are gas guzzlers of the first order that the owner doesn’t see even a remote possibility of getting anything anywhere close to $3500 for on a trade -in (cause if it were even close they’d try to trade it in and force the dealer to give them more for it to make a deal. These clunkers would only be a serious drain to the budget of someone who already has a strained budget. The clunks I’ve seen would cost the next owner a small fortune to operate (just maintenance) on top of the gas costs. And when gas goes back up to $5 a gallon and you’re driving an old beat up SUV that gets 12 mpg – you’re in trouble. Also, let’s not forget that a large percentage of these clunks will be recycled – so the next time you naysayers purchase a refrigerated cabinet for your wine collection it just may have a piece of clunk in it. I say it is an innovative idea in a sea of limited thought. I applaud it and hope that this administration keeps thinking “out of the box”. It’s refreshing.
Megan McArdle’s Kick ’em When They’re Down post inspired some second thought from me on C4C:
Is Cash For Clunkers Actually a Good Idea?
One thing people seem to be missing is that the Clunkers got 17-18 mpg WHEN NEW. The people driving clunkers don’t have the thousands of dollars needed to keep their car running at perfect efficiency. In fact, these cars are the ones that tend to belch black smoke when trying to get onto the freeway. 10mpg is generous. Some burn through a quart of oil every few miles.
These cars have a negative utility. They might be slightly useful for the person who drives them, but then he’s not cleaning the oil spills that their car leaves everywhere, paying all the people slowed down when their car breaks down in the middle of the freeway, for the kids having asthma attacks from the extra pollution, etc.
And it’s not like the people in question are losing money on the deal. The additional costs in gas and repairs is higher than the payments they’d make on a new car.
So why do we need Cash for Clunkers? Because our financing is all screwed up. A decade ago, if you had a clunker, you could make a deal with GMAC or Chrysler Financial and get a new car for reasonably cheap. Even five years ago, I got a new Mazda for payments less than I was paying to keep up my clunker, and for 4% interest! But now you can’t get loans for anywhere near that. So the natural flow from clunker to new car is gone. Short of forcing banks to offer loans at gunpoint*, this is really all that the government can do to get the cycle going again.
*which was kind of the point of TARP.
The problem with Matthew H’s comment is that he assumes that all “clunkers” being traded in under this program have negative value. This is not the case. Many are perfectly fine, some excellent, vehicles, that just happen to be worth less than the government is willing to pay for them.
As the majority of comments indicate, destroying them is a waste of capital. There’s no way around it.
I am a career automobile salesman and still think that overall this plan is a bad idea. The comments I have seen on here range from uninformed to intelligent. Here are a few facts about the program from our end:
We have approximately 80 cars taken in on the CFC program at an average of $4000 each (based on the $3500 or $4500 rebate). That is $320,000 that our dealership has “fronted” for the program since it’s inception. We have sent 28 of those vehicles to the scrapyard and sent the approved documents stating this to the government. We have yet to see any of the money we “fronted” come back to us. This means the dealership so far has “lost” (based on the numbers above) $112,000 in less than one month. That still doesn’t include the other 52 vehicles and commissions from the sales of the new vehicles.
As far as scrapping of the vehicles. All usable parts are stripped from the vehicle and sold through the scrapyard. The “scrap value” of the vehicle is taken into account in the sale of the vehicle and subtracted from the final sales price. The company we use to scrap is paying $350 per vehicle. Not a high sum, but extra money to the consumer never the less. The scrapyard makes some money as well in reselling the working parts off the vehicle.
Most vehicles that we have sold have an average MSRP of $28000. Take off the least amount of $3500 and the scrap fee $350 and company incentives at an average of $2000 and you get a $28000 vehicle for $22150. Great for the consumer and easier to get financing. If we see that a consumer cannot afford this vehicle, we do not sell it. They STILL have to qualify and still must have approved credit and often times a down payment.
Many of the vehicles we take in have begun the domino effect period of their existence. This means a higher fuel consumption, constant repairs and unreliability. The average EPA MPG on the vehicles we have taken in is 13 and the average of the new cars sold to those consumers is 35. A difference of 22 mpg. Averaging the cost difference in fuel (based on the price of regular unleaeded gas nearest my dealership) and the average costs of repairs/upkeep on the “clunkers”, you get a total of approximately $450 dollars a month. This is VERY close to what our average consumer is paying for the new vehicle. This means it is a wash for the buyer in monthly costs. This puts several theories that it will put buyers in the poorhouse out to pasture.
This does help dealerships if we actually get the money from the government, which surely we will. Obama wouldn’t want that kind of press!
It also helps the consumer, good deal on a new reliable vehicle at close to the same monthly cost from your old vehicle.
HOWEVER, this doesn’t help our nation, history has proven this. The more the government regulates, the less power we have, and the more our country suffers economically.
Did anyone catch the part where the Government said. “Oh, and by the way, the credit will be taxed as income on your taxes for individuals”
Not sure what tax treatment the dealers will get, assume they’ll be taxed on that “income” too. At least the extra profit will be taxed.
“Averaging the cost difference in fuel (based on the price of regular unleaeded gas nearest my dealership) and the average costs of repairs/upkeep on the “clunkers”, you get a total of approximately $450 dollars a month.”
That $450 dollars a month figure seems awfully high. Based on $3 per gallon gas and 1200 miles driven per month, I get a fuel savings of a little under $120 per month. Are people really paying $330 per month in repairs and upkeep for their clunkers?
The monthly payment on the Honda Civic I bought last October is $330 ($4K down and 7.7% 5yr loan). If people are really paying that much in repairs and upkeep it would make economic sense for most people to trade in even without the program (assuming a trade in value of $2K on average)
I cannot personally stand the thought of destroying older vehicles. As a Pastor, it makes MUCH more sense to donate an old clunker to a charity (like ours for instance). Those that can be repaired are. They are sold and put back into use. The charity receives maybe $350, or so. Those that aren’t resellable are junked, and our church receives about $100.
The “auto donation to charity” programs around the country have been severly hurt by the c4c program.
The worst thing I see is the “debt” the government wants everyone to incur. “Debt is good for the economy” they say, but we cannot “borrow our way” into prosperity.
Operating an older car is cheaper. Period.
Is everyone borrowing money on “overpriced cars” now, like they tried to get us to do during the “housing crisis?”
These new car prices WILL come down as soon as the c4c program ends.
The Cash for Clunkers boils down to this: the American consumer thinks he/she is getting something for nothing (or at least getting something for less(which he/she rarely, if ever thinks of getting something for less). Compare to buying something that is on sale for 20% off, when the item was marked up 40% prior to the 20% off sale.
BZ