Think of “cash for clunkers” as a sort of bizarro twin of that “bucks for banks” program from last autumn. You know, the one where Congress authorized $700 billion to keep financial clunkers on Wall Street up and running.
Thank goodness the automobile version won’t be nearly as expensive for taxpayers, consisting of a mere $1 billion in incentives for individuals to trade in their old gas guzzlers for new, (at least slightly) more fuel-efficient vehicles.
And giving away free money turned out to be so wildly and unexpectedly popular that the House quickly passed a bill giving away another $2 billion before heading out on August holiday. Now it’s up to the Senate to pass a similar extension before it takes the rest of the month off.
It shouldn’t. Although there’s no doubt the program encouraged a mad rush into automobile dealer showrooms, what will be the net effect of the deluge once it subsides? Probably not much.
An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car sales, not total sales: “In particular, we expect that roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway. Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.”
In other words, the program gets much of its juice via stealing car sales from the near future rather than generating additional demand. In practice, it works much like tax policies and subsidies to encourage women to have more children. Studies have found that women may have children earlier than they would otherwise, but they don’t necessarily have more kids.
The rebate program is also emblematic of the administration’s unwise approaches to economic policymaking. It borrows money to generate economic activity, which in effect borrows growth from the future, since eventually that loan will have to be paid back through higher taxes.
It picks and promotes a particular industry in a sort of small-scale industrial policy. It also places an emphasis on consumer spending as a route to renewed prosperity over greater investment — and isn’t that how the American economy got in trouble in the first place?
And for those reasons, cash for clunkers isn’t just a whimsically named government program that helps automakers clear out some inventory and generate a bit of quick cash flow, while also making average Americans feel they’re finally getting their bailout.
If that’s all it was, cash for clunkers wouldn’t be such a big deal. Rather, it is evidence that no one in Washington is learning any economic lessons. And that is a very big deal.
[...] And yeah, it must be said, can you IMAGINE the outcry over this, if it were a Bush program? James Pethokoukis: Cash for Clunkers is Obamanomics in Microcosm [...]
This may be a good program. If high mpg cars replace low mpg cars, that will reduce imports. Tis may be one of the few stimulus programs that really works. I say let it rip for the next five years or so.
You make an interesting point, that the cars being sold would have been bought anyway later in the year. However, this program is not JUST about selling more cars. It’s also about getting fuel efficient cars onto the roads and getting gas guzzlers off the road.
As for this being poor economic policy, I heard Alan Greenspan praise it this morning. I agree that Obama could be doing a smarter job of fixing the economy, but I have to give him credit for creative efforts!
Wrong. My kid brother was able to buy a new (cheap) car with this program. He’s had a beater for years that he’s always working on. C4C is the only reason this was possible for him. His car leaked, gas, oil, coolant…probably other things too. Really a mindless decision for him and probably millions of other people too.
Imagine if car manufacturers simply lowered the price of their vehicles by $5000. Wouldn’t that encourage the same frenzy but without a government subsidy?
I don’t think anyone in the administration thinks this is the best possible way to stimulate the economy but it is a popular way which makes it politically feasible. The methods that would best stimulate the economy would probably involve people outside the middle class - tax breaks for the rich or increased welfare for the poor - and neither is a political possibility.
Tax breaks on mortgage interest is another example of popular policy that is bad economics but the tax breaks go to people who vote in large numbers.
So what would you pick? You put 700b on Mr. Obama, I put that on Mr. Bush. Did it do anything to help? Kind of like putting a tournequet on a severed head. NOT ONE of the money money money’s does anything but skim theirs off the “real” economy where goods are exchanged to provide for wants and needs. Put your money where your mouth is and don’t be a mutt. If you think for a while you can probably find a segment of the economy that could use a boost. Biggest problem with 700b is it went to the top without starting at the bottom. NOTHING shoud go to the top without first passing the bottom. The grand consolidated motherload sitting at the top s about fourfold what it should be, so why don’t we inject 4 times the 460tn derivatives aggregate at the bottom and see how long it takes the top to absorb it (or how long the bottom can hold onto it) Love me or love my money, one is more valuable than the other.
James, don’t forget about the time-value of money. It is, in fact, better to have your cash now than to have it later considering interest alone. Secondly, and on a more theoretical note, the economy is a function of the velocity of cash, the speed at which trades take place. If cars are purchased faster because of this, then dealers, salesmen, and manufacturers will have that much more cash available to spend that much sooner on televisions, movies, whatever, and then it snowballs from there.
This program would be effective in reducing green house gasses and at the same time bringing some relieve to car dealers IF the new cars would have considerable higher miles per gallon than the old cars; why not having a prorated incenttive with the highest credit for the largest savings in miles per gallon? But that of course might benefit the imports. Ah well we need the new GM and other north american car makers to bring real efficient cool small cars to the market.
Imagine the outcry if it was a Bush program? If it was a Bush program it would have encouraged trading in more fuel efficient vehicles for gas guzzlers. I do have to say however, bailing out failing businesses in general flies right in the teeth of the concept of a free market.
“stealing car sales from the near future rather than generating additional demand” thats some nice piece of bull poop. Whether they buy now, or later, Earlier the better because money goes back into producing parts aka factory orders.
Just within a small group of a dozen acquaintances, two of them wanted to use the cash-for-clunkers program to trade in older, less fuel-efficient cars for newer cars. My wife and I considered trading in her old mini-van as well. Not sure if we live in some sort of weird bubble, but when 25% of this random group seriously considered buying a new car now - when they would have otherwise kept their existing cars for at least more than a year - I’m having trouble understanding how this particular study could reach the conclusion that this program is not generating additional car sales above the normal levels (or the dismal low levels we are currently experiencing). I’ve also heard comments (mostly from Republicans) that this does nothing good for America… Well, let’s see - More new cars purchased, helps keep auto-dealers in business, increases parts manufacturing and auto services demand - increasing employment - in addition to helping large auto makers support themselves through difficult financial times rather than shutter or bankrupt… Weird. There seems to be some funny math going on here - which contradicts what many of us (normal people) are seeing on the ground. It’s time to set aside biased politics which promotes lies and half-truths over actual facts. I’m supporting anything that helps America - not one political party or another… How long will it take for our representation to get on board with this concept?
I believe the “cash for clunkers” program is helping us lessen our growth for foreign oil, are you into the petroleum futures markets?!!!
It has already been established that a large number of the people using this program are the type of people who only buy cars once a decade. They are considered a new customer base when they are enticed to come in and spend their money one, two, or even three years ahead of their normal buying habits. It’s also allowing younger people to get into better cars now that they are more affordable to them. Your argument is purely political and lacking any real evidence.
I drive two old cars, one 20 years old with almost 400,000 miles, the other 18 years old with almost 300,000 miles. Both cars would qualify for the Cash for Clunkers program. I am at least THINKING of buying a new car using this program. Without the program, I would not even consider buying a new car. I would squeeze another 50-100K miles out of each car before buying replacement used vehicles. If I buy a new vehicle, I will help employ the people who built it, the people who transported it, and the people who sold it. I’ll also consume less fuel in the future. (That may result in under-employment in the petroleum industry, but we can’t have everything.)
You’re the only one proving you don’t know anything about economics. It needs to be said that short-term stimulation is sometimes the key to long term growth. Short term stimulation can have an effect on the economy when combined with long term policies. In the midst of such a recession as this one, one of the few ways of actually getting out of it within a reasonable time frame is giving the economy a strong short term burst.
Seems the program is a success so far, I’m for funding the extra $2B. Let’s see, pulls less efficient, more polluting vehicles off the road. Adds additional sales to support auto dealers, reduce built up inventories, and keeps factories manufacturing.
I’ve had it with conservative views that markets can regulate themselves and tax cuts are the only way. All the rhetoric about Obama policies. Here are a couple facts, the Bush 43 administration more than DOUBLED the federal debt during his eight years. We’re not going saddle our kids/grandkids with Obama debt until we start paying down REGEAN DEBT!
At least this spending is directed at us and our economic struggles. I’m not taking advantage of it, can’t, don’t need to, but I’m in support regardless.
These sales actually spark sales in secondary markets. We need to jump start the economy somehow. Let’s give these things a chance to work.
Will states like California and Texas be returning their sales tax? They are not complaining. who will be getting our abundance of scrape metal? China, Korea, Iran or Japan
“An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car sales, not total sales…”
More economic analysis devoid of real-world understanding. As others have pointed out, cash for clunkers allowed plenty of people to buy NEW cars who might otherwise have bought used. It is downright foolish ivory tower analysis to think that the availability of up to $4,500 in government assistance per vehicle only changed the timing of purchases rather than enabling purchases that would not otherwise have happened.
Plus, the program requires that the trade-ins be rendered non-driveable — so as someone else pointed out, they really are removed from the road. Again, something that the Macroeconomic Advisers seemed to have overlooked.
So his point is it is stealing future sales? What about do we do about the past sales lost to unemployment, uncertainty, etc. When do we make up for those? How about now? Does that sound like a good time to get the economy a jump start? Sometimes short-term solutions are needed to get us through a rough patch.
[...] Pethokoukis: Cash for clunkers is Obamanomics in microcosm An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car [...]
This program may get people buying higher efficiency cars, but that certainly does not make the program “Green”. The greenest car on the planet is the one that is already manufactured. Even if it gets less gas mileage than a new car, the new car has to work harder to pay off the embodied energy required to manufacture it. Of course the manufacturing and selling of cars keeps people working, a good thing, but to pass this program off as “Green” is a bold faced lie. And what about all the scrap metal created out of these cars that many high school and college kids would love to buy on the cheap?
Turning over inventory, getting secondary markets moving, in steel, auto parts, tires, etc…those are all good things for the economy.
How can you say that? We are talking about 2 different markets here. New cars and used cars. We are taking used cars supply away. This will decrease the used car market place. Now boosting new car sales that get better MPG. I am sure we took some of the new car sales from the future away, but not the percentage you are implying in your article. If anything we took the used car sales of the future away. This program is getting more people invested in this new “green” american Obama is going for. Thumbs up !
“If high mpg cars replace low mpg cars, that will reduce imports.”
Makes absolutely no sense. That would, if anything, increase imports now. Which, as the author said, doesn’t change anything, it just evens out the sales throughout the year, with some being earlier and the rest being later.
“He's had a beater for years that he's always working on… His car leaked, gas, oil, coolant"¦probably other things too.” - So he was just working on it? Not fixing it… Normally, cars have to be maintained no matter what age they are. “C4C is the only reason this was possible for him.” I find that very hard to believe. At most he got $4,500 off a $11,000 Kia. If he could pull $6,500 in financing for that (absolute minimum) he could have gotten a used car easily. No reason he needs a NEW car.
They just dont know how economics works.
Someone said: \”\”It's also about getting fuel efficient cars onto the roads and getting gas guzzlers off the road. ..As for this being poor economic policy, I heard Alan Greenspan praise it this morning.\”
This is asinine. The government creates yet another welfare program, subsidizing the purchase of new cars while destroying perfectly good cars, by paying dealers to absorb the costs of the rebate amount. The program runs out of money in a matter of days. Shocker.
Forget about the fact that the DOT and the Administration have no idea how to gauge demand for the program, because as is typical for most government programs, it quickly ran out of cash and needed congress to authorize more.
James\’ post is correct. The program does nothing to stimuluate demand for cars, boost production, etc. In other words, it did nothing to spur economic growth which, again, is true for most government programs anyway.
The government announced they were giving a handout to buy a car, and the people applauded. The same people who are broke, up to their eyeballs in debt, etc.
The government must think we are real morons, because it\’s the equivalent of 40 acres and a mule, or whatever the economic equivalent is these days. This way we just shut up about having our taxes raised and our paychecks squeezed even further.
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