"Cash For Clunkers" Revisited: Was It Worth It?

Automobile news site Edmunds.com released their analysis of the “Cash For Clunkers” program that ran during the summer. “Cash For Clunkers” was intended to offer consumers an incentive to trade in their older, less fuel efficient car for a newer vehicle with better fuel mileage. Given the state of the economy, that focus was lost and the program’s image became more about spurring new car sales to give the economy a boost. Back in August, I wrote about possible unintended consequences “Cash For Clunkers”. Edmunds.com ran the numbers from the summer and determined that “Cash For Clunkers” wasn’t as effective as was touted.

The most important numbers in Edmunds’ findings is 125,000, the marginal sales spurred on by “Cash For Clunkers”, and $24,000, which is how much each marginal car cost in federal funds from the $3 billion allocated to the program. Edmunds measured what the seasonally adjusted sales rate should have been using historical data and this year’s sales data to arrive at the marginal sales rate. Perhaps more importantly, using the same seasonal adjusted sales projections, Edmunds has been able to make predictions for the sales for the remainder of the year, and its not nearly as sparkling. Edmunds predicts that car sales will decrease on a seasonally adjusted basis for the last quarter of the year.

Predictably, the White House has issued a rebuttal to Edmunds’ findings. One of the major points the White House refutes is how “Cash For Clunkers” will benefit the US GDP in the second half of the year. When viewed on the macroeconomic level, I can believe this argument. The amount of labor and money that goes into delivering a car to a consumer is great. There are the part manufacturers making spark plugs and ignition switches, the freight companies that deliver components to the assembly lines in Detroit and elsewhere, where the components are assembled into a car. Then you have more freight delivering the cars to dealers, and the dealers themselves who employ salespeople, mechanics and an administrative staff. That’s a lot of hands that go into building a car. For now, the major manufacturers have to build more cars than usual due to the fact that cars traded in as “clunkers” have to be dismantled. But what happens when auto sales level off, production drops and layoffs occur? How far into the future will that occur? It could happen in a few years as part of a normal cycle, or it could occur in a few months if potential consumers still have difficulty obtaining a car loan.

As an aside, one would expect an official White House communication channel to sound more professional. Read the title of the post to see what I mean.

Perhaps the most troubling aspect of Edmunds’ research is the cost per marginal car. According to the Federal Trade Commission, the average selling price for cars stands at $28,400. Subtract the $4,500 maximum rebate available under the program, and you get $23,900. That means the government spent $100 more per marginal car than the average price. From an economic standpoint, selling for a loss is a dangerous prospect. I’ll be keen to see sales numbers for the last quarter of the year to see if those numbers hold up under the weight of the “Cash For Clunkers” program. If more than 125,000 sales are lost, then the program will have created negative net sales. If that happens, it will be hard to call the program a success.