Analyzing Cash for Clunkers

The CARS legislation, popularly known as "Cash for Clunkers," now appears certain to get additional funding.  The program provides an excellent example of a typical public policy question and the dilemma for decision makers.

Any new program has a range of impacts.  Some of these are obvious to all.  It is easy to trace cause and effect for these highly visible results.

The professional policy analyst has a more extensive tool kit.  The range of questions is wider and the analysis is much more sophisticated.  The average person may not find the results of this analysis to be persuasive.

A simple example is policy to expand free trade.  Jobs put at risk from foreign competition are highly visible.  Anyone can understand the consequences for domestic workers.  Jobs gained from increased exports and an improved economy cannot be "proved" to the satisfaction of the lay observer.  It is  an issue where there is a great discrepancy between the views of professional economists, who overwhelmingly favor free trade, and the average citizen.

Cash for Clunkers

The CARS legislation provides an incentive payment to people who trade in a vehicle that gets poor gas mileage for one that is better.  This might still be a 15 MPG SUV, but it is better than the trade-in vehicle.  To make sure that the old vehicle is taken off of the road, the engine must be destroyed.  The incentive ranges from $3500 to $4500.

From a policy analysis perspective the CARS program seems dubious, involving many significant questions.

• Does it really help the environment?  Nina Shen Rastogi, writing for Slate, suggests that the cost is ten times too much, when one considers the environmental impact of building the new car.

Was spending $1 billion a particularly cost-effective way to achieve those CO₂ reductions? Probably not. Assuming the above calculations are correct and that each consumer keeps his or her car for 10 years, then the total savings should be a little less than 5.7 million tons of carbon dioxide. That means each ton of carbon dioxide would be worth about $175.53 to the U.S. government. As the Washington Policy Center pointed out on its blog in June, a ton of CO₂ currently goes for about $17.50 on the European Climate Exchange.

• Does the program really add new sales?  How many?  Avery Goodman suggests that the program cost is actually more than $45,000 per vehicle.  Citing data from the online auto service Edmunds.com, Goodman makes a key point.  The program pays off even for those who would have bought a car anyway, not just for the incremental buyer.  If you look at the "counterfactual", what would have happened in the absence of the program, the net gain in sales is much smaller.
• The overall program is small.  Doug Kass suggests that this is a minor and temporary stimulus to the economy, although the psychological effect might be important.
• James Hamilton laments the waste from destroying the old engines. 

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.

• Bob McTeer says it best:  "What was the evidence of success? What lesson was learned?  Well, apparently, if the government offers to give people money, quite a few of them will take it."

The Popular Viewpoint

If one looks only at the highly visible policy results the story is different.  The program created a buzz in dealerships, including traffic from those who might not qualify for the program.  The plan is working in a way that is more obvious than other "shovel-ready" programs.

There are highly visible benefits for consumers, car makers, auto workers, parts makers, and the local economies in the auto states.

These stories are easy to present in the media, and easy for political leaders to embrace.  It is no surprise that the GOP leadership is going along with the extension and expansion of the program.

Our Take

We cite this as an example of how public policy decisions are reached.  While the program has many flaws, it illustrates the reality of the policy-making process -- a compromise where there are obvious beneficiaries.

Comments

[VennData]

Let's not forget the taxes paid by the re-hired autoworkers, the places they shop, etc... and even eating into whatever "loss carrys" the automakers themselves have.

If economics is about psychology as posited by Shiller, then there's an entire affect that's not measurable with current tools as well. All we know is gov'ts everywhere "do things" to "get the economy moving." And we've always come out of these things before - except when the Hooverites were in charge. But even then, "we did something," (aka Roosevelt was elected) and the gov't "did things" (many, many other things besides the Agricultural Adjustment Act.)

[oldprof]

Patrick -- As usual, you have made a good observation.

A problem in an article like mine is where to draw the line. I am trying to hit a theme of obvious impacts versus more comprehensive analysis, using economic approaches.

One is much more complex, and more accurate, than the other. Yet the complexity does not drive the debate. I have to decide how deeply to delve in order to show this.

There are many other similar issues, including almost everything related to the stimulus package.

As you and other readers no doubt can tell, I agree with the spirit of this comment and also your prior observations on many subjects.

Thanks,

Jeff

[oldprof]

RB -- Good point. I did not really "miss it" since I read carefully everything from Hamilton. I just needed to decide how deeply to delve. Perhaps I should have included this and thanks for pointing it out.

Jeff

[Patrick]

The Edmunds data uses sales figures from a year ago when auto sales were at all time highs (15-16 million per year). Since auto sales have been 60% of those figures since last Fall, the whole Edmunds analysis seems faulty or biased to produce a desired result.

The Gov't owns large stakes in C and GM. Any cost would have to figure in the appreciation in worth of these stakes. Could be that $1 billion produces $2 billion increased value in the auto makers.

While auto demand is maybe only temporarily depressed, and would have to come back 2-3 years from now, dealerships were full of unsold 2009 cars. This program, is clearing out the old inventory and makes room for 2010 models.

This is obviously a subsidy, and a big one. But I wouldn't compare the impact against carbon prices in Europe or other normal metrics. It is a stimulus program, maybe only a step above Keynes' famous hole digging, but it should be valued as a stimulus program.

[RB]

You missed probably the most important post of all -- that the replacement rate was already unsustainably low . Perfect example for policy makers jumping in to claim undue credit or perhaps, they get credit only for bringing in the correction by a few months. This, further explained by Jim Hamilton , was pointed out well in advance of current events.