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‘Cash for Clunkers’ a success? Don’t declare victory yet

Widely declared a smashing success, the recently concluded $3 billion “Cash for Clunkers” program has received little criticism in the media. For whom was it successful?

Many of the automakers enjoyed a sales boost, at least in the near term. I expect that factories and showrooms might be slow for the remainder of the year. The top 10 trade-ins were all American cars; eight of 10 cars in the top-selling list were foreign cars. If the goal was to move Americans from domestic cars to foreign cars, this was a success. Korean automaker Hyundai reported a 47 percent sales increase over August of last year. 

Collateral damage from the program includes charities that would have received some of these cars as donations, businesses that service used cars, and salvage yards that would have reused some of what the federal government demanded be destroyed. The unconscionable destruction of perfectly good engines, regardless of mileage or condition, is a topic for a separate treatise.

I have heard that the real winners were those who participated in the program, and are now sitting behind the wheel of a new car. Just as for automakers and dealers, it may be too soon to declare victory.

Let’s back up to consider why these new car owners were driving clunkers — one of two reasons: They understand the transportation value of driving an older car, or they are driving the car they can afford to purchase, under normal circumstances. Most of the people in the former group, like me, are still driving their car on the clunker list. Those in the latter group, some of them owning their first new car, are now experiencing the cost of owning and insuring a new car.

I can’t help but see the parallels between the “Cash for Clunkers” program and the federal government’s actions that led to the housing crisis. Just as people, regardless of their financial capabilities, were provided the opportunity to own a home, federal legislation is lowering the bar for owning a new car.

About this time next year, maybe sooner, I expect that there will be an oversupply of 2009 cars with 15,000 miles on them, some of which have not had their first oil change.

Steve Rose lives in Minneapolis.

Comments (18)

  1. Submitted by Thomas Swift on 09/09/2009 - 10:31 am.

    Let us not fail to mention that car dealers were bailing on this program before the money ran out, Steve.

    “The first national survey of dealer reimbursement under the federal cash-for-clunkers program shows that rebates have been paid on 5.7 percent of the transactions submitted.

    The National Automobile Dealers Association finding for all 50 states is identical to the results of surveys by dealer groups in North Carolina, Virginia, Louisiana and Alabama.

    The NADA survey, released today, also found that 83.7 percent of the dealer applications are still under review by the U.S. Department of Transportation.

    “The program administration has been a disaster, and it’s killing the dealers,” Rep. Pete Hoekstra, R-Mich., said in an interview.”

    http://www.autonews.com/article/20090902/ANA05/909029987/1203/FRONTPAGE

    And the government wants to take over our health care?

  2. Submitted by Alicia DeMatteo on 09/09/2009 - 11:56 am.

    “The top 10 trade-ins were all American cars; eight of 10 cars in the top-selling list were foreign cars.”

    I’d be curious to know more about where the newly-purchased cars were actually made, as opposed to this article which assumes a Ford is “all American” and a Toyota isn’t.

    It also would be interesting to see a breakdown of where your car buying dollar goes when you buy a “foreign” vs. a “domestic” car (yes, I’m using quotes here). I.e. How much goes to the dealer, the workers who made it, the car designer, corporate executives, etc.

    I really have no idea what the answer would be.

  3. Submitted by Richard Schulze on 09/09/2009 - 01:39 pm.

    I imagine that both the red and blue states loved the license fees and sales taxes.
    Most all “imports” are manufactured here in the good ole USA. Heck even Harley Davidson has “foreign” parts on it “Buy American” yeah right… What about “free trade”? “Open markets”. Guess that only matters when it suits your point of view and adds meat to your argument.. Too funny…..

  4. Submitted by Steve Rose on 09/09/2009 - 01:52 pm.

    Thomas: Thanks for pointing out the federal’s government’s disastrous administration of the program. No surprise, but nonetheless disappointing. Clearly little thought was given to the program’s unintended consequences, including additional strain on the financially challenged dealer network.

    Taylor: No assumption was made regarding the assembly location of Fords and Toyotas. Since 1994, all automobiles sold in the U.S. bear labels identifying the country of origin for components and assembly. Percentages aside, I think it is safe to say that the U.S. economy is better bolstered by the sales of cars from U.S. automakers than it is by foreign automakers.
    Hence, TARP money was only awarded to U.S. automakers.

    Though not enjoying the benefits of a new car, those of us on the outside still get to pay for a portion of each new car dealt out by the Cash for Clunkers program. I think it would be fitting for the federal government to send each of us outsiders a cardboard pine tree air freshener, so that we can get a sniff of that new car smell.

  5. Submitted by dan buechler on 09/09/2009 - 02:58 pm.

    There is some truth to your thesis buy methinks you stretch to far when you compare it to the housing crisis.

  6. Submitted by Steve Rose on 09/09/2009 - 03:13 pm.

    Richard: Funny you should reference free trade and open markets when the discussion is about a federal government program to manipulate the economy. I am not laughing because it is my money being wasted on yet another poorly conceived, disastrously executed, ineffective federal program.

    India’s Tata Motors lost over $67 million last quarter. They sell their products in the U.S. market; should they not be eligible for TARP money?

  7. Submitted by Mike Wyatt on 09/09/2009 - 03:24 pm.

    It would be interesting to see a comparison of the price people paid under the “clunkers” program versus what they would have paid without it. The end result is probably the same, and in doing so, we’ve encouraged people to go further into debt in that name of “saving” some jobs. So now we’ll have people defaulting on millions of new car loans. What progress!

  8. Submitted by Rodd Johnson on 09/09/2009 - 05:18 pm.

    Steve missed another hidden “bonus”. The real cost is being missed.
    Most dealers had to front the money to have the inventory, yet the government is sloooooow to pay out. So the cost of capital bites into revenue and many dealers opted out.
    Many consumers also were paying retail value for their new car, not realizing they were paying more than they had to, but it was “free money” in their minds. Its also estimated that the $4500 the government puts out now, will actually cost about $11,000.
    Regardless, the real crime is the gas consumption issue tied to this initiative. Yes, we should be as efficient as possible with our natural resources. But we don’t even have proof global warming is real. And if we really cared about foreign oil dependence, we’d go after our own resources. Just a few weeks ago the US Geological Survey revised the Bakken reserve (North Dakota) is 3 times that of Saudi Arabia. http://www.usgs.gov/newsroom/article.asp?ID=1911
    Anyone know that? Instead, we refuse to explore our own reserves, spend money we don’t have and offer a free lunch.

  9. Submitted by dan buechler on 09/09/2009 - 06:18 pm.

    And how would you commentators buttress the supply chain?

  10. Submitted by Rodd Johnson on 09/09/2009 - 06:51 pm.

    I wouldn’t buttress it. Free market capitalism needs to be left unfettered. If a business can’t make it on it’s own because of its products or bad management, it goes under. Period.

    The auto bailouts were to payoff unions. How else do you explain the bankruptcy laws being violated by the Feds? The Chrysler deal was an unconscionable reorganization plan for Chrysler, which rips off pension funds to provide short-sighted, unsustainable preferential treatment for the UAW.

    The net meaning the government should stay out of it all together. A lesson for healthcare too.

  11. Submitted by Richard Schulze on 09/09/2009 - 10:04 pm.

    Steve, I’ll assume that your question was rhetorical in nature. Your point of view is one of ideology, nothing really more sophisticated than that.

    Your claim that:
    “I can’t help but see the parallels between the “Cash for Clunkers” program and the federal government’s actions that led to the housing crisis”.

    You must be referring to the myth that CRA was the villain that brought down the economy. Allow me to help with some facts regarding CRA (community reinvestment act).

    The CRA has nothing to do with the financial crisis. How do we know this?
    1)It has been in place for some thirty years, so if its going to produce disasters its not a very good explanation of a current crisis.
    2)80% of non-prime loans were made by non-regulated entities not subject to the CRA. So obviously their behavior was not in any way prompted by the CRA.
    3)The institutions that were regulated and were subject to the CRA, none of them had any CRA rating problems. So they weren’t making these loans to try and improve their ratings. They already had great ratings.
    4) What changed in CRA regulation over the recent period relevant to the crisis? It was weaken not strengthened as a result of Phil Gramm and the repealing of the Glass-Steagall Act in 1999. The great success of the Glass- Seagall act was that it separated depositors from risky bets. I can assure you that all this CRA hooey is all made up.
    If you need further help with regard to this CRA myth. Please allow me to furnish you with a link for your perusal. http://economicedge.blogspot.com/2009/08/william-k-black-great-american-robbery.html

    Now if you are referring to Fannie and Freddie the ONLY reason that they are insolvent is because they purchased CDO’s that consisted of liars loans. This was in-spite of the fact that they were rated AAA by the rating agencies.

    Expansion was really fueled by housing. A huge amount of job creation was tied to housing. As well as a huge amount of consumption. Housing peaked 2006.

    Now relative to this assumption you have about government housing policies causing all our problems think about these facts and the empirical evidence which hopefully might question your factually inaccurate assumptions:

    A summary report by McKinsey provides the following frame for the key issues over the past decade:

    “Between 2000 and 2007, US households led a national borrowing binge, nearly doubling their outstanding debt to $13.8 trillion. The pace was faster than the growth of their incomes, their spending, or the nation’s GDP. The amount of US household debt amassed by 2007 was unprecedented whether measured in nominal terms, as a share of GDP (98 percent), or as a ratio of liabilities to disposable income (138 percent). But as the global financial and economic crisis worsened at the end of last year, a shift occurred: US households for the first time since World War II reduced their debt outstanding.

    Over the past decade, rising US household spending has served as the main engine of US economic growth. From 2000 to 2007, US annual personal consumption grew by 44 percent, from $6.9 trillion to $9.9 trillion – faster than either GDP or household income. Consumption accounted for 77 percent of real US GDP growth during this period – high by comparison with both US and international experience.”

    But seriously, no one likes to bail out anyone. Except of course for NWA here in MN.
    Evolutionary capitalism would be preferred but we haven’t seen that since the robber barons. Bailouts have been going on longer that you or I have been alive. They’ll be going on long after we are gone. It serves as a reminder as to who rules things…just saying

    I apologize for being off topic but some of your failed assumptions needed to be corrected with evidence based fact and not ideology. Your opinion was thoughtful but facts are always appreciated and more professional.

    I’ll be there to take advantage of those used car deals you mentioned. Grand kids will need some wheels….

  12. Submitted by Steve Rose on 09/10/2009 - 11:58 am.

    Richard:

    That was quite a sharp turn; I nearly blacked out from the g force. You’ve taken quite a tangent, and the assumptions which you address are yours and yours alone. Assumptions are fun, but according to you, “facts are always appreciated and more professional”. I would like to succinctly distill for you what I said. I think that C4C is bad policy, and it is too soon to declare it a success. What is your opinion regarding C4C? You didn’t say, other than you were hoping to benefit from the fallout, to get some wheels for your grandkids.

    Regarding the mortgage crisis, I see that you borrowed talking points from Representative Barney Frank (D-Mass.), Chairman of the House Financial Services Committee. I have provide a link below to a two minute clip in which Frank says that “Fannie & Freddie are not in crisis”; “the entities are fundamentally sound, financially”, “even if they do get in trouble, the federal government does not bail them out”. Frank led the charge, and successfully blocked legislation that would have limited Freddie and Fannie and provided greater oversight. In business, we have the concept of limiting losses. When the federal government has a bad investment, they double-down, and the taxpayer picks up the tab. On the 21st of August, The Obama administration raised its 10 year deficit projection from …$7 trillion to $9 trillion. Richard, that is something you will pass along to your grandkids that will last long after those C4C fallout wheels have ceased to rotate.

    http://www.youtube.com/watch?v=y56lGWvVsrc&feature=related

    Is Frank clueless, a liar, or a combo platter?

  13. Submitted by Gregory Lang on 09/10/2009 - 01:49 pm.

    The author made many good points. As for the cost of a vehicle, I was considering, but did not buy a 2009 Chrysler PT Cruiser. It is assembled in Mexico with a relatively low USA content. Go figure! Also good point made on credit and financing. (I was planning on buying the PT out of savings). I could have bought a new 2009 PT for $10 with tax and plates and the $4500 clunker credit. That is cheaper.

    Below, is a paste of what I wrote up previously. ——————–

    Looking back at the $10K PT Cruiser I almost bought with my 1993 S-10 pickup..
    I checked and insurance would have been $10 per month more than the clunker. Plates would have been $15 per month more. I hadn’t heard that the “cash for clunkers” $4500 would have been taxed as income. Between fed and state that would be almost one-third of the sum if true. I would have purchased out of savings. …….Here is how I think “cash for clunkers” should have been done………Basically, if we are to do a “cash for clunkers” program the goal should be to “shake the money out from “under the mattresses” so to speak. I would specify that there could be no leases or loan liens on the new vehicles. I would also specify that the current owner must keep the vehicle for a period of three years or more with an early sale pro-rated at (let’s say) $100 per month. The only exception to this would be a sale due to the death or disability of the owner resulting in permanent loss of driver’s licence. …….. First the no loans or lease. Many people have a lot of debt. Admittedly with “clunkers” discount there is a lot less repo loss but debt or lease is still a debt obligation. A lot of the “savers” have money “in the bank/under the mattress”. This is the money a stimulus program should be flushing out. I give the $100 per month penalty for early sale to avoid the “resale loophole” that seemed to exist with the current program. Many of the buyers under my scheme would be elderly so the exclusion for death or medically related drivers licence surrender would reassure them. I would exclude a repay exemption for sale after a licence revocation caused by a DUI or other traffic offenses or non-driving related imprisonment. How come I can figure this out and those Washington lawmakers and bureaucrats can’t? ….I will cross post at my http://fourfiftygas.com

  14. Submitted by Richard Schulze on 09/11/2009 - 07:10 am.

    Steve, sorry for the late post.. out of town.. Barney Frank? didn’t know he was on the ticket here in MN.

    While the Fed does bear much responsibility for sowing the seeds of recession, it’s commonly treated as an institution independent of politics and even the government itself. But the Federal Reserve Board consists of governors appointed by the president and confirmed by the Senate.

    Because the president appoints the board, he has primary influence over its policies. This is especially the case for chairmen of the Fed appointed by Republicans because they often have ties to Republican administrations. Chairman Ben Bernanke was originally appointed as a member of the Fed in 2002, serving until 2005, when he became chairman of the Council of Economic Advisers in the White House, a position that made him Bush’s chief economic adviser.

    As early as 2002, a majority of the seven-member Federal Reserve Board was Bush appointees, and by 2006 every member was a Bush appointee. While many critical decisions about monetary policy are made by the Federal Open Market Committee, the board’s position always prevails.

    The Treasury secretary also has had breakfast with the Fed chairman on a weekly basis for decades. Consequently, most economists generally believe that every administration ultimately gets the Fed policy it wants. Therefore, one must conclude that if there were errors in Fed policy that caused the current downturn, it must be because the Fed was doing what the Bush administration wanted it to do.

    To the extent that there were mistakes in housing policy that contributed to the recession, those were necessarily committed by Bush political appointees at the Department of Housing and Urban Development, Fannie Mae, Freddie Mac, and other agencies. To the extent that banks and other financial institutions made mistakes or engaged in fraudulent activity, it was either overlooked or sanctioned by Bush appointees at the Securities & Exchange Commission, the Comptroller of the Currency, the Commodity Futures Trading Commission, and elsewhere.

    But in a larger sense, the extremely poor economic performance of the Bush years really set the stage for the current recession. This is apparent when we compare Bush’s two terms to Bill Clinton’s eight years. Since both took office close to a business cycle trough and left office close to a cyclical peak, this is a reasonable comparison.

    According to the CBO, federal taxes will amount to just 15.5 percent of GDP this year. That’s 2.2 percent of GDP less than last year, 3.3 percent less than in 2007, and 1.8 percent less than the lowest percentage recorded during the Reagan years. If conservatives really believe their own rhetoric, they should be congratulating Obama for being one of the greatest tax cutters in history.

    Ideology and dogma get you through the night but facts really do matter Steve.

    Take a minute to watch this Federal auditor speak at Stanford. he was the lead auditor during the S&L crisis. He is non partisan with no political agenda and points fingers anywhere that responsibility is deserved.
    http://economicedge.blogspot.com/2009/08/william-k-black-great-american-robbery.html
    Best to all

  15. Submitted by Steve Rose on 09/14/2009 - 08:38 am.

    Richard, finally something we can agree upon, though I am still expecting you to comment regarding the C4C policy; good policy or bad.

    Your words, towards the end of your last post:

    “If conservatives really believe their own rhetoric, they should be congratulating Obama for being one of the greatest tax cutters in history.”

    I do congratulate Obama for being one of the greatest tax cutters in history, at least by the metric of tax revenue as a percentage of GDP. But, if you give him credit for the cut, you must also give him credit for the elements of the cut.

    Some Facts: In California alone, 800,000 Americans have lost their jobs in the past year, bringing their unemployment to a staggering 12%. Those folks aren’t paying federal or state income tax. Counties across the country have re-assessed property values to reflect deflated market conditions, reducing the tax revenues of state and local governments. Sales tax receipts have decreased in many states, as a result of slower retail sales. All great tax cuts, for which you ask us to applaud Obama, one of the greatest tax cutters in history!

    The President was in town on Saturday, but failed to mention his plan to reverse the unemployment rate. Nor did he make an attempt to justify his escalation of the war in Afghanistan (23,000 additional troops). The health care question seems less important than these other question relegated to the back burner.

  16. Submitted by Richard Schulze on 09/14/2009 - 02:04 pm.

    I see that car sales are down from the previous month…

    A properly functioning government would not have allowed the circumstances that were the preconditions for the economic meltdown we are experiencing. The government would not have accepted the almost unfathomable levels of leverage that were built into the system … including mortgage and debt backed securities that were levered at 30 or 40 to 1 and which were destined to become worthless if the value of the underlying asset pool declined by a paltry 2 or 3%. They would not have allowed AAA bond ratings on those same bonds. They would not have encouraged no-doc loans and exotic mortgages that were certain to result in foreclosure if property values didn’t continue their seemingly inexorable rise. And they would certainly not have allowed an unregulated market in credit default swaps that left us with the useless keys to the AIG kingdom and a host of other liabilities that we will probably never fully account for.

    Where is the evidence that everything would be better if Republicans were in charge? Does anyone believe the economy would be growing faster or that unemployment would be lower today if John McCain had won the election? I know of no economist who holds that view. The economy is like an ocean liner that turns only very slowly. The gross domestic product and the level of employment would be pretty much the same today under any conceivable set of policies enacted since Barack Obama’s inauguration.

    Conservatives delude themselves that the Bush tax cuts worked and that the best medicine for America’s economic woes is more tax cuts; at a minimum, any tax increase would be economic poison. They forget that Ronald Reagan worked hard to pass one of the largest tax increases in American history in September 1982, the Tax Equity and Fiscal Responsibility Act, even though the nation was still in a recession that didn’t end until November of that year.Indeed, one could easily argue that the enactment of that legislation was a critical prerequisite to recovery because it led to a decline in interest rates. The same could be said of Clinton’s 1993 tax increase, which many conservatives predicted would cause a recession but led to one of the biggest economic booms in history.

    Conservatives will respond that some tax cuts are good while others are not. Determining which is which is based on something called supply-side economics. Because I was among those who developed it, I think I can speak authoritatively on the subject. According to the supply-side view, temporary tax cuts and tax credits are economically valueless. Only permanent cuts in marginal tax rates will significantly raise growth.

    On this basis, we see that Bush’s tax cuts were pretty much the opposite of what supply-side economics would recommend. The vast bulk of his tax cuts involved tax rebates—which failed in 2001 and again in 2008, because the vast bulk of the money was saved—or tax credits that had no incentive effects. While marginal rates were cut slightly—the top rate fell from 39.6 percent to 35 percent—it was phased in slowly and never made permanent. Neither were Bush’s cuts in capital gains and dividend taxes.

    In my opinion, conservative activists, who seem to believe that the louder they shout the more correct their beliefs must be, are less angry about Obama’s policies than they are about having lost the White House in 2008. They are primarily Republican Party hacks trying to overturn the election results, not representatives of a true grassroots revolt against liberal policies. If that were the case they would have been out demonstrating against the Medicare drug benefit, the Sarbanes-Oxley bill, and all the pork-barrel spending that Bush refused to veto.

    Until conservatives once again hold Republicans to the same standard they hold Democrats, they will have no credibility and deserve no respect. They can start building some by admitting to themselves that Bush caused many of the problems they are protesting.

  17. Submitted by Steve Rose on 09/15/2009 - 03:38 am.

    Richard: Thanks for that opinion regarding the C4C policy.

    Your arguments are aimed at a pigeon hole not occupied by me. During the Bush years I compared his fiscal policies to that of a drunken sailor, thought I knew they were no more extravagant than Gore nor Kerry would have been. And, let’s not forget that the wheels were falling off the 2000 economy before election day, when heir apparent Gore would have taken office. Now on course for a $10 trillion debt, Bush was a teetotaler in contrast to Obama. “One of the greatest tax cutters in history”, Obama is burdening America with staggering debt. That will be his legacy; something for which your grandkids will be able to thank him and those Americans who made the White House his home.

  18. Submitted by Richard Schulze on 09/15/2009 - 06:59 am.

    This is what I call the philosophical impasse.
    Thanks for your thoughts and C4C was a nice article. Keep up the good work….

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