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Cash-for-Clunkers, as seen in the rear-view mirror

Cash-for-Clunkers, while arguably the feel-good government handout of summer 2009, failed to achieve the goals set for the program by Congress. Yet in December 2009, less than four months after the issuance of the program’s final voucher, the National Highway Safety Administration issued a 63-page report to Congress claiming success. [PDF]

Last September, I took a critical pre-trip look at the Cash for Clunkers program in this Community Voices commentary. A year down the road, it is now time to glance in the rear-view mirror, to see where we have traveled courtesy of the CARS program. In the government report, two definitions are used for the CARS acronym: Consumer Assistance to Recycle and Save, and Car Allowance Rebate System. (The report acknowledges the ambiguous use of the acronym in a footnote. Clearly, jobs were created to determine how the program could be named CARS, and it seems that there were two finalists.)

The final section of the report to Congress states two primary goals; “(1) stimulate the economy by providing incentives to purchase or lease new vehicles, and (2) aid the environment by ensuring that the new vehicles were more fuel efficient than the trade-ins and that that the trade-ins were never used again as automobiles.” It is unclear why the National Highway Safety Administration would be involved in a program with these goals.

Was the CARS program “wildly successful,” as stated in August 2009 by U.S. Transportation Secretary Ray LaHood? Or, was it “Epic Fail,” as concluded by Rick Davis, Consumer Metrics, in August 2010? Interesting questions to examine at this point include this one: What did we get for our $3 billion, and for whom, if anyone, was the program a success?

The new car buyer
A study by automotive-industry research firm CNW indicates that the CARS program participants differ in several important ways from the traditional new car buyer. Its January 2010 study indicated that subprime-credit borrowers who participated in the CARS program had a 4.8 percent repossession rate, more than double than the 2.2 percent who bought similar vehicles, but without government assistance. More jobs created and saved for Certified Automotive Repossession Specialists (CARS); for now, life is good for the repo man.

The CNW study also found a higher rate of buyers’ remorse among CARS buyers: 20 percent versus 2 percent for non-CARS purchasers. CARS purchasers are also more likely to be late with the payment.

These facts come as no surprise when you stop to consider that buyers leaped to dodge the snooze-and-lose proposition set before them. Spurred on by the news that the government cheese would soon be gone, those who missed the first billion were determined to get theirs from the second or third. Just as state and local governments cannot resist the allure of the federal dollar, we citizens also find it difficult to leave it on the table. Participating in a stimulus, many seem to have believed in better times ahead — times they would help to create, times that have yet to come.

What is the true value of the $3,500 or $4,500 voucher? Even if the trade-in vehicle is worth only $1,500, the value of the $4,500 government voucher is reduced to $3,000. As a point of reference, GM is currently offering $6,000 cash-back on some of its passenger vehicles. Due to the time and money limits of the CARS program, car dealers were able to hold their prices, discounting little from the Manufacturer Suggested Retail Price (MSRP). In some states, like South Dakota, sales tax was calculated before the voucher was applied. In Minnesota and Wisconsin, sales tax was not paid on the voucher amount.

We who pay the taxes
Edmunds.com, a respected resource for automotive information, calculated that each car of incremental sales during the eight-week period of the CARS program cost taxpayers $24,000 ($3 billion/125,000 incremental CARS sales). Because the average cost of cars purchased was about $25,000, the federal government could have purchased the cars outright for about the same price. Sales trended down in June 2009, as buyers waited for the CARS program to begin; the CARS program pulled in sales from future months and years. GM and Chrysler had particularly poor Septembers, being off 45 percent and 61 percent, respectively, after the conclusion of the CARS program.

According to the Bureau of Labor Statistics, unemployment in July 2009 was 9.4 percent. The unemployment rate for October, November, and December 2009 was at or over 10 percent, and is currently 9.6 percent (August 2010). The unrecovered economy stumbles forward in low gear. There is no need to foot the clutch; as we pull up this long grade, there is no up-shift on the horizon.

The CARS report to Congress claims 60,000 jobs saved or created; the Council of Economic Advisers reported the jobs gain at 70,000. Considering 125,000 incremental CARS sales in over an eight-week period, for every two cars built, one permanent job was created (or saved). Does that pass the sniff test? Borrowing a line from Ferris Bueller’s sister Jeanie: “Dry that one out, you could fertilize the lawn.”

In response to sales peaks of a known short duration, manufacturers do not hire permanent employees nor invest in capital equipment. Instead, they add shifts, authorize overtime, and hire temporary laborers. When that is not enough, they fall short of meeting consumer demand. Chrysler saw limited CARS sales, as it was unprepared, with low inventories, and it could not respond quickly to the demand for its most popular CARS-eligible models.

The environment
Calculations of CO2 and GHG emissions published in the CARS report to Congress are based on a 25-year life for passenger cars and 36 years for light trucks. I judge those numbers to be erring on the optimistic side. Further, shouldn’t the environmental calculations be based on the retirement of those beastly clunkers? How many months or years would those CARS trade-ins have persisted on the roads if not for the program? It would be an entirely different and meaningful calculation, as few of those trade-in clunkers would have remained in service for another 25 years.

CNW Marketing surveyed purchasers of the first 239,000 CARS cars. They learned that the average intended new-car mileage was 10,894, compared with actual clunker mileage of 6,162. No stay-cation for the family this year; no siree! Even though the average fuel economy improved from 16.3 mpg to 24.8 mpg, the efficiency will not cover the extra miles. The new car will, on average, consume 60 more gallons of gas annually. To be fair, it should be noted that the new engines burn cleaner than the clunker engines. Though not a CARS goal, I expected we might receive some therapy for our addiction to foreign oil.

What’s next?
If CARS truly was wildly successful, surely more of the same or similar should follow. By picking winners, the federal government also picks losers. When money is diverted to one sector of the economy, it is diverted from all others. Economist Joseph Schumpeter talked about the concept of “creative destruction.” Schumpeter explained how economic dynamism causes turmoil and displacements as workers lose jobs in declining companies and industries, but how it is necessary for economic growth. Today, there are fewer farmers and train conductors than 50 years ago, but more workers are employed in the semiconductor and software industries. This doesn’t mean that food and transportation are obsolete; it means we get those things done in a different way, a more efficient way. It is an evolutionary process.

If the federal government is propping up obsolete jobs in dying industries, it will only serve to dampen the economic dynamism. Is the federal government making wise choices? Should it be taking on debt in vain attempts to manipulate the economy?

Many of us live in residential clunkers: houses that are energy inefficient and outdated. To stimulate new home construction, the federal government could issue vouchers toward the demolition of our clunkers and construction of modern and efficient homes, built using green materials and processes, powered by alternative energy. To me, this sounds no more ridiculous than destroying other productive assets, like cars, that have not completed their productive service life. The government could take on massive debt to fund such a program, and lure the nation’s citizens into doing the same. Modeled after the CARS program, but on a grander scale, it could be the thing that completes our demise.

Steve Rose lives in Minneapolis.

Comments (11)

  1. Submitted by Robert Moffitt on 09/14/2010 - 08:11 am.

    The U.S. automobile industry is not dying, nor are munufacturing jobs obsolete, Steve.

    Nothing would be created from the loss of the U.S. automakers, except for more people out of work in the thousands of businesses, large and small, that count on the Big Three in Detroit for a large share of their business.

  2. Submitted by Mike Dudic on 09/14/2010 - 08:32 am.

    I’ve always been a critic of cash4clunkers. Why put people with paid off clunkers into loans for overpriced new cars? In this economy it’s just a recipe for reposssessions.

  3. Submitted by Richard Schulze on 09/14/2010 - 10:15 am.

    THE cash-for-clunkers and homebuyers’ tax credit—and the current Obama proposal for temporary expensing of capital outlays through the end of 2011—all have the effect of altering the time path, rather than the level, of targeted outlays. They are suboptimal because they induce outlays at times that households and firms might otherwise not undertake them.

    The Senate unanimously approved Republican Ga. Senator Johnny Isakson’s amendment to stimulate the housing market. Both programs were variation of the same theme. Did I mention that the good senator from Georgia is is Real Estate Broker? It’s not a case just Democrats it’s a bipartisan effort Steve.

  4. Submitted by Steve Rose on 09/14/2010 - 01:20 pm.

    Robert: Please provide support for your claim that the auto industry is not dying. Two of the Big Three automakers were saved from the corporate scrap heap by bankruptcy/bailout. While on life support, would you claim that you are not dying? While not quite the Monty Python dead body that claims it isn’t, neither would the U.S. auto industry receive a clean bill of health.

    I agree with you that manufacturing is not obsolete. The only way to create wealth is to build (manufacturing) or grow (agriculture) something. An economy based solely on services is unsustainable.

    While researching the recent history of the auto industry, the state that really stands out is California. California may not leap to mind when thinking about American automobile manufacturing, but it was once a big player in the industry. American motors once operated a plant in El Segundo. Chrysler operated plants in Los Angeles, Stockton and San Leandro. Ford operated plants in Long Beach, Pico Rivera, Richmond, and Terminal Island. GM operated plants in South Gate, Oakland, Fremont, and Van Nuys. The last automobile manufacturing plant in California closed in April of this year. It was the NUMMI Plant, a joint venture of GM and Toyota. The tombstone reads “California Automobile Manufacturing, 1916-2010, R.I.P”.

    Since the $865 million stimulus package was enacted, California has lost over 400,000 jobs. 21 of 58 California counties presently have unemployment rates 15% or higher. 13 U.S. metropolitan areas have unemployment of 15% or greater; 11 of them are in California. Michigan, the core state for the automobile manufacturing and its supply chain had July unemployment over 13%. Where are these created jobs?

    The CARS report to Congress uses a calculation that they credit to the Council of Economic Advisers. The EAC estimates that $92,000 of direct government spending creates one job-year. If you do the math, with the $3 billion spent, the quotient is about 31,000 jobs. The report goes on to explain that they annualized the jobs over the third and fourth quarter of 2009, to double the number to 62,000 jobs. If they had only thought to annualize the spending over the third quarter only, they could have created 124,000 jobs. It seems, the faster you spend it, the more jobs you create. Sadly, you can’t make this stuff up; you have to read it from a government report.

    House Ways and Means ranking member Dave Camp (R-Mich.) released data in August, compiled by his office, that shows 48 of 50 states have lost jobs since the February 2009 the economic stimulus bill was enacted. Camp’s office stated, “To date, 2.6 million jobs, including 2.5 million private sector jobs, have been lost.”

    Richard (#3): I concur with your comment.

  5. Submitted by Robert Moffitt on 09/14/2010 - 01:55 pm.

    GM is out of Chapeter 11 bankrupcy and has repaid its multi-billion dollar loan from the government “in full, with interest, ahead of schedule” because of its rapid car sales. In August 2010, the company announced that it had brought in $1.3 billion in profits in the second quarter of this year.

    Ford, which did not take a government bailout, did even better, primarily because it had trimmed its costs (painfull) largely before the recession hit.

    Sounds alive to me.

    I’ll agree with you that Chysler is in real trouble and might not survive. But I wouldn’t count them out just yet.

    The economy of California, the stimulus or the nation’s jobless rate is a bit off-topic, so I won’t address those.

    I understand that the American taxpayer is still heavily invested in GM and Chysler, as the US Treasury holds much of their stock value. That may change soon, though, as GM prepares a public offering of its stock, and it will be “Government Motors” no longer.

  6. Submitted by Steve Rose on 09/14/2010 - 03:44 pm.

    The GM TARP loans were paid off with other TARP funds in a Treasury escrow account. Only 10% of the money repaid by GM was earned manufacturing and selling cars. GM claimed total repay in their TV and radio commercials, which prompted formal complaints of false advertising to the FTC.

    The Treasury Department’s stake in GM consists of $2.1 billion in preferred stock and 60% of the common equity. GM is still Government Motors. The long awaited IPO is tentatively scheduled for November, pending SEC approval.

    The closing of the last automobile manufacturing plant in California earlier this year is germane to this discussion of the decline of the auto industry. The fortunes of automobile manufacturing communities are closely linked to fortunes of the auto industry. After nearly 100 years, automobile manufacturing in California ended this year.

  7. Submitted by Robert Moffitt on 09/14/2010 - 04:30 pm.

    Consider the TARP repayment some “creative bookeeping” and move on.

    I am familiar with the NUMMI plant closing. It was Toyota, not GM, that made the final decision to close the plant. Why close down a model plant? They wouldn’t say, The California plant was union, no other Toyota plant is unionized. Draw your own conclusions. Laid off workers were given a bonus if they did not bad-mouth Toyota’s decision to close the plant.

  8. Submitted by Steve Rose on 09/14/2010 - 06:05 pm.

    Robert:

    Move on? You brought up the bogus TARP repayment to support your claim of a healthy GM.

    Perhaps the union workers priced themselves out of a job. Toyota operates assembly plants in three U.S. states, employing thousands of Americans.

  9. Submitted by Richard Schulze on 09/14/2010 - 09:22 pm.

    If you define success as getting people to take “free’’ money to make a purchase most of them are going to make anyway, while simultaneously wiping out productive assets that could provide value to many other consumers for years to come. By any rational standard, however, this program was sheer folly.

  10. Submitted by Steve Rose on 09/15/2010 - 07:58 am.

    Richard (#9): You accurately and succinctly captured the essence of C4C.

    Robert(#7): You piqued my interest in the decisions regarding the closing of the NUMMI plant. Yes, Toyota did decide to close it, but the last one out does have to turn out the lights. You failed to mention that GM pulled out months earlier. This Time article provides more details: http://www.time.com/time/business/article/0,8599,1919395,00.html

    It seems that GM’s pullout made the plant unprofitable. GM, under pressure from the White House’s auto task force, cut the Pontiac brand, a big NUMMI customer. Toyota offered to build vehicles at the NUMMI plant for GM, but GM declined. Toyota operates more modern, non-UAW, plants in Texas, Indiana, Kentucky, Alabama, Missouri, Tennessee, and West Virginia. Losing over $7 billion in their last fiscal year, Toyota must consider manufacturing efficiency and labor costs, as they struggle to return to black ink.

  11. Submitted by Craig Westover on 09/15/2010 - 11:16 am.

    This is economic nonsense:

    “Nothing would be created from the loss of the U.S. automakers, except for more people out of work in the thousands of businesses, large and small, that count on the Big Three in Detroit for a large share of their business.”

    In reality, nothing is created by moving resources from productive companies to unproductive companies. Funds used to prop up GM and Chrysler had to come from somewhere. They came at the expense of competitors and other private sector investments.

    Had GM gone under, the demand for GM cars would have been displaced to other manufacturers, who in turn would add jobs/capacity to meet actual demand.

    Yes, some jobs at GM and its suppliers would be lost, but along with those lost jobs goes the resources not spent to support those jobs. Those resources left in the private sector would support other jobs in other industries with pent up demand.

    Economic principle always prevails; outcomes are based on the incentives built into the system, and it makes no sense to provide incentive to make less than the most efficient use of resources.

    Excellent piece, Steve!

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