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.
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.
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.