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August 25, 2009 / Jim Fenton

Thoughts on the Cash for Clunkers Program

I’m going to stick my neck out a bit and blog about something that I don’t think I know that much about:  economics.  Hopefully some astute reader will set me right through some insightful comments if I’m all wet.

I have been watching the Cash for Clunkers feeding frenzy with some concern.  The government contributed first $1 billion, then another $2 billion, to incentivize consumers to trade older, less efficient vehicles for new, somewhat more efficient ones.  This was billed as both an environmental and economic incentive.

On the environmental side, many commentators have observed that the benefits aren’t entirely clear:  the program only required a modest improvement in fuel economy, which might be overshadowed by the environmental impact of manufacturing the new car and disposing of the old one.  This is a concept known as life cycle assessment, which I find fascinating but which hasn’t yet, to my knowledge, analyzed something as big and complex as an automobile in detail.  The disposal cost is aggravated by the requirement that the car being returned be rendered undriveable.

On the economic side, I’m all for stimuli that create jobs by building infrastructure.  The most famous example of this was FDR‘s creation of agencies such as the Works Progress Administration and the Tennessee Valley Authority during the Great Depression.  These projects created infrastructure, much of which we’re still using, that enabled future growth in addition to creating jobs in the short term.

But I see a fundamental difference with Cash for Clunkers.  What’s happening generally is that people are accelerating their purchases of new vehicles using the program.  With the exception of the remaining life on the “clunkers” being destroyed, the program isn’t creating new demand, it’s accelerating future demand.  In other words, it’s mining demand that might occur during the recovery from the current recession and pulling it into the present.  It’s making the current recession a bit shallower but wider, and not much different in total volume, at least as far as the automotive industry is concerned.

Are there benefits to a shallower recession?  Sure.  Not as many workers will be affected, and those that are might reasonably make career changes to other industries.  This is much harder than it seems, though — these other industries may not exist where the workers live, and it’s very hard to sell a home in an area with a weak economy.  I’m also concerned when I hear that automakers are ramping up capacity to meet the demand of Cash for Clunkers; it is such a short-term program that this is likely to be the wrong thing to do.

Many of the things in President Obama’s stimulus plan build infrastructure for the future, but I wish there was more emphasis there.  I won’t be at all surprised if I hear that the automotive industry takes longer to recover than other parts of the economy.  After all, we have already gotten the clunkers off the road.

4 Comments

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  1. steph / Aug 26 2009 8:45 am

    Sadly, we have *not* gotten the clunkers off the road. The definition of “clunker” was very closely defined and did not allow participation of the *real* clunkers. Because there were no EPA figures on mileage (let’s be clear here: it was all about MPG, not about real clunker-ness) on cars before 1989, cars built before 1989 were not included in the plan, even if they got 16 MPG on average during the last 10 years.

    Many of the owners of these more senior cars have not traded them in on a newer car because they couldn’t afford to. They continue to keep their old, low MPG cars running — and keeping their fingers crossed every two years for the smog test — because that’s what they can afford. I’m sure we could have gotten a lot more actual clunkers off the road had congress been able to come up with a secondary plan for getting incentives to those folks to trade in their cars.

    In California, many of the regional Air Quality Management boards are offering $600 – $1000 to owners of these aging cars to get them off the road, but $600 doesn’t make a very big dent in the purchase of a newer car.

    To add to the issue, the State of California will actually kick in $500 to help you get your smoggy car so that it *will* pass a smog test.

    So, what’s the message?

  2. tajmutthall / Aug 27 2009 10:06 am

    I’m a big Obama fan, and yet I realize that no one president is going to do everything to please one person. I’ll trade some decisions that I think aren’t the best for a general trend to do what I think is best. I’m also not enthused for the cash for clunkers for the exactly the same reasons as you and Steph. In addition, “junk yards” thrive on the hulks of older car models as people come by to pay for used parts that dealers charge ridiculous prices for new. They’ve just collectively lost a tremendous source of older model cars. Maybe this will stimulate the dealers & manufacturers by forcing people to buy new. But I suspect not, having been in the junkyard browsing mode myself on many occasion. So THOSE jobs/businesses may be hurt. Plus I think I’d rather have older cars on the road that have been repaired with used but useful parts than older cars on the road that have not been repaired & break down on the road or lose parts as they go or dribble fluids… because the owner can’t afford new parts & the old ones aren’t available. Dunno, maybe this is a small piece of the puzzle.

    -ellen

  3. Jim Fenton / Sep 1 2009 4:07 pm

    In today’s news, I see a new term for the phenomenon I described here: a “clunker hangover”. They also note that inventories for popular models are low, further discouraging people from buying cars in the post-C4C period.

  4. Mitesh Damania / Oct 2 2009 9:36 pm

    The whole program was a waste of money and resources. People were turning in fairly new (less than 10 years old), good running vehicles. They were not clunkers. Now comes the blowback: http://link.businessinsider.com/view/84z.kk/95154466

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