Cash for Flunkers?

Signed into law by President Obama on June 24^th, 2009, the Car Allowance Rebate System (CARS), more popularly known as Cash for Clunkers, was supposed to encourage buyers to trade in older, less fuel-efficient vehicles, for newer vehicles with better fuel economy, by giving a credit of $3500 or $4500. That aim was fulfilled. In an August 26^thTime Magazine Q and A between contributor Joseph R. Szczesny and Jesse Toprak, vice president of industry trends and insights at Truecar.com, Toprak noted that Cash for Clunkers generated an estimated 700,000 total vehicle sales, jumpstarting a stagnant car buying market.

But was it short lived? "If we assume an average selling price of $25,000 for the program, and total unit sales of 700,000, the cash-for-clunkers program generated at least $17.5 billion of economic activity," Toprak said, "not including incremental sales of additional products, such as extended warranties, alarm systems and financing revenue for the dealerships - as well as roughly $875 million in sales-tax revenue for state governments. When we add in the fiscal multiplier effect, the net impact of the program was easily north of $25 billion - if not much higher."

What then, does this mean for the economy? "Having said that, there will be a natural decline in new-vehicle sales for the rest of the year when compared to August levels unless we see a new stimulus or record manufacturer incentives," Toprak said. "Without those stimulants, we'll go back to the preclunker levels of about 10 to 11 million annual vehicle sales."

Another question that must be begged then, is did Cash for Clunkers help the American auto market? Irwin Stelzer, Washington Examiner columnist and senior fellow and director of the Hudson Institute's Center for Economic Studies doesn't believe so: "The buyers of the almost 700,000 cars - 41 percent from Japanese makers and 39 percent from the (once) Big Three - for which dealers have filed $2.88 billion in refund requests included many who merely accelerated their purchase" Stelzer said. "Estimates are that 60 percent of buyers would have bought cars this year without this incentive." Cash for Clunkers, then, not only boosted more of the foreign auto market, but provided consumers with little more than a convenience package. "Cash-for-Clunkers proved that if you give people $4,500 to buy a durable good, they will be more likely to buy it while the refund is available than later. But it does not show that the increase in spending meets one of White House economist Larry Summers' tests - sustainability" Stelzer said.

And as for the supposed cut-down in fuel consumption? Stelzer notes, "On the best of assumptions about the fuel saved by replacing inefficient Clunkers with cars that get perhaps 10 mpg more than the Clunkers they replace, the reduction in gasoline consumption will cut our oil consumption by 0.2 percent per year, or less than a single day's gasoline use." Perhaps more more mind-boggling, Stelzer adds, "Cash-for-Clunkers added $3 trillion to the billions of taxpayer money expended to save General Motors and Chrysler, i.e., members of the United Auto Workers. What a like sum might have done for furniture makers, or the hotel industry, or small businesses, was never even considered."

Stelzer highlights the affordability factor as well: "Programs such as Cash-for-Clunkers have no regard for lower-income consumers. By mandating the destruction of trade-ins, Congress removed 700,000 cars from the used-car market, inevitably driving up prices of the cars that lower-income consumers tend to buy."

Now, a near two months after the end of the program, can Cash for Clunkers be deemed a complete failure? From a philosophical standpoint, the answer is no. Consumers flooded showrooms across the United States purchasing vehicles in frenzied numbers, many whom would never have considered the option. The extra $2 billion that was pumped into the program lasted only a month. Dealers were resurrected, conjuring up images of better times.

In our complex world, who's to say that excitement can't sometimes be the remedy amidst all the chaos?