Was “Cash for Clunkers” a Lemon?

Annual new car sales, 2002 to 2014

Most of the articles and talk posted online about Cash for Clunkers doesn’t feature the graph above.  For some, it’s hard to find images of this nature to make their argument (although it didn’t for me).  For others, this graph destroys their argument.

Looking at the chart, we were down 3 million or so in new car sales from 2008; and a whopping 6 million when compared to 2007.  Nobody wanted to buy a car.  Couple this with the exorbitant price for gas at the time, and you couldn’t give some cars away. This double-dip of doom helped Hummer to fold in 2010.

Even if you allow that there was a glut of supply on the market pre 2007, being down 6 million isn’t a normal sales dip, and wasn’t going to be fixed with simple supply and demand, because there was no demand.  It was all supply.  The dip did give automakers an opportunity to better link inventory to production, reducing glut and lessening their reliance on sales promotions.

Autoblog.com is revisiting one of the first battlegrounds of the War Against Obama, the “Cash for Clunkers” program of 2009.  Today, on the 5th anniversary of the program, they posted a story “It’s been 5 years since Cash For Clunkers, was it a success?”  They take a look into some of the circumstances surrounding CfC and whether it worked or failed.  Here are some snippets from the post:

That’s right, it’s been five years since the federal government launched the Car Allowance Rebate System – known as CARS for short, or more popularly as Cash for Clunkers. The program set out to kill two birds with one proverbial stone: jumpstart slow automobile sales across the country on the one hand, and get a large number of older (and less environmentally friendly) cars off the road. Identifying both problems and a single way to solve them, the government offered financial incentives (cash) for drivers to trade-in their old cars (clunkers) in favor of new ones, following the lead set by similar scrappage programs that had taken place in other countries around the world.

Even with a moribund economy, buyers jumped at the opportunity, and in less than a month, the entire $1 billion allotted by Congress to the program had been used up. So legislators approved an additional $2 billion, which ran out before the end of August 2009 – two months ahead of schedule.

Autoblog notes the common criticisms:

The program’s detractors claim that the increased sales promoted by the program were not created out of nowhere, they merely pulled ahead future sales that would’ve taken place anyhow, resulting in a zero net gain at the cost of $3 billion to the taxpayer.

…detractors point out, it was not American automakers but Japanese ones like ToyotaHonda and Nissan that brought in the lion’s share of new car sales from the program (while American cars were ineligible under Japan’s own scrappage program).

These are some of the usual complaints.  The first one needs to be separated from sales data in the image above in order to live. Had Cash for Clunkers cannibalized future sales, Fox News would still be complaining about how Obama killed new car sales.  Not hearing that anywhere.

The second one, while true, needs you to forget some key things.  Like the impact of foreign automakers on the American economy, micro as well as macro.

On the micro side, think about how many people are employed at the Honda, Toyota, Nissan, BMW, Kia, Mercedes, and Volvo dealerships in your area.

On the macro side, there were a little more than 20,000 new car dealerships in the US at the time of CfC, according to NADA.  It’s safe to say at least 1/4 of these were foreign car dealerships.  Add more if you include dealers where you could buy a domestic and foreign car (like a dealer near me that has a Toyota facility right next to the one that sells Chevys.  There are 16 plants making foreign cars in the US.  I don’t have numbers on 2009, but lets say there were 8. Still a lot of people.  There are even more design facilities, administrative and service centers.  Foreign automakers have an impact on our economy.  Whatever they sold, the money entered the American economy at all levels.

Even the foreign car argument is something to keep your mind off the point.  In 2003, the Center for Automotive Research put the number of jobs associated with the auto industry at 14 million.  Where were these jobs going to go while the market “worked it out?”  What would have been the result if half of these people lost their jobs?  What would have been their impact on the healthcare system and the social safety net?

Cash for Clunkers was a success.  Based on auto sales since 2009, I believe it can be said that CfC didn’t cannibalize future demand.  At worst it helped provide a firm floor for demand. At best it kept the Big 3, and their vendors in business.

 

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Sebastian James

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