Cash for clunkers is Obamanomics in microcosm

August 3, 2009

Think of “cash for clunkers” as a sort of bizarro twin of that “bucks for banks” program from last autumn. You know, the one where Congress authorized $700 billion to keep financial clunkers on Wall Street up and running.

Thank goodness the automobile version won’t be nearly as expensive for taxpayers, consisting of a mere $1 billion in incentives for individuals to trade in their old gas guzzlers for new, (at least slightly) more fuel-efficient vehicles.

And giving away free money turned out to be so wildly and unexpectedly popular that the House quickly passed a bill giving away another $2 billion before heading out on August holiday. Now it’s up to the Senate to pass a similar extension before it takes the rest of the month off.

It shouldn’t. Although there’s no doubt the program encouraged a mad rush into automobile dealer showrooms, what will be the net effect of the deluge once it subsides? Probably not much.

An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car sales, not total sales: “In particular, we expect that roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway. Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.”

In other words, the program gets much of its juice via stealing car sales from the near future rather than generating additional demand. In practice, it works much like tax policies and subsidies to encourage women to have more children. Studies have found that women may have children earlier than they would otherwise, but they don’t necessarily have more kids.

The rebate program is also emblematic of the administration’s unwise approaches to economic policymaking. It borrows money to generate economic activity, which in effect borrows growth from the future, since eventually that loan will have to be paid back through higher taxes.

It picks and promotes a particular industry in a sort of small-scale industrial policy. It also places an emphasis on consumer spending as a route to renewed prosperity over greater investment — and isn’t that how the American economy got in trouble in the first place?

And for those reasons, cash for clunkers isn’t just a whimsically named government program that helps automakers clear out some inventory and generate a bit of quick cash flow, while also making average Americans feel they’re finally getting their bailout.

If that’s all it was, cash for clunkers wouldn’t be such a big deal. Rather, it is evidence that no one in Washington is learning any economic lessons. And that is a very big deal.

92 comments

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[...] And yeah, it must be said, can you IMAGINE the outcry over this, if it were a Bush program? James Pethokoukis: Cash for Clunkers is Obamanomics in Microcosm [...]

This may be a good program. If high mpg cars replace low mpg cars, that will reduce imports. Tis may be one of the few stimulus programs that really works. I say let it rip for the next five years or so.

Posted by Benjamin Cole | Report as abusive

You make an interesting point, that the cars being sold would have been bought anyway later in the year. However, this program is not JUST about selling more cars. It’s also about getting fuel efficient cars onto the roads and getting gas guzzlers off the road.As for this being poor economic policy, I heard Alan Greenspan praise it this morning. I agree that Obama could be doing a smarter job of fixing the economy, but I have to give him credit for creative efforts!

Posted by Christian | Report as abusive

Wrong. My kid brother was able to buy a new (cheap) car with this program. He’s had a beater for years that he’s always working on. C4C is the only reason this was possible for him.His car leaked, gas, oil, coolant…probably other things too. Really a mindless decision for him and probably millions of other people too.

Posted by Nick | Report as abusive

Imagine if car manufacturers simply lowered the price of their vehicles by $5000. Wouldn’t that encourage the same frenzy but without a government subsidy?

Posted by Quin | Report as abusive

I don’t think anyone in the administration thinks this is the best possible way to stimulate the economy but it is a popular way which makes it politically feasible. The methods that would best stimulate the economy would probably involve people outside the middle class – tax breaks for the rich or increased welfare for the poor – and neither is a political possibility.Tax breaks on mortgage interest is another example of popular policy that is bad economics but the tax breaks go to people who vote in large numbers.

Posted by Ras Pepe | Report as abusive

So what would you pick? You put 700b on Mr. Obama, I put that on Mr. Bush. Did it do anything to help? Kind of like putting a tournequet on a severed head. NOT ONE of the money money money’s does anything but skim theirs off the “real” economy where goods are exchanged to provide for wants and needs.Put your money where your mouth is and don’t be a mutt.If you think for a while you can probably find a segment of the economy that could use a boost. Biggest problem with 700b is it went to the top without starting at the bottom. NOTHING shoud go to the top without first passing the bottom. The grand consolidated motherload sitting at the top s about fourfold what it should be, so why don’t we inject 4 times the 460tn derivatives aggregate at the bottom and see how long it takes the top to absorb it (or how long the bottom can hold onto it) Love me or love my money, one is more valuable than the other.

Posted by DanO | Report as abusive

James,don’t forget about the time-value of money. It is, in fact, better to have your cash now than to have it later considering interest alone. Secondly, and on a more theoretical note, the economy is a function of the velocity of cash, the speed at which trades take place. If cars are purchased faster because of this, then dealers, salesmen, and manufacturers will have that much more cash available to spend that much sooner on televisions, movies, whatever, and then it snowballs from there.

Posted by Brian | Report as abusive

This program would be effective in reducing green house gasses and at the same time bringing some relieve to car dealers IF the new cars would have considerable higher miles per gallon than the old cars; why not having a prorated incenttive with the highest credit for the largest savings in miles per gallon? But that of course might benefit the imports. Ah well we need the new GM and other north american car makers to bring real efficient cool small cars to the market.

Posted by wevers | Report as abusive

Imagine the outcry if it was a Bush program? If it was a Bush program it would have encouraged trading in more fuel efficient vehicles for gas guzzlers. I do have to say however, bailing out failing businesses in general flies right in the teeth of the concept of a free market.

“stealing car sales from the near future rather than generating additional demand” thats some nice piece of bull poop. Whether they buy now, or later, Earlier the better because money goes back into producing parts aka factory orders.

Posted by jimen | Report as abusive

Just within a small group of a dozen acquaintances, two of them wanted to use the cash-for-clunkers program to trade in older, less fuel-efficient cars for newer cars. My wife and I considered trading in her old mini-van as well. Not sure if we live in some sort of weird bubble, but when 25% of this random group seriously considered buying a new car now – when they would have otherwise kept their existing cars for at least more than a year – I’m having trouble understanding how this particular study could reach the conclusion that this program is not generating additional car sales above the normal levels (or the dismal low levels we are currently experiencing). I’ve also heard comments (mostly from Republicans) that this does nothing good for America… Well, let’s see – More new cars purchased, helps keep auto-dealers in business, increases parts manufacturing and auto services demand – increasing employment – in addition to helping large auto makers support themselves through difficult financial times rather than shutter or bankrupt… Weird. There seems to be some funny math going on here – which contradicts what many of us (normal people) are seeing on the ground. It’s time to set aside biased politics which promotes lies and half-truths over actual facts. I’m supporting anything that helps America – not one political party or another… How long will it take for our representation to get on board with this concept?

Posted by Thomas | Report as abusive

I believe the “cash for clunkers” program is helping us lessen our growth for foreign oil, are you into the petroleum futures markets?!!!

Posted by Angela Walker | Report as abusive

It has already been established that a large number of the people using this program are the type of people who only buy cars once a decade. They are considered a new customer base when they are enticed to come in and spend their money one, two, or even three years ahead of their normal buying habits. It’s also allowing younger people to get into better cars now that they are more affordable to them. Your argument is purely political and lacking any real evidence.

Posted by Travis | Report as abusive

I drive two old cars, one 20 years old with almost 400,000 miles, the other 18 years old with almost 300,000 miles. Both cars would qualify for the Cash for Clunkers program. I am at least THINKING of buying a new car using this program. Without the program, I would not even consider buying a new car. I would squeeze another 50-100K miles out of each car before buying replacement used vehicles. If I buy a new vehicle, I will help employ the people who built it, the people who transported it, and the people who sold it. I’ll also consume less fuel in the future. (That may result in under-employment in the petroleum industry, but we can’t have everything.)

Posted by Elrond | Report as abusive

You’re the only one proving you don’t know anything about economics. It needs to be said that short-term stimulation is sometimes the key to long term growth. Short term stimulation can have an effect on the economy when combined with long term policies. In the midst of such a recession as this one, one of the few ways of actually getting out of it within a reasonable time frame is giving the economy a strong short term burst.

Posted by John | Report as abusive

Seems the program is a success so far, I’m for funding the extra $2B. Let’s see, pulls less efficient, more polluting vehicles off the road. Adds additional sales to support auto dealers, reduce built up inventories, and keeps factories manufacturing.I’ve had it with conservative views that markets can regulate themselves and tax cuts are the only way. All the rhetoric about Obama policies. Here are a couple facts, the Bush 43 administration more than DOUBLED the federal debt during his eight years. We’re not going saddle our kids/grandkids with Obama debt until we start paying down REGEAN DEBT!At least this spending is directed at us and our economic struggles. I’m not taking advantage of it, can’t, don’t need to, but I’m in support regardless.

Posted by Tomsbrew | Report as abusive

These sales actually spark sales in secondary markets. We need to jump start the economy somehow. Let’s give these things a chance to work.

Posted by jk635 | Report as abusive

Will states like California and Texas be returning their sales tax? They are not complaining. who will be getting our abundance of scrape metal? China, Korea, Iran or Japan

Posted by JLF | Report as abusive

“An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car sales, not total sales…”More economic analysis devoid of real-world understanding. As others have pointed out, cash for clunkers allowed plenty of people to buy NEW cars who might otherwise have bought used. It is downright foolish ivory tower analysis to think that the availability of up to $4,500 in government assistance per vehicle only changed the timing of purchases rather than enabling purchases that would not otherwise have happened.Plus, the program requires that the trade-ins be rendered non-driveable — so as someone else pointed out, they really are removed from the road. Again, something that the Macroeconomic Advisers seemed to have overlooked.

Posted by Old Hickory | Report as abusive

So his point is it is stealing future sales? What about do we do about the past sales lost to unemployment, uncertainty, etc. When do we make up for those? How about now? Does that sound like a good time to get the economy a jump start? Sometimes short-term solutions are needed to get us through a rough patch.

Posted by jk635 | Report as abusive

[...] Pethokoukis: Cash for clunkers is Obamanomics in microcosm An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car [...]

This program may get people buying higher efficiency cars, but that certainly does not make the program “Green”. The greenest car on the planet is the one that is already manufactured. Even if it gets less gas mileage than a new car, the new car has to work harder to pay off the embodied energy required to manufacture it. Of course the manufacturing and selling of cars keeps people working, a good thing, but to pass this program off as “Green” is a bold faced lie. And what about all the scrap metal created out of these cars that many high school and college kids would love to buy on the cheap?

Posted by dnha14 | Report as abusive

Turning over inventory, getting secondary markets moving, in steel, auto parts, tires, etc…those are all good things for the economy.

Posted by jk635 | Report as abusive

How can you say that? We are talking about 2 different markets here. New cars and used cars. We are taking used cars supply away. This will decrease the used car market place. Now boosting new car sales that get better MPG.I am sure we took some of the new car sales from the future away, but not the percentage you are implying in your article. If anything we took the used car sales of the future away.This program is getting more people invested in this new “green” american Obama is going for. Thumbs up !

Posted by Derick | Report as abusive

“If high mpg cars replace low mpg cars, that will reduce imports.”Makes absolutely no sense. That would, if anything, increase imports now. Which, as the author said, doesn’t change anything, it just evens out the sales throughout the year, with some being earlier and the rest being later.”He’s had a beater for years that he’s always working on… His car leaked, gas, oil, coolant…probably other things too.” – So he was just working on it? Not fixing it… Normally, cars have to be maintained no matter what age they are. “C4C is the only reason this was possible for him.” I find that very hard to believe. At most he got $4,500 off a $11,000 Kia. If he could pull $6,500 in financing for that (absolute minimum) he could have gotten a used car easily. No reason he needs a NEW car.They just dont know how economics works.

Posted by Yup | Report as abusive

Someone said: \”\”It’s also about getting fuel efficient cars onto the roads and getting gas guzzlers off the road…As for this being poor economic policy, I heard Alan Greenspan praise it this morning.\”This is asinine. The government creates yet another welfare program, subsidizing the purchase of new cars while destroying perfectly good cars, by paying dealers to absorb the costs of the rebate amount. The program runs out of money in a matter of days. Shocker.Forget about the fact that the DOT and the Administration have no idea how to gauge demand for the program, because as is typical for most government programs, it quickly ran out of cash and needed congress to authorize more.James\’ post is correct. The program does nothing to stimuluate demand for cars, boost production, etc. In other words, it did nothing to spur economic growth which, again, is true for most government programs anyway.The government announced they were giving a handout to buy a car, and the people applauded. The same people who are broke, up to their eyeballs in debt, etc.The government must think we are real morons, because it\’s the equivalent of 40 acres and a mule, or whatever the economic equivalent is these days. This way we just shut up about having our taxes raised and our paychecks squeezed even further.Wake up America. We\’re circling the drain faster and faster with each passing day….

Posted by John G. | Report as abusive

This program is more than useless, it represents a perpetuation of free-lunch economics that has dominated American culture and is the prime cause of current depression. It is also deeply wasteful of energy – make no scientific sense. Consider:- Move future sales into present (as the article clearly shows), but no net increase in sales- Continue the consumer bribery mindset- A tacit recognition that US simply cannot move away from 70% consumption economics, and thus incapable of digging out of its economic black hole. Is this the Obama ‘hope’, or Obama ‘stuck’?- A slight improvement in gas mileage gained by replacing old clunkers is far far offset by 1) energy required to build the new cars to replace them; 2) energy require to collect the clunkers and turn them into raw metals. Many of the clunkers are in fine shape and their relative high mileage is better managed by using them as second car for low usage instead of destroying and replacing them just to get a 2 mpg improvement. It is scientifically invalid in energy calculus.- The federal government, already insanely deep in $12 trillion of debt, already has at least $1 trillion of budget deficit and thus has to borrow $3 billion EVERY DAY to finance it, now borrows a few more billions to bribe the consumers not to help create economic value and thus solve problems, but to borrow and spend on replacing a car most already own. There really is no hope for recovery in such an irresponsible culture.

Posted by The Real Deal | Report as abusive

I find it so interesting that after 8 years of the previous administration destroying our economy and reputation around the world, it has taken less than 1 year to resolve the major economic problems, such as almost experiencing the Great Depression 2, and yet the Obama administration receives no credit for turning this country around. I believe that this program is an excellent idea, since as a business owner, we have several vehicles that we will exchange under this program in order to save on mechanical repairs, gas usage and down time for breakdowns. It shows that with a young President in the White House, we are able to push new ideas and get away from the way things were done for the past 8 years. By the way, how much is the tab for the Iraq “war”… 1 trillion and counting…..

Posted by james zuniga | Report as abusive

This author says borrowing to generate economic activity now means borrowing from future growth because of the higher taxes that are needed in the future. That is a misunderstanding of economics. There is roughly a maximum economic output that can be achieved, and that is at full employment. At full employment, lower taxes causes no additional growth, but rather only inflation. Higher taxes at that point can actually manage to keep inflation in check and keep the economy from overheating, all while also reducing government debt.The author also suggests that investment should be emphasized over consumer spending, which translates to tax policy that favors people who are able to save at a higher rate (wealthier people) compared to those who spend at a higher rate (less than wealthy people). This may be good policy when we have full employment in order to cut out excess demand. But this is exactly the opposite of what is needed now. All the investment in the world means nothing if nobody is buying. In fact, right now we have divestment as businesses close their doors due to lack of demand. Demand drives investment, not the other way around.

Posted by T-Bone | Report as abusive

James, why are you resurrecting this weak argument?As many of the commentators have said, there was no guarantee that the people taking advantage of “C4C” would have purchased a new vehicle in the near future. If anything, it will depress USED car sales in the near term. Many of the people currently taking advantage of the C4C would not have been able to afford a new vehicle, especially with a junky worthless trade-in. This program is benefiting the lowest segments of society, which is a good thing. A side benefit is that it increases MPG and reduces reliance on oil imports.So far, its been the only clearly successful stimulus program, at least in the eyes of the public. I would consider it a win-win for Obama & Co. It will also provide a timed and immediate boost to ailing automakers.So stop knocking it just because it doesnt fit into conventional economic thinking. If anything we have learned from this crisis is that conventional economic thinking certainly contributed to it.

Posted by greg | Report as abusive

To an extent I agree with what he is saying. For example my car is ready to die. I can buy one now or buy one next year. Either way I am going to buy ONE car. So I feel that there is some truth in what James is saying.I am worried that this program may continue to support dying car companies, such as GM. If Americans on the whole do not want to buy GM (for instance) than is this program giving a reason for Americans to continue to buy GM when perhaps they should purchase other practical and higher MPG vehicles? The result is a dying company continues to drag along…..

Posted by James | Report as abusive

I didn’t buy a gas guzzling SUV years ago, but bought an impala that now has 190,000. Now my tax dollars subsidize the SUV driver’s new purchase, while the impala doesn’t even qualify for the program.

Posted by Joe Klochan | Report as abusive

#1 if all these people buying cars in these few weeks tend to be “every 10 year buyers” as many of you state, did you ever think maybe this happens to be every 10 years anyway? Considering the late 90s were economic boomtimes for us, most of these people are due a new car.#2 cars that are way under 20 mpg, are listed as 20 mpg+ and don’t qualify, such as an early 2000s Pontiac Grand Prix GT (I used to have one, but i bought before CARS)#3 States such as NJ and NY are allowed to tax the $4500, so they get double taxes, meaning you end up with $4k. Does that mean your state taxes will go down???

Posted by Berbs9 | Report as abusive

You couldn’t be more wrong. I can now afford the new 40mpg+ diesel Jetta that I wouldn’t have otherwise purchased. My 70-mile daily commute is now costing me 1/3 as much in fuel as the SUV I was driving. But without the clunkers program, I wouldn’t have been able to afford the purchase and I probably would have driven the SUV another 5 years.The clunkers program helps the environment; it helps the ailing auto industry; it helps consumers upgrade to more reliable, safe, efficient vehicles; and it helps the economy overall.

Posted by Dan | Report as abusive

[...] Read the original here: James Pethokoukis » Blog Archive » Cash for clunkers is … [...]

Oh, because we need jobs, NOW. We need more fuel efficiency, NOW.Under Bush we put off programs that would create jobs for the middle class and develope car fuel efficiency programs.Now we’re having to employ crisis measures to prevent further collapse of our economy.The author has obviously not been reading Reuters the past 18 months.

Posted by rgoalierob | Report as abusive

The writer of this article should wake up! The Cash for Clunkers has a multiplier effect for the economy. It is a big deal. It is evidence that Washington is doing something to get the economy moving. The auto industry has to lower their inventory. This also effects the Steel/Parts industry.

Posted by George | Report as abusive

Hey – I am recently unemployed and was driving a gas sucking ford van until I capitalized on the cash for clunkers. It had only 120k miles – however, recently was constantly breaking down (most recent was a radiator leak).There is no way in hell I would be buying a new car while unemployed – without the 4500 dollar chunk of change for a current value less than 1000 dollar cheaply made van.We are now driving a 2010 very efficient carolla. Not as much room as before – however it’s amazing how fast we learned to like it.Instead of scrapping all those gas guzzlers – Give them away free to a country you don’t like. Let them burn thru the fuel like there is no tomorrow.

Posted by Marius | Report as abusive

The Cash for Clunkers program reinforces the American view that we continually need more than what we have. This is similar to the stimulus plan. A waste of our money. A waste of cars that are good enough for somebody – just not us.

That’s the whole point in trying to smooth out economic cycles. You stimulate demand when things slow down and dampen it when the economy is growing too fast.

Posted by Richard | Report as abusive

Doesn’t anyone see this for what it is? It’s just another wealth redistribution program. The Fed doesn’t just print up an extra $1 billion to fund this. So we all pay $1.25 billion in tax (don’t forget the 25% government overhead) to give $1 billion to 250,000 people who want a new car. Great. Just great. I love my tax money to go for some schmuck’s new car. Not.

Posted by Methusselah | Report as abusive

The program was more about trying to boost new auto sales than anything else. Because only new cars qualify, used auto dealers are being hurt in the process, even though cars they have may be fuel efficient. So, if it was really about fuel efficiency why:- don’t efficient used car sales qualify- does a 5mpg improvement in a truck get $4500 but it takes a 10mpg improvement in a carThere are a lot more, but these are the obvious. I also can’t believe it is coincidence that only new sales are getting the boost at a time when the government has such a large stake in 2 major car companies. Fuel Economy/Oil Dependence/Environment is just a reason/excuse the public will swallow.

Posted by Justin, Va | Report as abusive

What is wrong with moving up the timing of sales? That’s what the economy needs right now, a big jolt to get it moving again. If I am motivated into buying a new truck to replace the clunker that I am driving, even though maybe I will eventually buy one some 2-3 years down the road, I am contributing significantly to (1) creating revenue in the severely troubled U.S. auto industry, (2) produce a positive downstream effect of employment, and (3) most importantly, improving the environment by taking the gas guzzler I have off the street.The Cash for Clunkers program is probably one of the better programs put out by the current administration so far. Good for them!

Posted by Flora Sun | Report as abusive

Cash For Clunkers… that would be buying business… similar to buying votes… well, even though congress can’t operate a pencil sharpener, it is expert at being bought off…

What’s interesting to me is that the author doesn’t mention the obvious environmental and energy independence motivations associated with this program. Leaving these items out makes the program much more vulnerable to criticism in prinicple. What it does in fact is reflect poorly on the motives and personal integrity of the author. I’m not sure what anybody would take the time to write a commentary that is so obviously biased by leaving out critical information unless they thought they could get away with confusing people.

It’s the same “keep the economy moving now and pay later” strategy used during the Bush administration except that, instead of extending credit recklessly to individual citizens, the government is recklessly sinking itself into massive debt. It still remains that someday the piper will require payment.Who owns U.S. debt? Last I knew China owns a whole bunch of it, so not only have they taken all American jobs, but in the not too distant future they will own the U.S.A. lock, stock and barrel.

Posted by Andrew | Report as abusive

Pretty dead nuts on article. And how is this going to reduce imports? I think you can buy any car with the free $$, not just Americian. Nick, I think your brother is the exception here, not the norm. Although, he now has a car loan he probably can’t afford, so we’ll just have to pay anything he spent above the $4,500 after he defaults on the loan in 6 months. Another waste of my hard earned dollars by our government. YA!!!!!!!

Posted by Steveo | Report as abusive

This article is mostly wrong or besides the point, and ignores one very key fact about the program. From the cars.gov website: “The program requires the scrapping of your eligible trade-in vehicle…”If the dealer could turn around and re-sell the traded-in vehicle like any other trade-in, then the overall effect of the program would be quite mushy – at worst, some future sales only displaced by ones spurred on by the rebate deal. But by mandating the scrapping of the trade-ins, the program ensures that the pool of used vehicles shrinks, forcing more new vehicle purchases down the road than otherwise, which directly benefits the manufacturers, possibly saving some jobs in the process.Even in the nearer-term, forcing the overall fuel-efficiency improvement means a direct and immediate reduction in demand for gasoline. Say, a billion dollars divvied up at an average of 4,000 per car – that’s 250,000 cars. Assuming an average annual driving mileage of 12,000 miles per car per year, that’s 3 billion miles in a year. Assuming, conservatively, a 5 mpg improvement in fuel efficiency, that’s 600 million gallons over the course of a year. Not a huge percentage – according to http://www.eia.doe.gov/basics/quickoil.h tml, we use 378 million gallons a DAY, so the savings is about 43/100 of a percent. If the actual mpg improvement per car was closer to the hoped-for 10mpg, we’d be closing in on 1 percent. For low-hanging fruit, I’d say an overall gasoline use reduction of the order of magnitude of half a percent isn’t too sucky of a deal for an investment of about three dollars per person in the US.And that’s only the flat money side of the picture. The newer cars on the whole are doubtless significantly lower-emission than the scrapped clunkers – so we’re putting less crap into the air after this program, as well.

Posted by rog | Report as abusive

Why should stores have sales? This only gets consumers in to buy things they would have eventually bought anyway.He’s probably right, so many economists nailed the economic collapse I’m sure they have this program pegged,too.Course this increases ad valorem taxes people pay, sales taxes, insurance, extended warranties, other monies pumped into the economy that wouldn’t have been such as car salesmen commissions. Those darn truckers sitting idle now must go pick up new cars to replenish inventories. What a disaster.

Posted by Mike O | Report as abusive

Why is it that 75% of the people in favor of this program are the ones who are tradeing in an SUV that they never should have purchased in the first place? Now my tax dollars have to pay for your car, after I just had to pay for your mortgage. sweet. Glad I lived within my means.Btw, no growth is being made here. All that is being done is liquidation of inventory. All of the inventory being sold right now will not be replaced, because there is no market right now. There was oversupply under demand. We are spending billions on another bubble, just like the $8k for a new home, under the disguse of being green. Sheep. No wonder the same politicians keep getting re-elected.

Posted by Steveo | Report as abusive

Take this issue back to basics. when did the auto sales cycle start getting out of whack to begin with?? It was with the introduction of zero (0%) financing. You broke the typical cycle of car buyers at that point which was the beginning of the end for the auto industry as we knew it.Now as we are trying to recover, Washington (OBAMA) is trying to manipulate the cycle again in the name of stimulation. Again back to basics- the number of drivers is starting to decline as the baby boomers age further. the market will continue to shrink over time & thus needing less vehicles going forward. People still today have less disposable income to be driving newer vehicles with little prospect of growing that disposable income. You need a job to have or grow savings.I am telling everyone to buckle up for the ride OBAMA is putting us on. Each one of us are becoming the crash test dummies for each one of his economic plans that he shoves down our throats without giving it proper investigation as to the true effect.After all of the ooohhhs and aaaahhhs from the fireworks he is launching will come the clouds of confusion. After the clouds clear we will be worse off than we were today.

Posted by K Lane | Report as abusive

Most of these clunker people are borrowing money to buy their new cars. I presume they have to have decent credit to do that. What kills me about all you naysayers is that you have completely forgotten about the millions of Americans walking around out here who are holding up the economy. We’ve got money! We’ve got good credit! We’ve got jobs! It’s us doing the grunt work on the economy out here, not Wall Street barons buying luxury boats and Mercedes SL’s. Our new cars today support banking now and tomorrow, and the automobile “system,” (think steel, among other things), let alone the fact that we can deprive a few despots millions in oil revenue. And gees, don’t get me started on $10 or more million a month to fight two wars for this very reason. Imagine an economy with $10 million a month more.

The “Cash for Klunkers” program failure is a clear indication of how the Democrats plan on the run the Healh Care plan. God help us all. We need a peaceful revolt in this country to say to Congress that WILL WILL NOT ACCEPT this plan. This is America! Lets to free market work!

Posted by James Coker | Report as abusive

My concern is that some people have failed to appreciate one of what are probably many unsettling aspects of the Cash for Clunkers program: It looks like demand for new cars exists only at a discount of 15% off the market price for new cars. This is not a whole lot different from what the real estate market is experiencing, with demand continuing to be concentrated in the low end of the market rather than moving up into higher price points as low-end inventory is sold off. The concern is that that American consumers are not buying because they don’t have money. That problem is going to be very difficult to address, especially since 15% is a big gap between the market price and the price needed to create demand.

Posted by Bob | Report as abusive

Another pointless blog from Mr. Pethokoukis. Cash from Clunkers is a low cost way to get some crappy cars/ trucks off the road and replaced with semi crappy to decent vehicles. As a bonus it increases some dollar velocity and sells some cars at a time when the auto industry badly needs help.God man, if your going to just hate pick some Obama policies that are actually worth fighting about.

Posted by boom | Report as abusive

Imo, a great article that sums up the situation very well.Thank you for writing it.

Posted by McRocket | Report as abusive

James Coker is right.This is America and everyone is free to kill and get killed, and go hungry, and be homeless.This is America with over 30% of people without medical help. This is America, the country of dominating ignorance and prejudice.This is America, the country of failing cities and rapidly declining environment.This is America or more precisely United States of America – a large chunk of commonly disregarded rest of the Americas – North and South.

Posted by Mathew Wagner | Report as abusive

This is great. I counted a number of people above talking about those people who only buy cars once a decade or people buying now who might otherwise drive their cars into the ground, etc. That is the point. That is EXACTLY what “taking sales from the future” means – those people would still have bought new cars anyway, they’re just buying them now instead of later.As to the whole notion someone mentioned that the economy is a function of the velocity of money – nice reference to Milton Freidman, but you’re incorrect. The velocity of money is only part of the quantity theory of money and the equation of exchange (derivation of inflation, etc.) and is more a consequence of the economy, rather than some kind of driving force in the economy.

Posted by Andrew | Report as abusive

Didn’t Bush start the money wagon in Aug of ’08?? It would be great if some right winger could wave a magical wand to make it all better,But alas no magic.C4C may not be the best way to start thing going but it will help.Dealers will sell inventory, banks and CU’s will make loans and the used parts market will hopefully get a boost.Towns and city’s and states will get tax money to keep jobs for teachers and police and fire personal.All we need is for the feds to help with medical coverage.ER’s do test for no reason except to make money, Doctors do the same test again to “make sure” the patient is OK.Just because you have a MD after your name doesn’t mean you should make a Million dollars.Bush had a zero deficient and it was over 2 trillion.

Posted by Roger B | Report as abusive

Didn’t Bush start the money wagon in Aug of ’08?? It would be great if some right winger could wave a magical wand to make it all better,But alas no magic.C4C may not be the best way to start thing going but it will help.Dealers will sell inventory, banks and CU’s will make loans and the used parts market will hopefully get a boost.Towns and city’s and states will get tax money to keep jobs for teachers and police and fire personal.All we need is for the feds to help with medical coverage.ER’s do test for no reason except to make money, Doctors do the same test again to “make sure” the patient is OK.Just because you have a MD after your name doesn’t mean you should make a Million dollars.It also doesn’t mean that you are GOD.

Posted by Roger B | Report as abusive

Auto Manufacturers make a car, lose money and on many of them can’t turn a profit on them…Obama tells us he is taking our money and buying GM, to give the goverment a majority stake. Putting aside that this is Unfairly ganging up against small start-up competition that is working up to emerge as a new auto competitor in a post GM world (FREE market stuff that is not happening). Also puting aside the fact that GM is a company that has no real idea how to run itself successfully (management and union) and hasn’t in a long time.But Obama then pays people to go buy cars that GM, government, Tax payers are already losing massive amounts of money on. Losing more tax payer money.It’s not enough that the government is already losing so much on this unconstitutional take over and seizure of a private organizations, but he is now paying people 4500 for each car so people will buy cars that don’t make money.Huh!It’s like me going to the store and buying ten 2 liter Mt Dew soda pops for $1.50 a piece… then turning around and going out in the street and selling them for $.75 cents a piece and paying people .15 cents to buy them from me at a loss.Not a good business function.

Posted by CJ | Report as abusive

1) it takes used old junk cars out of circulation, it is a great green thing!2) even if it only accellerates the purchase of a new car, is a good thing, we do not live forever and I like to breath better air and save gas now.3) The import comment is total bs too… US made cars have good mileage too now.Thumbs UP to Obama!

Posted by Rob | Report as abusive

C4C Program. 1. Most GM, Ford Econo cars are not made in the USA. Thats not good. You want American made econ car you must buy a Japanese or Korean Brand2. Engine efficiency has improve a great deal in the last 10 years, which means more power and less emissions, thatsgood3. Engine displacement and HP increases have negated any real fuel savings, not good. They sure are fun to drive though. Don’t need Hybrids, need smaller motors.(See Europe)4. Showroom traffic and selling off inventories of already made cars are up. and thats good. Keeps the dealers, loan companies, mechanics etc alive.5. Couple Billion is a drop in the bucket from the fire hose of money bailing out Wall Street and the banks. Its helping those who need help the most, and thats good.OR Maybe you nay Sayers would rather send a couple more trillion to corporate America for big bonuses and hope Reagons VOODOO Economics policy of trickle down economics finally works after 28 years of NOT working.James, you need a second job…say flipping burgers on Grave shift at the Box. Then maybe you might learn enough to write about economics in America. Your too G BUSH league to be believable.

Posted by roger | Report as abusive

It is amazing how many people buy into the ‘broken glass’ fallacy. A kid who smashes a window may provide work for people involved in making and installing windows, but because the owner of the window will have less money for other things, the kid’s actions will deprive of work those on whom the window-owner’s money would otherwise have been spent.Further, while the C4C program may encourage some people to buy new cars who otherwise would not do so, it removes from the marketplace vehicles which would otherwise be available to used-car buyers. Fusing the engine of the vehicle which could otherwise have enabled a poor person to drive to work should hardly be taken as “compassion for the poor”.

Posted by supercat | Report as abusive

[...] http://blogs.reuters.com/james-pethokouk is/2009/08/03/cash-for-clunkers-is-obama nomics-in-microcosm/If Americans on the whole do not want to buy GM (for instance) than is this program giving a reason for Americans to continue to buy GM when perhaps they should purchase other practical and higher MPG vehicles? … #2 cars that are way under 20 mpg, are listed as 20 mpg+ and don’t qualify, such as an early 2000s Pontiac Grand Prix GT (I used to have one, but i bought before CARS) #3 States such as NJ and NY are allowed to tax the $4500, so they get double taxes, … [...]

[...] http://blogs.reuters.com/james-pethokouk is/2009/08/03/cash-for-clunkers-is-obama nomics-in-microcosm/If Americans on the whole do not want to buy GM (for instance) than is this program giving a reason for Americans to continue to buy GM when perhaps they should purchase other practical and higher MPG vehicles? … #2 cars that are way under 20 mpg, are listed as 20 mpg+ and don’t qualify, such as an early 2000s Pontiac Grand Prix GT (I used to have one, but i bought before CARS) #3 States such as NJ and NY are allowed to tax the $4500, so they get double taxes, … [...]

[...] Today at 11AM Eastern, James Pethokoukis talks about taxes, the economy, and why cash for clunkers is Obamanomics in microcosm. [...]

Direct assistance to consumers 1b, maybe 3b. Out of ??? 780b or more? What makes an economy run? CONSUMPTION driven demand. The obvious at this point is that in propping up financials they seem to hold or expand themselves rather than engage the economy (help real business take real risk) so all that is left is direct govt. assistance to those of us who have been (also) keeping our powder dry. AND IT IS WORKING! Don’t be too concerned about the used car (very green) dealers. By shrinking the supply of clunkers by 750,000 what happens to used car pricing? Inject more money into the economy.Just make sure it goes to the bottom so that it does all of the work it can do on its way to the top. No dime should ever originate at the top…THAT IS JUST OFFENSIVE.

Posted by DanO | Report as abusive

[...] the number of car sales? It will affect only the timing of new car sales, not the total sales. Cash for clunkers is Obamanomics in microcosm __________________ BARACK OBAMA! PUTTING THE Rx IN MARXISM! The urge to save humanity is [...]

Wow James, some of these posters fell for the Obama ploy hook line and stinker. Every day I grow less and less surprised at the crazy circumstances in which we find ourselves. Nice writeup Mr P.To all of the people out there who are talking about how great the new gas mileage is: Really?http://www.carbonoffsetsdaily.com  /usa/clunkers-program-displacement-of-g asoline-and-carbon-10400.htmHave a look at the numbers. That worth your billion dollars? Want to go triple or nothing?

Posted by dave | Report as abusive

This legislation rewards bad behavior. I’ve been driving a since 1991 a model that gets over 50 mpg. I could use some trade in money about now, but only the people who have made poor choices in the past get rewarded.

Posted by Greg | Report as abusive

GM has been making terrible cars for decades, and turning them into Government Motors is not going to make them any better. To the extent that government subsidies keep it from feeling marketplace pressures, they will not get any better.Here is news flash – Bush isn’t President anymore.

Posted by news flash | Report as abusive

What people aren’t getting is that we are not getting a discount on these cars. The fact is that we always pay. In this case we will pay with higher taxes and higher debt. It’s a shell game and an illusion (and also a gift the UAW).

Posted by Steve | Report as abusive

A lot of the posters desperate to defend anything Obama does seem to lack a prerequisite understanding of basic economics here. Put aside the fact that this is essentially a tax rebate for auto shoppers (proof that tax cuts stimulate economic activity?) and that we should in fact, if the logic continues, give every consumer a $4500 check for everything in the economy (groceries, mortgages, etc.). Why not? It’s Obamanomics! Spend, spend, spend the taxpayer into oblivion!The government does not “legislate” demand, nor do they “create” it. There was no overwhelming demand for these vehicles, and there isn’t now. What happens when the initial run of this boondoggle dissipates (and James is right – this isn’t actually increasing sales in the future, nor is it stimulating more trade-ins that already weren’t happening)? The demand goes back to what it was in the market before the govt intervention, and the business falls back down to normal levels. That is, unless the government continues to “stimulate” with artificial demand and taxpayer money in perpetuity, the bubble will deflate and we’ll be back at square one again.This is not how free markets function. This is, however, how law school dropouts and tax dodgers in Administration think free markets function. All this is is the sub-prime mortgage technique applied to the auto industry – all to sell “environmentally friendly” cars that couldn’t sell themselves while destroying affordable used vehicles for lower-income consumers and charities.Some “plan.”

Posted by Good Lt | Report as abusive

After defaulting on my mortgage, I was surprised that I could get an auto loan and apply the $4,500 and a clunker trade to buy a $24,000 new car. I have no intention of paying the loan back mind you, because that’s the governments job. I’m just upset that there is no government program to trade-in my TV for a new big screen and a cell phone deal so I can get an Iphone. If we aren’t going to tax the rich so I can buy stuff, why bother living in America?

Posted by Tom Jefferson | Report as abusive

I recently saw a Youtube video of the steps the dealers must take to render the “clunkers” undriveable so that they can not be re-sold. The engine oil is replaced with sodium silicate and run for 7 minutes until the engine seizes. During the video there is a large of amount of smoke from the engine, as well as a large puddle of liquid under the car. Has anyone tested the smoke for CO2; or extrapolated what amount of noxious fumes are being released by all the cars turned in? And where exactly does the liquid (oil or sodium silicate?) go when it rains? Are any streams or ponds being polluted? Seems these questions would have been raised by the Eco-freindly by now. Unless it is not politically correct.

Posted by Dave | Report as abusive

[...] James Pethokoukis » Blog Archive » Cash for clunkers is … [...]

“More economic analysis devoid of real-world understanding. As others have pointed out, cash for clunkers allowed plenty of people to buy NEW cars who might otherwise have bought used. It is downright foolish ivory tower analysis to think that the availability of up to $4,500 in government assistance per vehicle only changed the timing of purchases rather than enabling purchases that would not otherwise have happened.”Absolutely correct. The last new car I bought was in 1980. No way would I have bought a new car except for this program (and the manufacturer’s rebate).

Posted by Owen Glendower | Report as abusive

“Tax breaks on mortgage interest is another example of popular policy that is bad economics but the tax breaks go to people who vote in large numbers.”Yes, and note that you never see the deductibility of mortgage interest referred to as a “loophole.”

Posted by Owen Glendower | Report as abusive

The top-selling car was the Ford Focus, and the top three — including the Honda Civic and Toyota Corolla — were compacts. The list also includes three vehicles that are available as hybrids. One, the Ford Escape, is a small crossover SUV also available as a hybrid.Sooooo…The C4C program had a 2 out of the top 3 that were FOREIGN car manufacturers….This program was a BIG help for the US automakers huh?

Posted by Brad J | Report as abusive

1. The global warming fairy doesn’t manufacture cars. Disabling a perfectly good older car to build a new one is an environmental negative.2. Although I would be happy to get some of my tax money back from you ungrateful louts (still waiting for my thank you for those stimulus checks), moving up a car purchase to save $4500 is bad juju. My clunker costs $4000/year to keep on the road. The equivalent new car costs $12000. You do the math.3. I wouldn’t buy a car from Obama motors at any price. Fords have lousy engineering (20 years after the Bronco they still can’t keep SUV’s from rolling over), so I will buy Japanese or Korean. How does this help the US economy.Other than that, it is a great program. Go liberals. Yay.

Posted by John Galt | Report as abusive

incrementalism. The government is feeding the people there communist pudding as you continue to suck it down you’ll be hooked. Way to go america.

Posted by Rick | Report as abusive

Does someone know where the money is coming from?

Posted by Jack | Report as abusive

Oh, and let’s not forget these cars are still driveable and we are destroying capital when we disable them. They would otherwise be traded in and be available to America’s poor for their transportation needs. Instead, we destroy them to satisfy the “greens” and make the poor suffer the consequences of reduced transporation choices. Nice policy guys!

Posted by Marty | Report as abusive

The program is both bad for the environment and economic madness.Bad for the environment because each new car has to be manufactured and shipped a process that uses far more energy than any difference in mpg over the life of the car.To those who thinik it’s good economics, where do you thing the $4,500 comes from. And surely if it’s a good idea at $4,500 it’s even better at $5,000 and better still at $10,000? In fact if it’s a good temporary stimulus, let’s make it permanent!It’s your money people, the government has just decided to give it to car buyers. So you have less to spend on what you want and a car buyer has more.And because we are destroying assets, the price rises meaning fewer people can afford them which depresses economic activity.How is that ‘stimulating’?

Posted by Tony | Report as abusive

My dang grandson went and got rid of his nice 1997 chevy so he could have a new car. Now he’s in debt for five years and i bet he runs outa money fore then.Thats the way he is. Never could pay his bills.We’ll see the repo man in 2 years.

Posted by grandma | Report as abusive

I fear that C4C will become too addictive to end. How many times have GM and Chrysler postponed restrucuring their businesses to be profitable? They were losing money even in good times.If I had a clunker available for trade-in, I would feel pretty guilty about accepting the $4,500, as if I sold my soul to the devil. I’d really hate the idea if perfectly good components for reuse being destroyed.

Posted by Steven Kalka | Report as abusive

I have been in sales my entire professional career. Is this not the oldest rule in sales? Push a deal through today (or early) and you dry up tomorrow’s revenue stream, happens every freaking time. Seriously, it took an “expert” to figure this one out. I must be smarter than I thought, or maybe…just maybe…politicians are so stupid they cannot even attain to the rank of average intelligence!!!

Posted by Duck | Report as abusive

[...] 4, 2009 · Leave a Comment Cash for clunkers is Obamanomics in microcosm An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car [...]

[...] think this piece nails this program: James Pethokoukis Blog Archive Cash for clunkers is Obamanomics in microcosm | Blogs | The rebate program is also emblematic of the administration

This is a perfect example of the broken-windows fallacy. The government is giving incentives for the destruction of functional durable goods (the used cars). In trade, we’re getting a few people buying new cars who wouldn’t otherwise have done so. My tax dollars are going to pay for their new cars, at the same time this policy is removing used cars from the market, causing used cars and parts to increase in price, making it more expensive for my daughter to buy her first car.

Posted by Steve | Report as abusive

No one has brought up the fact that salvage aka junkyards make their bread and butter off of people buying parts off of junked cars. With this program they are being hung out to dry. There is a huge part of this country that are car nuts.Oh yeah forgot to mention that the government also took CONTROL of the dealers computers….Why?Never questioning or criticizing government is unpatriotic.Thoma Jefferson

Posted by Graymatter | Report as abusive

[...] by the number of trade-ins for more fuel-efficient cars. As for the stimulus effects, that’s mostly hype too: An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of [...]

[...] is extended by Congress and remains as popular as it is now. Climate experts aren’t impressed. James Pethokoukis

[...] James Pethoukis is worth quoting at length: An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car sales, not total sales: “In particular, we expect that roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway. Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.” [...]

Welfare, just welfare, for a select group of car owners and car buyers and a great gift now to some UAW members.That’s all.

Posted by U NO HOO | Report as abusive

And the shaft to junk yard owners.

Posted by U NO HOO | Report as abusive

If its U.S. tax money I feel it should be only the big three that get the money .Why send the money overseas. I dont care if they are made in the states. Then what about our son,s and daughters buying a older used car? Or my self?

and if you go here, you can see another piece of anti-CfC analysis http://blogs.reuters.com/james-pethokouk is/2009/08/04/cash-for-clunkers-a-bad-id ea-and-a-false-promise/

Posted by James Pethokoukis | Report as abusive

Obama = commander in THIEF!!I don’t care what the justification is; stealing mu money to buy someone else a care is WRONG!!!Wake up people. Stand up for freedom and liberty before it’s gone!

Posted by Captain Steve | Report as abusive

[...] evidence that no one in Washington is learning any economic lessons. And that is a very big deal. James Pethokoukis Blog Archive Cash for clunkers is Obamanomics in microcosm | Blogs | __________________ "The problem with socialism is that you eventually run out of other [...]

[...] my (admittedly half-assed) search for answers, I came across this article in which Reuters blogger James Pethokoukis argued that Cash for Clunkers should be discontinued. [...]

August 3rd, 2009 2:26 pm GMTThis may be a good program. If high mpg cars replace low mpg cars, that will reduce imports. Tis may be one of the few stimulus programs that really works. I say let it rip for the next five years or so.- Posted by Benjamin Cole—–unfortunately the dealerships that are profiting from this are NOT U.S. made vehicles. On the way to work this morning, the Nissan dealership had a wrecked car in front with cash for clunkers spray painted on it. No, this isn’t going to help the American dealerships.

Posted by disenchanted | Report as abusive

what sense does it make that my category III can only qualify for the “cash for clunkers” program and a $4500.00trade in value if I trade it on another huge gas guzzling category III vehicle that will get me at best 5 miles more per gallon. Who’s stupid idea was this? Mr. President, if you want my gas guzzler off the road you are going to have to change the category III vehicle rules and regulations.I can’t afford to take it off the road under these circumstances. This is sheer stupidity.

Posted by disenchanted | Report as abusive

Congress has allocated $3,000,000,000 to, at least in part, support two companies where the government has an ownership interest. It is not hard to see that such support will raise the value substantially of an upcoming General Motors initial public offering. Have we forgotten the meaning of the phrase “conflict of interest” or has the term “blind trust” been altered to mean what is expected of American taxpayers?

Posted by Val D. Turner | Report as abusive

I did some research and made a list of Pros and Cons to the Cash for Clunkers program. So far, it’s 6-Pro, 12-Con.http://www.CashForClunkersInstruc tions.com(And I added a video – Jon Stewart on Cash for Clunkers, for kicks)

[...] James Pethokoukis wrote an interesting post today onJames Pethokoukis » Blog Archive » Cash for clunkers is <b>…</b>Here’s a quick excerpt [...]

[...] Cash for clunkers is Obamanomics in microcosm [...]

[...] my (admittedly half-assed) search for answers, I came across this article in which Reuters blogger James Pethokoukis argued that Cash for Clunkers should be discontinued. [...]