James Pethokoukis

Politics and policy from inside Washington

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.

Comments

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
 

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
 

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
 

“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
 

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
 

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
 

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)

 

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