Cash for clunkers: a bad idea and a false promise

August 4, 2009

David Rosenberg of Gluskin Sheff weighs in on cash for clunkers, the feel-good story of the Summer of 2009, and why it reminds him of a similar phenomenon earlier this decade (bold is mine):

In the aftermath of 9-11, the Big Three unveiled 0% financing to rejuvenate auto sales, which were moribund at the time. So what happened was that motor vehicle sales soared from 16.1 million annualized units in September 2001 to 21.7 million in October — a 3,643% surge at an annual rate! Retail sales skyrocketed 6.6% that month (+116% at an annual rate), a record that holds today. And instead of declining, as was expected, real GDP recovered at a 1.4% annual rate, with the consumer expanding 6.4%, at that time, the best performance in two years.

But what all these gimmicks do is bring forward consumption — they don’t “create” anything more than a brief spending splurge at the expense of future performance — the pattern gets distorted as opposed to there being any real permanent change in the trend. Auto sales dropped the next three months, following which they came right back down to around 16.0 million units; retail sales also fell each of the next three months.

Now there was also a production part to the story, and automotive output rebounded hugely in November (+4.2%) and December (+3.4%) of 2001, with the three-month trend finishing the year at a +25% annual rate. The ISM index jumped from the 40.8 low in October 2001 to over 50.0 by February 2002 and then to a peak of 54.4 in June.

Autos can be a really big swing factor and they are like motherhood to politicians but in reality, they account for less than 3% of spending and 2% of output in the U.S. economy. But even after a 3,643% annualized surge that got so many people excited over V-shaped recovery prospects back in late 2001 and early 2002, let’s have a look at what the GDP performance (percent change at an annual rate) actually was back then:

2001Q3: -1.1%

2001Q4: +1.4%

2002Q1: +3.5%

2002Q2: +2.1%

2002Q3: +2.0%

2002Q4: +0.1%

10 comments

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I guess I don’t understand the math on this. If both the 16.1m & 21.7m are annualized rates, then the annualized increase is 34.78%.

Did I miss something?

Posted by StevenKs | Report as abusive

2001 we get 0% on cars. 1999 I bought a car at 0%. Thats been around a long time and really big rebates have too. This comes back to pricing being out of step with what people are willing to pay…Therefore by spending tons of money on advertising and fire sales (expense expense expense) tax code and accounting gimmicks kick in and money is made anyway. SO Mr. smart eco geek, you sit there with your charts and graphs trying to prove a negative. My gas guzzler clunker qualifies to a pretty good bonus. But I ain’t biting. Retail price is too high, and I (above median) will buy one of these rebated cars in a couple years used green and still shiney. In the meantime, if we get a recovery with jobs…entirely possible with the coming paradigm shift toward populist ideals, maybe I will buy. The leaders have thir heads up and are looking around unlike the last admin with their heads up their…er, in the sand!

Posted by DanO | Report as abusive

Republicans like to say “No” a lot.

Posted by Chris | Report as abusive

Wow, ran out of money after a few days of the mighty Cash for Clunker program.

Free-lunch, bribery, and lousy economics do work. In America, that is. I give up. Join ‘em when you can’t fight ‘em. Therefore:

- I need Cash for TV program. See, my many tube TVs in the attic (including a 12″ washing machine model of 1950) is bad for environment and jobs. How about $1000 for each big fat flat panel TV I buy? No TV are made in the USA anymore? Well, most flat panel TVs are made in Mexico by the mighty Japanese electronics giants, imported under NAFTA rules. That should be good for American economy.

- I need Cash for Mortgage program. Need I say more? For every mortgage outstanding, the Gov should offer $10,000 for $100,000 of mortgage. 10% just like C4C. And let’s no discriminate subprime – every mortgage should qualify. Boy this should fix up the economy like real fast.

- What’s good is a car without gas? So I need a Cash for Gas program. For every dollar on gas I should get a rebate check of 43.3854 cents. (The math is complicated involving proprietary knowledge.) Let’s go rolling on C4C cars and C4G fuel!

Yes, there is sunshine, there is a God after all. For a while I thought Anglo-Sexton hyper-capitalism trickle-down economics is dead after Wall Street got its belly full of TARP. Now my faith is restored by the Cash for People economics. Free money trickling down to little old me! Bernanke, you do fly helicopter after all!! Karl Marx and Mussolini love you.

Posted by The Real Deal | Report as abusive

I think this constant hammering over the head of cash-for-clunkers, based on one ridiculous report, sponsored by neo-cons, really shows the mentality of neo-cons in America. They complain that not enough is being done NOW, but here is a program that is making something happen NOW (while maybe at the expense of sales spaced out of the next few years) and neo-cons waste no time in crapping all over it. Worse yet, all they do is scream bloody-murder, or in their parlance Obamanomics, and don’t offer anything that comes close to a reasonable, viable alternative – other than the vague cry of slash taxes and spending that is rather meaningless and frankly pointless.

Unless you are going to offer constructive criticism, leave the jabs on the side. I think VP Biden said it best during the campaign, to paraphrase ‘if you want to trash talk someone as policy, at least have the balls to say it to their face or GTFO’. And if all you can offer is one report that over-states the obvious, that’s a shame. It’s like the person who doesn’t believe in climate-change because on average the temp is .1F lower than last year, ignoring though that there were record highs in the summer and record lows in the winter that ‘averaged out’ to lower overall, barely. Think about it, and think how that may help politics in America (and the environment) in general.

Posted by the Shah | Report as abusive

Just remember everyone: TANSTAAFL.

Posted by Ben | Report as abusive

From reading all the comments, I conclude that liberals live life based on feelings, not on truth, facts and common sense; whereas conservatives argue on facts, and often times they hurt the feelings of liberals.

Posted by Mark | Report as abusive

I propose a CASH-FOR-WINDOWS program; smash all the old windows in America (to save the planet of course) and give everyone 4,500$ to buy new planet-saving windows. Or how about this one CASH-FOR-REFRIGERATORS; Destroy all Fridges older than 2 years and give everyone 1000$ to buy a new one to save the planet. Just think what these subsidies would do for the construction and manufacturing industries! Don\’t worry about the cost it will save us so much money, in fact we will install a new program, make money by destroying what you have and buy new. How about CASH-for-COATS, destroy all of the old energy-inefficient coats, give 500$ for NEW Coats that people could wear to turn down the thermostat,(save the planet). Great Ideas,I could get elected to Office.

Posted by Daniel Lonce | Report as abusive

I propose cash for trash. Why not. These silly programs don’t even start to make a dent.

“Officials expect a quarter-million gas guzzlers will be junked under the original $1 billion set aside by Congress — money that is now all but exhausted.

Calculations by The Associated Press, using Department of Transportation figures, show that replacing those fuel hogs will reduce carbon dioxide emissions by just under 700,000 tons a year. While that may sound impressive, it’s nothing compared to what the U.S. spewed last year: nearly 6.4 billion tons (and that was down from previous years).

That means on average, every hour, America emits 728,000 tons of carbon dioxide. The total savings per year from cash for clunkers translates to about 57 minutes of America’s output of the chief greenhouse gas.” AP Press

Effectively, your kids and your kids children will be paying for this joke of an idea for years to come. That is a lot more than change…

Posted by Jen Andalou | Report as abusive

Just wanted to post up the following quote from a yahoo finance article on people’s experience with the “Cash for Clunkers” program. It clearly supports my position that most clunker participants would have purchased a used vehicle.

Respondent was dealing with a failing Buick, and had 2 choices.

“I was going to get her a used car, but Cash for Clunkers made it possible to buy a new Elantra. It was an absolute no-brainer.”
http://finance.yahoo.com/family-home/art icle/107474/what-i-got-with-cash-for-clu nkers.html?mod=family-autos

I think that it is very clear that the clunkers program will not necessairly bring new auto sales forward, but will certainly impact used car sales. I believe this respondents position is fairly common.

Posted by Greg | Report as abusive

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