Posted on 09/05/2017 7:30:26 PM PDT by 2ndDivisionVet
When was it, exactly, that petite Toyotas and stubby Hondas came to rule the American road? One milestone in the compact-car takeover dates back to the summer of 2009. Times were, as you’ll recall, pretty dark. The US economy was bleeding jobs. Trillions of dollars in wealth in stocks and home equity had been vaporized. People were clinging to what cash they had—and definitely not spending on cars. With sales nosediving, several flagship US auto companies were on the brink of ruin.
And then came the great Keynesian experiment known best as “cash for clunkers.”
Under the bipartisan program, the federal government offered incentives of between $2,500 and $4,500 to US residents trading in a gas-guzzling, older vehicle to buy a new, more fuel-efficient car. (That’s worth about $2,900 and $5,100 today.)
Even in the deepest recession doldrums, Americans proved plenty ready to splash cash on new gas-sippers—provided Uncle Sam pay for some of it.
As promised, car sales surged.
(CHART-AT-LINK)
So popular was the scheme that car buyers blew right through funds the government had expected to last until November 2009. The government had to cough up an extra couple of billion dollars to meet demand.
What seemed like a great idea at the time, however, probably wasn’t. The latest evidence comes from a new paper (registration required) in the American Economic Journal that deals an extra harsh double-whammy of revisionism.
Cash for Clunkers was supposed to do a couple of things. By requiring traded-in clunkers to be junked, it aimed to replace sales of used cars with new ones, boosting sales for beleaguered automakers, and goosing those Keynesian “animal spirits” that would encourage even more consumer spending. In the process, the US fleet would be left cleaner and more fuel-efficient than if aging gas-guzzlers clunked around for another half-decade.
Obama officials expected the incentives to “pull forward” consumer spending to July 2009—when everyone was still too broke or freaked out to buy much—that would have happened many months later. It wouldn’t matter much that cars weren’t being bought for months or a year after Cash for Clunkers because the economy would likely have recovered enough to need them less.
The program did boost short-term spending—but not much. Under the plan, only gas-guzzling clunkers were eligible for the program; the cutoff was cars that got 18 miles per gallon (about 7.7 kilometers per liter). Using data from sales in Texas—where about 6% of the program’s purchases took place—the researchers compared the car-buying behavior of households just within the cutoff with that of households whose cars fell just beyond it (so that they acted as a kind of control). Around 60% of the subsidies were claimed by consumers who would have bought a new car during the Cash for Clunkers window anyway, they found. Within eight months of the end of the program, there remained no difference in new car ownership between those eligible for Cash for Clunkers and those not.
But the program didn’t just sputter—it backfired. Cash for Clunkers didn’t juice consumer spending; it reduced it.
Had the law’s environmental focus merely limited the fuel-economy rating of the vehicles eligible for trade-in, Cash for Clunkers would probably have worked pretty much as planned, say the authors. And in fact, the sizable rebate would likely encourage buyers to buy more expensive cars than they otherwise would have—boosting auto industry revenue over the long term.
So why didn’t that happen? The fatal flaw lay in the program’s second environmental component—the part of the law that aimed to clean up the US vehicle fleet by encouraging households to buy more fuel-efficient cars than they normally would have. For instance, a passenger vehicle needed to get at least 22 miles per gallon to qualify for the subsidy.
This incentive made fuel-efficient vehicles cheaper than other cars. This put hybrids like the Toyota Prius—which retailed at between $21,000 and $35,000—within reach of some customers. Fancy hybrids aside, though, the vast majority of highly fuel-efficient vehicles tended to cost less than other vehicles.
This shifted demand toward cheaper cars. Cash for Clunkers wound up discouraging the sales of vehicles that ran between $30,000 and $50,000, according to the authors’ results—and boosted purchases of those priced from $15,000 to $25,000.
The authors estimate that households forked over an average of $7,600 less per subsidy for a new set of wheels than they would have otherwise. Add all that up, and even under conservative assumptions, argue the authors, the program cut new vehicle spending by about $2 billion (and it could be as much as $5 billion). The authors also find that the de-clunking helped cut environmental damages by $253 per vehicle. That’s surely not nothing, but it’s also not a lot of bang for fiscal buck.
(CHART-AT-LINK)
Of course, many of these cheaper, smaller cars are foreign. But they weren’t necessarily imports; many were made in the US or Canada. This would explain the researchers’ finding that the slump in spending that the program triggered didn’t disproportionately hit US production.
Still, Cash for Clunkers didn’t exactly help the intended beneficiary, US automakers. The nearly 39% share of autos sold under the program was actually about six percentage-points less than their overall market share at that time.
(CHART-AT-LINK)
This isn’t that surprising. At the time, American carmakers didn’t much specialize in zippy little fuel-efficient autos (except Ford, which happened to be the lone major US carmaker not in financial straits). For instance, GM’s hybrid, the Volt, was still years away from profitability. Detroit’s specialty was more high-margin steely behemoths—the dutiful exhaust-coughers that delivered their owners to dealerships that summer of 2009, so that Uncle Sam—and his merry band of unwitting taxpayers—could pack them in their new Prius, Versa, or most probably, Corolla, and send them on their way.
We’re all supposed to be surprised?
“... great Keynesian experiment...P>It was a Kenyanesian debacle.
It was a Kenyanesian debacle.
“Under the bipartisan program, the ...”
Yeah, right.
When my Daughter got married they had both just graduated from college. She had a job as an English teacher and he was working part time and getting a second degree as an RN. He is a big gorilla but they apparently find that useful in hospitals.
Their only car was an old Cavalier which had been salvaged from a flood and sold honestly as one which had been flooded and refurbished. She asked for my advice on a new car.
Since they didn’t have much money, I suggested a Corolla. I was a bit surprised when they actually took my advice.
Fifteen years later they are living the good life. Partly due to his having a high salary and partly due to inheriting around a half million dollars. That Toyota was traded in several cars ago.
The affordability of used cars was wildly distorted as well.
“accidentally”
I’ve had one for eleven years. It’s been paid off for five. I get 40 mpg on a flat highway. It’s got 239,000 miles on the odometer and has had only regular maintenance and a replaced clutch at about 190,000. Best car I ever owned, hands down.
Horsesht! It was not cash for clunkers, it was the Obama era insane gas prices that never got a democrat complaint. But during Bush Sr Desert Storm, all the papers were plastering about gas going from 95cents to 1.25.
My Brother-in-Law gave me his old 97 Lumina. It now has 202,000 miles on it. He did nothing except the normal things which happen to all cars but no major maintenance.
The same week I got it, a warning light came on. As luck would have it, Wal-Mart was clearing out a code reader that same week. It was marked down from $100 to $25.
It indicated “insufficient flow in the egr valve” It took me a week to look it up on the internet and I eventually cut the magnet off a pick-up tool and chucked the handle in a drill.
The device worked perfectly. As I squeezed on the drill the flexible wire was wound in a direction which literally pulled itself through the channel. I ran it though a few times, sprayed a little carb cleaner and ran it a few more times and it was clear. The light went off and has not come back on.
now it runs very smoothly but I keep hearing noiese in the rear which I can’t figure out. It is front wheel drive so it might be rear shocks.
Indeed, that experiment got us inflation and high gas price, hence the move to gas savers like the Corrola... has nothing to do with subsidies, or, rather, because of the catastrophic effect of subsidies
Accident? The headline reads “Accidentally”. Pravda
All it did was take all of the older cars that the poor could afford, and bumped their prices to over $5000. Then, they gave them to China to build ships and tanks
I love my Corolla——great car for my current needs.
.
“...helped cut environmental damages by $253 per vehicle.”
I’d love to see the assumptions behind the calculations for that.
Versa is a great car.
As I see it,it did a couple things. 1. It scrapped out some decent used cars & really messed up that market to some extent. 2. It took taxpayer money from some who didn’t need a new car or couldn’t afford one & helped others into a new car. Why should one taxpayer’s money be helping another into a new car?
As I see it,it did a couple things. 1. It scrapped out some decent used cars & really messed up that market to some extent. 2. It took taxpayer money from some who didn’t need a new car or couldn’t afford one & helped others into a new car. Why should one taxpayer’s money be helping another into a new car?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.