White House To Edmunds: Don't Knock Cash For Clunkers

Edward Niedermeyer
by Edward Niedermeyer

It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program that sold nearly 250,000 cars in its first four days alone. There can be no doubt that CARS drummed up more business for car dealers at a time when they needed help the most.

The Department of Transportation’s Bill Adams lays into recent Edmunds.com analysis showing Cash For Clunkers could have cost as much as $24,000 per vehicle sale [via CNN]. But one man’s negativity is another man’s constructive criticism. After all, Adams doesn’t touch the heart of the matter: the program’s cost per vehicle, and Edmund’s analysis (like all analysis) was educated guesswork. Luckily, CNN was able to shed a little more light on how Edmunds came up with their numbers.

In order to determine whether these sales would have happened anyway, Edmunds.com analysts looked at sales of luxury cars and other vehicles not included under the Clunkers program.

Using traditional relationships between sales volumes of those vehicles and the types of vehicles sold under Cash for Clunkers, Edmunds.com projected what sales would normally have been during the Cash for Clunkers period and in the weeks after.

And guess what? Ford analyst George Pipas basically concurs with Edmund’s calculation of incremental sales, and therefore the cost of the program. But he still echoes the DOT’s line: C4C was a success… as long as you ignore the amount of money spent.

The whole purpose of the program was to provide some kind of catalyst to kick-start the economy, and by all accounts the extra production that was added this year was a boost to the economy.

Indeed it was. The White House says that up to 1.6 of the 3.5 percent increase in 3rd quarter GDP came from a cash-for-clunker-stimulated auto sector. Which explains why they’re lambasting the Edmunds report: like Ford, they have a vested interest in seeing Cash For Clunkers hailed as a success, and possibly even repeated. But that requires glossing over the fact that incremental stimulus estimates range from 30 to 60 percent of clunker sales, meaning that even by the most optimistic analysis, C4C was an expensive endeavor when measured on a per-incremental-sale basis. And, as Edmund‘s points out in their retort to the White House’s retort:

It is also claimed we missed the possibility that Cash for Clunkers generated excitement and consumers bought vehicles even if they didn’t qualify for the program — a claim that has been widely supported by anecdote but by little analysis. It does, after all, seem a bit odd that masses of consumers would elect to buy a vehicle because of a program for which they don’t qualify — doubly so when you add in the fact that prices shot up during Cash for Clunkers, creating a disincentive to buy.

September’s miserable sales showing by GM and Chrysler (the two automakers the US government most needs to be stimulated) shows that the stimulus had a hangover effect on demand (despite a possible flattening-out caused by the anti-stimulation of non-qualifying segments illustrated above), and (more importantly) a confusing effect on inventory and production strategy. The fact that C4C increased 4Q auto production may have been good for GDP numbers, but it actually makes another collapse of the taxpayer-owned automakers more likely if unstimulated demand doesn’t catch up. Finding a real, sustainable bottom of the market from which to grow is not made easier by erratic bursts of stimulus frenzy. But then, if the cost per incremental sale of C4C doesn’t matter, why would another injection of cash into the reeling zombie automakers matter?

Edward Niedermeyer
Edward Niedermeyer

More by Edward Niedermeyer

Join the conversation
2 of 43 comments
  • Johnthacker Johnthacker on Nov 01, 2009

    Christina Romer, chair of the President's Council of Economic Advisers, is one of the foremost experts on stimulus and multipliers. (Her research is more ambiguous than her public statements, as politics force people to sound more certain than the conventions of academic research require.) Yet Pch101 has the temerity to contradict her about how to judge C4C and then claim that others don't understand Economics 101! Everyone agrees about the correct way to measure the impact of C4C. Small differences in assumptions lead to different results. The program is unprecedented in US history, and the only analogies are admittedly imperfect. I would prefer that the Edmunds's analysis be made public, but it's absurd to use only Q3 GDP data to judge the program, and it's absurd to think that a preliminary report issued September 10 is the final word, when we still await to see if actuals from Q4 match the projections in that report. The CEA report agrees, as the CEA notes within that they expect to update the report as more data comes in. It's simply not worth jumping up and down prematurely on something that is so difficult to judge right now.

  • Pch101 Pch101 on Nov 02, 2009
    Why in the world would you think that the President would want to boost Q3 GDP at the expense of Q4 GDP and of Q1 2010 GDP? Particularly when the Council of Economic Advisers repeatedly in their report disagrees with you? Thanks for the strawman, but that isn't the claim at all. Incidentally, the CEA certainly did want an increase to Q3 GDP. As they state in the report that you claim to have read, "a perception that the program has helped the economy turn the corner out of recession could have had a real effect on consumer sentiment, market risk spreads, and other determinants of demand." The report goes to some lengths to discuss the claimed impact on Q3 GDP. This period of time was clearly a big deal to them. It is not illogical to claim that a product has a price elasticity close to or even equal to zero over certain price ranges. It is completely illogical to make such an argument in this context. Perhaps that's why the CEA report (that you selectively skimmed and at times misunderstood) makes the statement that "The assumption that no payback exists, however, is not plausible, and is not consistent with economic theory." Apparently, they agree with me. You don’t have much room to talk about ignorance when you’re directly contradicting the White House’s Council of Economic Advisers. As noted, you obviously didn't understand what you've read. Let's try to explain this again. Let's suppose you go shopping and spend $500. The question is asked: Did John get a good deal, or not. If all we know is that you spent $500, the answer is: We don't know. If you paid $500 for a brand new laptop computer with some good specs, that might be a killer deal. If you paid $500 for a Number 2 pencil and bag of chips, then you got ripped off. Numbers without context don't mean much. Ultimately, we need to know how many bona fide sales were created by the report. Everyone acknowledges that this is an important figure. But its importance belongs in the context of the greater issue of calculating the economic benefit and contrasting it to the cost. What the politically driven pundits miss is that the point of the program was to induce consumer spending. The government spends $4,500, and gets some larger amount of spending -- perhaps $15,000-20,000 -- in return. The sales figure is one component that goes into a larger formula. The ultimate exercise is of computing the benefit, and comparing it to the cost, with some consideration for the timing. As noted in the excerpt that I posted above, the timing of GDP clearly matters. Their goal was, in part, to get a good Q3 number that would hopefully encourage consumers to help drive a good Q4 number based upon a (hopefully) increasing stream of good news that defeats the doldrums. They are more politically savvy than some might appreciate, and perhaps more politically savvy than some of those who are reading these comments.
  • Lorenzo 1 million barrels is 42 million gallons. The country uses 368 million gallons a DAY. The reserve was set aside after Hurricane Sandy caused a gasoline shortage for emergency vehicles. The hurricane season starts on June 1 and is predicted to be active. Nice going.
  • Chuck Norton Toolguy- I have. It's hard on the knees...
  • EBFlex Welp the corpse is at it again. They think they can buy votes by selling off from the SPR. The best thing they could do to get votes is close the border and start deporting people. That would guarantee them a win in November. As of right now though, they are not doing that and Trump is rising in the polls every day.
  • Jalop1991 What is this "dealer" thing Ford speaks of?
  • Picard234 So this release amounts to 2.7 hours of gasoline consumption in the US. You won't even see a penny. The administration is draining the reserves for political optics, nothing more.