Tuesday, August 18, 2009

Can We Officially Declare "Clunkers" An Abject Failure? (Answer: Yes)

A little over 2 weeks ago, I documented why the "successful" Cash for Clunkers ("C4C") program was actually anything but. As I said then, "Only in Washington can a plan to give away free money over three months, which was delayed, then collapsed after 4 days and was riddled with administrative problems, be deemed a 'success.'" I also highlighted other problems, namely (1) the unintended consequences of the program - harming used car and parts dealers and the poor people who shop there; (2) the incompetence of government management - including how the program would probably have no positive economic or environmental effects; and (3) how ripe the program was for fraud and abuse.

Nevertheless, as I not-so-boldly predicted the Senate approved another $2 billion of funding for the program, and the US government tore a rotator cuff patting itself on the back. Everyone cheered... well, everyone except the poor, independent car dealers, used parts sellers, and taxpayers not in the market for a new car (or wanting to game the system for a free wad of money). But government was happy because car dealers and American automakers were loving the influx of customers. And the government loves itself some auto-money. WOO HOO!

Now, only 2 weeks later, dealers aren't so happy anymore. The Detroit News reports that the Transportation Department is “ramping up efforts to speed payments to dealers under the $3 billion ‘cash for clunkers’ program.” It's hiring 1,100 workers (stimulus!) to process voucher payment requests by tapping the Enterprise Services Center in Oklahoma City, Okla. I guess that would be good news if we didn't also hear today from the AP, which informs us that dealers “have reported submitting tens of thousands of dollars — in some cases more — worth of rebates to the federal government for repayment that are still outstanding. Many report they have been repaid for only a small fraction of the deals they made under the program, creating strain on cash flows at dealers nationwide.” Uh oh. And the Chicago Sun-Times piles on: “dealers across the country, who have been giving discounts to car buyers, are still waiting for their money.” While “problems with applications have been reduced, getting approval for reimbursement requests still faces ‘significant hurdles,’ said John Lyboldt, vice president for dealer operations at the National Automobile Dealers Association.” Things have gotten so bad that a lot of dealers are thinking of dropping out of the program, says the Milwaukee Journal Sentinel.

Ok, so new car dealers aren't big fans anymore, but at least Ford, GM and Chrysler are psyched, right?

Wrong, as the FT reports:
According to data published by the National Highway Traffic Safety Administration on Monday, Americans are using the scrappage incentives to buy more vehicles from Toyota than any of the three Detroit carmakers.


The top models bought since the scheme began on July 24 are the Toyota Corolla, Honda Civic and Ford Focus, all small sedans. Three of the top five are Toyotas.

The popularity of smaller models underlines the price paid by the Detroit companies for their strategy to all but cede the passenger car market to their foreign rivals during the 1990s as they concentrated on bigger and more profitable sport-utility vehicles, pick-up trucks and minivans.
Ugh. Ok, so dealers AND the Big Three aren't huge fans, but, well, umm, at least the economy is cranking now, right?

Wrong again, as MarketWatch informs us (emphasis mine):
U.S. retail sales unexpectedly fell 0.1% in July, as soft sales for most types of merchandise offset a boost from the government's cash-for-clunkers subsidy, the Commerce Department reported Thursday.

It was the first decline for seasonally adjusted sales in three months. The report shows that consumer spending is still weak despite attempts by the government to stimulate demand. Sales at most kinds of stores declined in July.

Economists surveyed by MarketWatch were looking for sales to rise 0.8% in July after an upwardly revised 0.8% increase in June. See Economic Calendar.

"We know a clunker when we see one, and the July retail sales report was a real clunker," wrote Richard Moody, chief economist for Forward Capital.


The government subsidy that gives owners of older, less-efficient vehicles as much as $4,500 toward the purchase of a new one had a major impact, as auto sales rose 2.4%. Analysts expect the program will have an even larger effect on auto sales in August. The program was running for just one week during July.

Excluding autos, retail sales fell 0.6%, against an expectation of a 0.1% increase. Sales excluding autos rose 0.5% in June and are now down 8.5% in the past year.

The cash-for-clunkers program may be having a negative impact "as consumers shift dollars to paying for their new vehicles instead of other purchases," said Adam York, an economist for Wells Fargo Securities.

"The consumer is still under considerable pressure tied to a weakening labor market, a negative wealth effect and tight credit conditions," said David Greenlaw, an economist for Morgan Stanley. "Also, it appears that the recent tax stimulus is having limited impact. We look for a modest pop in consumer spending in the third quarter driven by the success of the 'cash for clunkers' followed by a return to a more tepid pace in the fourth quarter."
Wait, so people who bought cars didn't also buy other stuff? NO WAY!! On the bright side, this dispels the "magic beans" theory of liberal economics.

But with car dealers, the Big Three, and the US economy all hating on C4C, the environment - mother Gaia herself - still has gotta be a (small) fan of a program that takes all those carbon-emitting clunkers off America's roads, right? Right?!?

Wellllll.... maybe not. In fact, a brand new study (PDF) by economists Lucas Davis and Matthew Kahn shows that, when factoring the large international trade in used cars between the US and Mexico, C4C and programs like it might actually increase global carbon emissions over the long term. Here they are explaining why in a new op-ed (caution: nerdspeak and euro-spelling ahead):
Under the US “cash for clunkers” programme, billions of dollars are being allocated to pay drivers to purchase a new vehicle and scrap their old automobile. This column says the programme will reduce international trade in used cars, which significantly benefits consumers in developing economies. Such trade also increases the average emission efficiency of automobiles in both the US and developing nations, which raises the possibility that “cash for clunkers” might raise global emissions.
In other words, people who say C4C will help reduce carbon emissions totally failed to consider international trade in used cars. These clunkers are typically less efficient than the average American car, but they're far more efficient than the Mexican averages. By destroying the clunkers, C4C will dramatically reduce the used car trade between the US and Mexico. This will not only harm poor Mexican car-buyers (who must pay more for a smaller supply of used vehicles), but it also could decrease the average fuel-efficiency of Mexican cars and thus increase total carbon emissions in Mexico (where more polluting cars aren't replaced with less-polluting American clunkers). The result: more overall pollution, not less. Quick conclusion: yet another one for the "nasty unintended consequences" file.

So who the hell is still calling this program a "success"? Anyone? Anyone? Bueller?

(Ok, ok, other than the tiny percentage of American consumers who are getting free money, of course.)

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