(Lots of) Cash for Clunkers

Edmunds.com reports that its statistical analysis of the Cash for Clunkers program finds that the program generated only 125,000 extra new vehicle sales, meaning that the cost to the U.S. government was $24,000 for each of those new cars.

The reason the cost per incremental car is so high is that, according to Edmunds.com’s modeling, 82 percent of the vehicles purchased under the program would have been bought this year anyway, even without the subsidy. So Cash for Clunkers mostly just turned out to be a gift from the government to people who happened to be in the market for a new car at the right time. The auto manufacturers and dealers did not end up getting a very big chunk of the money ultimately, although they did get paid earlier rather than later in the year.

Is this surprising? Not to an economist. It is relatively easy to move around the timing of when someone purchases a durable good, but much harder to affect whether they buy a durable good or not.

For the second time in a week, I am deeply disappointed at the response of the Department of Transportation to research into areas of relevance to the department. The first case was Secretary LaHood‘s response to my research on car seats. Here is what the agency had to say in response to the Edmunds.com analysis:

“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,” said Bill Adams, spokesman for the Department of Transportation.

The right response, it seems to me, is either to say 1) that this new evidence convinces us not to do the program again, or 2) that this analysis is wrong. That’s the response that Macon Phillips had on the White House blog (who knew the White House had a blog!):

The Edmunds analysis rests on the assumption that the market for cars that didn’t qualify for Cash for Clunkers was completely unaffected by this program. In other words, all the other cars were being sold on Mars, while the rest of the country was caught up in the excitement of the Cash for Clunkers program. This analysis ignores not only the price impacts that a program like Cash for Clunkers has on the rest of the vehicle market, but the reports from across the country that people were drawn into dealerships by the Cash for Clunkers program and ended up buying cars even though their old car was not eligible for the program.

I’m not sure whether this argument is empirically important or not, but at least it is actually engaging in a meaningful way with the Edmunds.com analysis.

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  1. Craig says:

    You did not of course factor in the environmental benefits of taking old cars off the road.

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  2. Jason S says:

    I just wonder what the reaction will be when everyone that participated in the Cash for Clunkers finds out that they have to pay taxes on their “free money” gift. Many of these people that couldn’t have purchased a car without the program may soon find themselves getting it taken away with to pay for their taxes.
    Wonder how much that will stimulate the economy?

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  3. Gene S says:

    Edmunds analysis is unsatisfactory for two reasons. The first is that, until Cash For Clunkers, car sales were terrible. Their analysis of previous data just ignored the then-current trend. Second, Edmunds ignored the fact that selling is an emotional business. When salesmen are confident, they sell more cars. The C4C program injected confidence into the equation. It also helped that C4C created traffic in showrooms which had become ghost towns.

    I expect an analysis of all car sales with and without C4C could be made which would show that the actual cost per resulting added car sale might be as low as $1500, and be no less valid than the Edmunds analysis.

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  4. econobiker says:

    I still want to know how a 1998 Dodge Neon and 2008 Hyundai Accent qualified as trade-ins for the program. These two showed up on the CARS pdf list of traded in vehicles.

    The ’98 Dodge would never have had less than 18mpg and was never listed on the CARS websites as qualifying The 2008 Hyundai was actually listed on the CARS website as qualifying yet the EPA website had it’s mileage at least at 28mpg for the automatic. And that is not even posing the question of why someone would trade in a 2008 vehicle anyhow…

    Basically the taxpayers gave at minimum $7,000 of false refunds for those two cars…

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  5. Hunter says:

    You did not of course factor in the environmental benefits of taking old cars off the road.

    — Craig

    Eric Morris had a good piece on this a while back. How do we know that people with their new fuel-efficient cars won’t just drive more?

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  6. Chad says:

    I agree with you Craig that it should be considered. I’d really love to know the cost per carbon unit reduced. I have a feeling there would be a cheaper way to get the same result.

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  7. charles says:

    They should also factor in the environmental COST of the program.

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  8. Robert says:

    I find this form of “accounting” annoying regardless of the politics. Say I take my two kids out to dinner – I buy them each a meal for 5 bucks each. One isn’t hungry. Does that mean I spent $10 bucks “each”? since one meal didn’t get eaten?

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