Guess What the Initials NADA Stand For

I blogged a few days ago about the Edmunds.com analysis of the Cash for Clunkers program, which concluded that the program was an expensive bust, costing the government roughly $24,000 for each extra car sold.

Now a group called NADA is weighing in on the subject. In a press release issued by NADA, they quote their chief economist Paul Taylor as saying the following:

It’s really not that hard to determine a credible cost estimate for the Clunkers program. You subtract projected sales from actual sales for July and August when the Clunkers program was operating, and divide the program’s $3 billion by that number.

When you do that calculation, you come up with a cost to the government per extra car sold of $4,587.

If you are in the mood for a little test of your economic acumen, re-read that quote above and see if you can figure out why it is completely and utterly wrong.

That quote makes no sense economically, of course, because people have control over the timing of when they make their purchases. If you tell people the price of anything is going to go way up in the future (because the Clunkers program is ending), they will make their purchase earlier. This is especially true with automobiles, which are durable goods. It would be less true, of course, with something perishable like a meal at a fast-food restaurant.

With or without a Ph.D. in economics, it should be obvious that the wrong way to judge the success of the Clunkers program is without factoring in shifting of the timing of purchases.

When I see a mistake as egregious as this, I usually suspect it is more likely the result of someone trying to intentionally deceive the public rather than an error of logic. So the first thing I do is try to figure out the incentives of the group that is making the statement.

In this case, I was not surprised to find out that the initials NADA stand for National Automobile Dealers Association. One of their main purposes: to represent auto dealers on Capitol Hill. Their incentive: to say Cash for Clunkers worked so that the program is renewed and more government funds are funneled to auto dealers.

I know it is Paul Taylor’s job to figure out ways to make it seem like Cash for Clunkers was a success, but it is bad for the field of economics when people calling themselves economists make ridiculous, erroneous statements like this one.

If nothing else, getting an economics Ph.D. should teach someone how to complicate and obfuscate the issue so that it isn’t so obvious to outsiders that the argument makes no sense.

(Hat tip: David Cushman)


Michael F. Martin

With the exception of Hamermesh, there have been few posts on this blog about how economists tackle the problem of temporal shifts in supply and demand. As an avid reader, I would love to see more posts on this subject.

Billy Merck

I'm not saying that you're wrong, or that the Cash for Clunkers thing was necessarily a great idea, but just as devil's advocate here, isn't the shifting forward of auto purchases a separate benefit to the economy also envisioned by the program (i.e., a stimulus NOW by shifting forward of future purchased), and therefore shouldn't it be given some credit when calculating the "cost" of the program? I'm not saying the NADA figure is correct, but I'm equally wary of the Edmunds one, is all I'm saying.

Miguel

Interestingly enough, "nada" means "nothing" in portuguese :)

Nathan Clark

I'm not sure I understand why you're saying he's wrong. If the purpose is to stimulate the economy, which is effectively making positive economic happen immediately, isn't Taylor's metric effective? Perhaps if you showed how the following two month showed plummeting sales I'd get it, but otherwise what he's saying makes pretty good sense.

Rockford Emett

I'm no economist. But it seems to me that you're only counting the program's budget against "cars sold that otherwise wouldn't have been".

Aren't there other bits of value in the economic equation?

Donnie

Perhaps we should wait until the end of the year to determine the effect, and look at the annual actual sales minus annual projected sales.

You would be better able to see the effect.

Ted J

Seems to me that, yes, Levitt and Edmunds.com are mostly right when they suggest that earlier-than-planned purchases increase the cost of the Cash for Clunkers program.

However, an earlier purchase may have an oppositive effect that Levitt and Edmunds are not considering. An earlier purchase will accelerate obsolescence. In other works, if I buy a car earlier than I had planned, I will also replace it earlier than I had planned. This pumps more money into the system, yes?

Jenifer

Thank you for the revealng article, Steven. When presented in this manner, NADA's efforts seem apallingly transparent. Since politics is largely a game of confusion and obfuscation, it's nice to see you note it so clearly in print.

Don Sakers

I have a very naive question. Accepting the Edmunds figure of $24,000 per car, and assuming that the dealer got $3,500 or $4,500 per car...where did they other $20,500 or $19,500 go?

I'm sure there's a simple answer, but my poor brain isn't coming up with it.

Jim Blasiak

Does Mr. Levitt agree with Edmunds? The article poses good questions but without an independent analysis which would include an estimate of the important stimulative effects of this program during the depths of an unprecedented recession, there is little to learn from this article.

Given the 4,500 dollars maximum government contribution per clunker turned in, the NADA estimate looks kind of straight-forward to me.

Jim

Toothy

neither measure is accurate - one is too optimistic the other too pessimistic - and each has the same flaw - fails to account for changed behavior

- in one case they fail to account for the cheap price simply shifting the time of purchase

- in the other the they simply fail to account for the possibility the the demand would have been substantially lower than in other years

L

"If nothing else, getting an economics Ph.D. should teach someone how to complicate and obfuscate the issue so that it isn't so obvious to outsiders that the argument makes no sense."

I thought that's what any Ph.D. program teaches...

ralph tyler

I love the last sentence of this piece.

I also love what people do with statistics(not). One can really do anything with them. For example, there is a statistic going around that says medical malpractice reform will only very slightly help medical costs. Of course, the statistic doesn't take into account the cost of defensive medicine.

It should be illegal to make such a mess of mathematics.

jz

@Prof. Levitt,
I wish you would study the entitlements giving rise to the single mothers. EX. in my county**, 50% of all babies are born to single mothers. Women with an income of less than $35,000 are eligible for Medicaid benefits including maternity benefits. Our county ave. household income is $37,000. What women would chose marriage?

The plagues of entitlements are reaching up into the middle class.

**Winnebago County, IL

ps.. my daughter enjoyed your class

dj

And it's a lot more complicated than you make it as well.

While there may certainly be some consumers who, fueled by the fact that the clunkers program was ending, bought cars earlier. But that number could be very (VERY) small.

Another fact -- and one that is far more important in buying decisions -- is consumer confidence and the willingness to spend. As we all know, one huge factor in the failure of the economy to right itself is the reticence of consumers to spend. And spening on big ticket items like cars is a huge leap of faith.

People made this leap because the program was attractive to them. Is that bad? Hardly. It gave the economy a temporary but very important boost. People who can only finf fault with programs such as these never have their own fix for the economy; they are just narcissists who want us to think they know better.

James

Dr. Levitt: What is the right number and how would you calculate it?

M.M.

It seems to me that, to support your time-shifting hypothesis, you need to ALSO analyze the actual vs. projected sales of the months AFTER the program ended. Was there, indeed, major drop below estimates? That could indicate that people shifted their buying behavior, and simply bought their car a month or two early.

One question would be: how many months do we need to track this? Three? Six? 12? Perhaps we won't know until we analyze all sales for 2009.

Another question: how do we know that the estimates weren't simply wrong? No one projected that the economy would fall off a cliff last year. In an anomalous economic situation (i.e., record high unemployment, low growth, and a lot of people and institutions still frightened about the strength of the economy), how does one project sales with any sense of accuracy?

ShowMe

How can the Cash for Clunkers cost the Federal government any more than the maximum paid for any one vehicle, which was $4500? This seems very straightforward to me. Some only got $3500.

The part of the Cash for Clunkers program that I don't think was fair is calling the traded-in vehicles "clunkers". Usually, they weren't old worn-out clunkers, but just vehicles which had been designed to get poor mileage from the day they were made. My neighbor's 10+ year-old Ford Escort with over 200,000 miles on it, and barely running, did not qualify for the credit! Explain why not!

Chris

If you are going to subtract the economic impact of those that simply moved their purcheases up, you also must account for the economic impact of the increased sales during a declining econmomy, any impact on extra money that may be spent on other things because of the rebate and, of course, the impact on health care and others over a period of time because of a cleaner environment. Of course these are very hard to measure, but that doesn't mean you should simply ignore it.

Gary

Everyone complains that people would have bought cars anyway, but they just bought them earlier.

I'm not an economist, but isn't accelerating expenditures kind of the point of stimulus? If your economy sucks today because no one will spend, stimulus can get people spending today. Maybe demand will drop for subsidized items later. But in the meantime today's economy sucks a little less, and the dollars might move around enough to stimulate demand for something else, raise levels of wealth, and maybe even move forward purchases for cars next year into the bargain.

The idea that there's some finite time boundary that circumscribes all demand for a product, and all you're doing with a subsidy is to shift things around within those boundaries, is really misleading. The effective time boundary for car demand appears close to infinite, and moving car purchases from 2010 to 2009, or even from December to August 2009, probably means some purchases from 2011 moved into 2010, from 2012 into 2011, etc.

Whether doing this with automobiles is the wisest approach remains debatable however.

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