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)


Gene S

Unfortunately, Cash For Clunkers was a one-time program -- and should not be repeated as such. It would help, however, if we had some ongoing program which would have the effect of subsidizing the removal of vehicles with a heavy carbon load on the environment in favor of vehicles with a much lighter carbon load. The replacement vehicle should have an EPA AVERAGE estimate of 30 mpg or less, a figure which would be increased as technology and our fleet improved.

As to the debate by captive economists, each with an employer's interests to tout, It may be too soon to tell the amount of forward shifting which actually occurred. The point to bear in mind is that the auto industry has suffered terribly due to the financial collapse, and this program helped restart sales. That was worth doing. It also helped put the focus on fuel efficiency. That was worth doing. Amen and amen.

Scott Hendrix

I'm a sales manager for a new car dealer. I feel very sure that the only thing that we accomplished was to move new car sales from the fourth quarter to the third quarter.Were paying the price now in reduced demand for new vehicles and a scarcity of low priced trade-ins.

The consumer is also very likely waiting for the next wave of goverment subsidies.Let's just let the market take care of itself.

Jake

@showME,

What they are saying is " How much did cost to get someone that was not planning to buy a vehicle to purchase one?"

The Edmund analysis is saying that around 5 out 6 people using the program were already going to make the purchase. The money paid to all 6 just generate about true new sale.

Incontinental

I don't think anyone has taken into account the vehicles that did not go into the used car market. I don't think it's true that all of them had a value of $0. Every transaction took a car out of circulation, which is not the case with a normal sale. Many of those cars and trucks could have been re-sold instead of new cars.

Banty

But wait - isn't part of the *point* of the Cash for Clunkers was to move the purchases to a more immediate time frame, so as to provide some stimulus NOW to the auto industry including, naturally, the auto dealers? To avoid layoffs - NOW. The stim was supposed to be "targetted, temporary, and timely" and this is exactly it.

Now I think it is a fair question as to how much demand was shifted from a near-but-not-quite-as-near timeframe. And to what extent it did real good. But it does not make it some fake effect.

Just one data point: Cash for Clunkers made me consider seriously going for a new (read: has to be manufactured in Detroit, Chicago, or Cleveland right now) Ford Fusion rather than a used car. And now, and not next year, nursing my Explorer out a little longer. Upcoming college expenses is probably the only thing that kept me from going over that line. That would have been a purchase (new) that would otherwise not happened at all.

It is difficult for any such study to really know how individual decisions were shifted, or changed completely. I suspect the truth (if there be a truth) is in between the cheerleaders for the Cash for Clunker program and the naysayers.

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G.,,,

Do economists lack a governing body that requires them to adhere to a baseline ethical standard like other professions?
Like engineers for instance?
Or do economist hew closer to that old accounting joke.

Interviewer: What's 2 plus 2?
Candidate #1: 4.

Interviewer: Next.

Interviewer: What's 2 plus 2?
Candidate #2: What would you like 2 plus 2 to be?

Interviewer: Welcome to the team!

bobby g

I'm tired of these "clunkers was a failure" arguments because they never seem to take into account most of the money customers saved through the program is going to be (or has been) spent in other ways, further stimulating the economy. More generally, the benefits of the program are multifaceted, some of which are harder to operationalize than others.
As in the case of Watergate - if you want to understand this, follow the money.

JobHuntingInANewCarNow

You said: "...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."

Correct me if I'm not getting it; but, it seems to me that you are assuming that these consumers were planning to buy a car very soon, with or without a clunkers program.

Excuse me for putting the cards on the table, but I can tell you have not been short on money and/or unemployed lately. There are many (myself included) who had no intentions of buying a car this year or probably next year, because they simply did not have the money. So, they had resolved to being stranded in a broken-down car from time to time. The clunkers program, for many people, made the difference, actually making it possible to buy a car.

This, my friend, caused sales that would not have occurred in the near future at all. And this cannot be measured unless it is known.

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Brian in PA

I think the only way to really judge this is wait to see the end of year totals month over month to see if there is a drop in October-Dec sales. If 4th quarter sales are flat (or even slightly down) than it could be said that clunker actually produced some stimulus in the industry. If (as I suspect) the numbers do indeed drop, we would have paid consumers to do what they would have done anyway, namely buy a car. We would have just got them to buy it in August instead of November, certainly not worth the 3 billion we spent on it. Of course if the sales rise in q4 then we would have wasted the money to stimulate an industry that could have fixed itself through the market. So from where I stand there is very little upside to having offered clunkers (except that we gave more government money to automakers but this time "laundered" it so that it did not seem like it was yet another corporate handout)

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Alex MacDonald

Some of the comments misunderstand the usual meaning of "stimulus." It used to be called "pump priming," and its economic purpose is to bring economic velocity up to a level that is self-sustaining or increasing beyond the duration of the stimulation. Political motives inevitably vector such programs, but do not necessarily negate the economic motive. The problem here is that the clunkers program may have diminished future sales and thus may prove to have been self-negating. So it seems to me. Correct me if I am wrong, as I would like to know.

jh

What if the goal of 'Clunkers' was to shift demand forward? The real issue is whether shifting demand forward will lead to sustainable private sector demand.

Stephen

I'm not sure how much the government put into Cash for Clunkers, but I bet a lot of it went to paying the bureaucracy to manage the program.

What a waste.

Justsayin

Seems to me that a lot of different groups will use various economic measures to push agendas that suit their needs. "The Bush tax cuts were a success just look at these unrelated economic figures", etc. Of couse the real agenda behind this was environmental, and from that stand point it was a huge success by replacing aging gas guzzlers with more fuel efficient cars now rather than later.

Justsayin

Suppose it did cost $24,000 per car, how does that translate to $$$ per job saved or created. How does this contrast with the wall street bail out. How much taxpayer $$$ per job there?

Phil

But if Cash for Clunkers just moved purchases instead of creating new ones, why would NADA be in favor of it? Under that theory, it wouldn't increase their profits at all. It might actually *lower* them, because they can't make any profit on trade-ins that legally have to be destroyed.

I suppose it might have shifted sales from used cars to new, but that might not benefit dealers that much either.

The only benefit to dealers I can think of is that customers might not be as tough negotiators with the government cheque driving the price down. Maybe.

Skip

You don't take into account the folks who came in, didn't qualify and still bought.

C4C = Epic Fail?

The primary purpose of C4C was to reduce auto inventories in order to spur production in a classic Keynesian stimulus of demand. Increasing production increases employment and incomes thereby jump-starting a virtuous cycle for the economy.

So did C4C reduce inventories and spur production or not? Of course, the anti-Keynesian "economists" will deny it, but two months down the road, the results are obvious to everyone else. The American auto industry is well on the way to recovery with year over year sales increases and future production increasing.

Compare the paltry $3B C4C program with the $100B bailouts of GM and CC, and it is obvious Edmunds had a Con-servative agenda too nonsensical to even consider.

larry

Here is another way to think about it. The WSJ estimated between purchase price, increased insurance, registration, taxes, etc., that people who used cash for clunkers would spend about 6 times as much money total on their new cars as the price of the incentive. So at the very least, even if you use Edmonds very distorted numbers and only count participant-claimed incremental sales, C4C at least got a 1 to 1 stimulus to spending rate.

Tax cuts were a 100 times larger portion of the stimulus and correspond with consumer spending going down and savings rate going up- for a net loss per dollar of tax cut. Therefore when thinking incrementally, even using Edmonds very distorted numbers, C4C is infinitely more effective of a stimulus measure than tax cuts. Therefore, we would be economically and fiscally better off if we raised taxes to extend cash for clunkers.

usercarbuyer

Anyone of middle age or older who has purchased a used car and is even modestly savvy knows what N.A.D.A. stands for, and will have been familiar with the orange-yellow "NADA official used car guides" to know what a vehicle's value is before going into a dealer who is trying to snooker them....But I digress....

We'll never know the *true* cost of the program because we cannot know or hold all the other variables fixed (what level of automobile sales would have been w/o cashforclunkers, how people's perception of the economy may have changed since the program, compounded stimulous affect, etc) while we look only at the vehicles sold/payouts made during the program's time window.

Maybe worth a study for book # Threekonomics

Ben Goldstine

Whether it be economists with doctorates funded by industry lobbyists or doctors with medical degrees funded by the NFL to investigate brain trauma in retired football players, or the quintessential example of the tobacco-sponsored smoking researchers, the number of professionals who compromise their intellectual integrity for the sake of their paychecks is infinite. Nothing will ever happen about this until the media is somehow held accountable to stricter standards of journalism in obtaining unbiased information. Put bluntly, I'm not holding my breath.