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Cash for Clunkers Duel: Edmunds vs the White House


On October 28, Edmunds posted a press release: “Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold, Reports Edmunds.com.” Edmonds explains the process it used to arrive at incremental vehicle sales from Cash for Clunkers incentives, and then calculated the average cost per vehicle.

On the White House blog, Edmunds has been attacked for for its analysis of the real cost of the Cash for Clunkers program that determined the cost of the program to be $24,000 per vehicle. In an October 29 blog post, Senior White House propagandists announced that on the very day they discovered that motor vehicle output added 1.7% to economic growth in the third quarter, which is the “largest contribution to quarterly growth in over a decade,” Edmunds popped its bubble when it unleashed its press release “suggesting that the Cash for Clunkers program had no meaningful impact on our economy or on overall auto sales.” The blog post even goes so far as to call the Edmunds analysis a “space suit” approach.Though I am always highly skeptical of any of these studies, Edmunds takes the position that it is just trying to understand the true state of auto sales in the U.S. outside of the crazed incentives offered through the Clunkers program. Also, while the government has a very clear agenda to fulfill, Edmunds only has the purpose of weeding out market distortions – such as government intervention – to arrive at normalized sales data for the auto industry. In a follow-up to the White House comments, Edmunds responded:

Apparently, the $24,000 figure caught many by surprise. It shouldn’t have. The truth is that consumer incentive programs are always hugely expensive when calculated by incremental sales — always in the tens of thousands of dollars. Cash for Clunkers was no exception.

The argument is over understanding how many cars that were sold under the Clunkers program were pulled ahead from future months. While Edmunds uses a seasonally adjusted annual rate, the government’s blogger takes a hilarious anecdotal approach and claims that the Edmunds analysis is flawed because it 1) ignores people who were drawn into dealerships and bought cars in spite of the fact that they did not qualify for the incentive, and 2) ignores the GDP rise in the 4th quarter from automakers ramping up production to replace sold inventory. Who is wearing the space suit? Additionally, there are some amusing statements put forth in the “Economic Analysis of the Car Allowance Rebate System (“Cash for Clunkers”)” report released by the Council of Economic Advisors (CEA).

The Car Allowance Rebate System (CARS) 1 is one of several stimulus programs whose purpose is to shift expenditures by households, businesses, and governments from the future to the present. (Other programs with the same motivation include support for bringing forward future infrastructure investments, and accelerated depreciation to bring forward business investment.) Such time-shifting is valuable in a recession, when the economy has an abundance of unemployed resources that can be put to work at low net economic cost; even conservative economists such as Martin Feldstein, Chairman of the Council of Economic Advisers (CEA) under President Reagan, have endorsed this logic for stimulus spending. The benefits of such expenditure-shifting programs are particularly clear when the induced spending is in an industry (like the automotive industry) with a disproportionately large amount of unemployed resources. An additional benefit specific to the CARS program is that bringing forward the replacement of dirty (high-polluting) “clunker” motor vehicles by cleaner, high-efficiency vehicles means there will be less pollution over some time period.

The government’s report also makes the point that GM, Ford, Honda and Chrysler all increased production through the end of the year, which is another sign of growth beyond just the 3rd quarter spike. This is in spite of the fact that it admits that some of the Clunkers program car sales were merely pulled forward from future months or delayed in June, the month previous to the program’s start-up. It’s safe to say that most of this step-up in production is making up for delayed purchases (people who were going to buy a car waited until Clunkers passed congress before they bought a car) and the sales that would still have occurred in later months in the absence of the Clunkers program.

But I will give Big Guv its due and say, yes, of course there will be additional sales when you stand at the entrance of auto dealerships waving $4,500 checks in the faces of people who like to spend money and buy new stuff. Of course, some of these sales would not have taken place otherwise. And Edmunds calculated that amount to be 125,000 incremental sales. Yet, in its usual make-believe fashion, the government, in its CEA report, goes on to write that there are all sorts of really good effects of Cash for Clunkers that cannot be measured (such as consumer perceptions!), while it quietly admits to the numerous economic distortions the program would trigger:

There are other even more difficult-to-measure effects of the program. For example, 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. And news reports have suggested that increasing showroom traffic associated with the program has generated some extra sales to buyers who were not eligible to participate. A number of other possible impacts would be even more problematic to quantify, such as any consequences from the reduction in charitable donations of used automobiles, any increase in the price of the remaining not-traded-in clunkers caused by a reduced supply of such vehicles, and the effects on demand for the services of the auto salvage and auto repair industries.

Further effects that we have left out could undoubtedly be imagined. Some of them might even be substantial. But none seem likely to rival the size of the first-round effects that we believe should serve as the starting point for understanding the economic impact of the program.

While the government claims that Edmunds takes a space suit approach, the CEA uses terminology such as “none seem likely” and “what we believe should serve” to support its wild claims. Then it offers up this tripe:

Our analysis leaves out a variety of effects that might modify the conclusions somewhat. For example, even for an auto sale that is borrowed from the distant future, the net effect on the consumer’s total spending may be less than the direct effect on auto spending, because a consumer who purchases a new vehicle under the CARS program will likely need to trim spending in other areas to make up for the extra automotive outlay. However, standard economic theory suggests that the reduction in non-auto spending should be spread out smoothly over time and will thus mostly occur after the economy has returned to normal.

What the report does not mention is that this program involved the allocation of funds to a specified industry that served to boost the government’s union constituency, and additionally, the Obama administration set the rules for allowable purchases under strict guidelines that induced the consumer to purchase smaller, more “green friendly” automobiles that conform to its long-term, environmental ambitions. Yet this political redistribution was disguised and sold as a stimulus to the economy. See my Cash for Clunkers piece here.


Contact Karen De Coster

Karen DeCoster, CPA, has an MA in economics and works in the healthcare industry. She has written for an assortment of publications and organizations, including LewRockwell.comMackinac Center for Public PolicyTaki's MagazineEuro Pacific Capital, and the Claire Boothe Luce Policy Institute. Her website is KarenDeCoster.com.

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