Cash for Clunkers

September 5th, 2014 at 4:00 pm by David Farrar

John Sununu at the Boston Globe writes:

POLITICIANS HAVE difficulty learning from their mistakes; it’s tough enough to just acknowledge them. Admitting mistakes leaves elected officials feeling exposed and vulnerable. And why bother, when the partisan divide encourages both sides to endlessly litigate the rights and wrongs of past legislative choices?

Cash for Clunkers should be the exception. Enacted in 2009, the $3 billion program was intended to stimulate the economy by offering $4,500 credits for trading older vehicles for newer, more fuel-efficient cars. 

I recall the hoopla around that. People said it was visionary. I think some parties even pushed for such a programme in NZ. Yes, here is the Green Party pushing for it.

It was a spectacular failure, at least according to two comprehensive studies. The first was completed last year by the Brookings Institute, a left-leaning Washington think tank. Another, conducted by Texas A&M researchers, was released recently by the National Bureau of Economic Research.

Here’s some conclusions from Brookings:

Using Li, Linn, and Spiller’s (2012) long-term jobs estimate for the CARS program, the program created 0.7 jobs for each million dollars of program cost, resulting in a cost of $1.4 million per job created.

This is presumably what the mean by Green jobs!

Li, Linn, and Spiller’s (2012) estimated reductions in carbon dioxide emissions (including the co-benefit reduction in carbon monoxide, volatile organic compounds, nitrogen oxides, and exhaust particulates) amounts to a cost per ton of carbon dioxide of $91 to $301 stemming from
the program.

The usual cost for a ton of carbon is no more than $25. This was a huge waste of money in an environmental sense.

So why did the programme get accepted and then fail?

First, get caught up in the hoopla. Clunkers produced the type of headlines that politicians dream of: helping people buy cars, better fuel efficiency, the promise of job creation, and the word “cash” in the title. (Spelled with a $, if you please.) It was full of the kind of vague simplicity that has great political appeal, but begins to disintegrate as soon as it comes into contact with the real world.

Second, ignore the reality and complexity of human behavior. Proponents never seriously considered that subsidies would appeal most to consumers who were already considering replacing their vehicles. Both studies showed conclusively that the short-term spike in sales simply represented transactions that were pulled forward in time. Legislators’ belief that a temporary $4,500 rebate would result in sustainable sales growth was wrong from the start.

Lawmakers also failed to consider that the owners of “gas guzzlers” and those able to act quickly on a new car purchase tended to be higher income families. In fact, Brookings’ analysis showed that recipients of the credit were wealthier and better educated than the population at large.

Third, set aside basic economics, including the fundamentals of supply and demand. To justify the fuel savings promised under the program, the clunkers returned to dealers were destroyed, rather than resold as used vehicles. A year later, the resulting shortage of used cars pushed prices up an average of 10 percent.

The emphasis on smaller, fuel efficient vehicles also meant that the cars sold were less expensive than would otherwise have been the case. Consequently, automobile dealers — who actively promoted the bill and lobbied for its passage — saw lower revenues, and less profit, per car. Whether out of desperation or ignorance, they failed to consider the effects of this substitution.

Finally, use the wrong measurement for success. Ironically, early assessments asserted that the program was successful because it was popular. That’s a natural way for politicians to think, but completely meaningless where economics are concerned. (Throwing money in the street might make you popular, but it’s still a terrible idea.) Brookings and the Texas A&M researchers both concluded that across meaningful measures of success — economic growth, job creation, and emissions reductions — performance was abysmal. It was a costly error: by mistaking demand for success, legislators were convinced to throw away $2 billion more on top of the initial $1 billion program.

Many many government initiatives fail, like this one, because they never predict the unforeseen consequences.

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27 Responses to “Cash for Clunkers”

  1. SPC (5,787 comments) says:

    Any connection between the scheme and the early pay back of federal government loans to car manufacturers?

    Any subsidy scheme to modernise the cars on the road is a regulatory support to those who buy new vehicles – did they require the new car to be American/NAFTA made?

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  2. EAD (1,331 comments) says:

    Like all barmy Socialist ideas, “clash for clunkers” is sold to the gullible masses as an idea that will help the poor but it really is a scheme designed that will enrich a few. Obama of course the idiot-in-chief that implemented it. The only Presidential candidate with any understanding of real economic (Ron Paul) explains this here:

    Like Bill Clintons intervention in the housing market which caused the sub-prime crisis. this keynesian nightmare is going to be another economic bubble that will burst in no time as it gives people the ability to buy things which they can’t really afford.

    There are fewer used cars in the market to be sold which artificially drives up the price of used cars. People who tend to buy used cars – poor people and young people get screwed.

    And who will win? The carmakers but just like the subprime crisis, it will be the banks of course

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  3. Kimble (4,443 comments) says:

    Many many government initiatives fail, like this one, because they never predict the unforeseen consequences.

    Unforeseen?

    Every single one of the failings of the program were identified and explained before, during and after the scheme was initialised.

    No, these werent unforeseen consequences. They are the consequences that were ignored by Keynesian ideologues who ironically dismissed every opponent of the program as being “blinded by ideology”.

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  4. lastmanstanding (1,304 comments) says:

    And that folks is reason #4376 why Gumints should never ever be let loose near a commercial activity. They will swamp it in red tape and cause endless unintended consequences.

    Why. Because Pollies are spending OPM. Not their own.

    A successful business owner will carefully weigh up all the pros and cons BEFORE committing their own money.

    Pollies( and the only saving grace is that the Right are usually more careful than the Left) will waste OPM like drunken sailors.

    And before the Lefties start raving on let them name a list of Labour and Green Pollies who have had a successful business career.

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  5. dog_eat_dog (790 comments) says:

    It would have literally been cheaper to just give people a million dollars.

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  6. SPC (5,787 comments) says:

    The scheme was designed to protect jobs in car manufacture during the post GFC downturn.

    Like the bail out of banks to keep the system in place.

    The cleaner car fleet was the rationale used by the Democrat Party, because the reduced stock of used cars (higher price) was not in the interest of some of their own supporters.

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  7. SPC (5,787 comments) says:

    dog eat dog, it was $10 per American.

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  8. daniel carter (34 comments) says:

    If you want to talk about failed policies how about nationals sale of half the energy companies. The companies profits have risen, electricity costs have risen, and NZ got FAR LESS $$ than Bill English planned – Rio Tinto, gfc, Labours alternate threats etc meant the income was a quarter less than was foreseen.

    Perhaps these issues were unforeseen? Perhaps government spent only a cursory day thinking through the challenges in the process, perhaps they didn’t think about it at all.

    Or how about selling down more of Air NZ, effectively losing control of the board and then complaining that the airline price gouges on regional flights.

    I could go on.

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  9. EAD (1,331 comments) says:

    It’s a bit like the New Zealand government mass immigration scheme. They sell it as being a scheme for “economic growth” but it really just another tool to get the government involved in the private economy.

    Mass Immigration makes housing unaffordable to the poor as housebuilding can’t keep up with the sheer number of people coming into a limited space (particularly Auckland) in such a short space of time. The result of course being a shortage in housing. To solve this government created shortage, the Government then sticks it’s nose in the private economy with idiotic schemes such as Kiwibuild (Labour) or Kiwisaver equity (National) in order to “help the poor”

    The poor don’t benefit of course as they still have to pay for it via taxes or inflation (which they don’t see in a PAYE system) and they end up indebted to at least the same amount as they were before before the Government opened the floodgates and they end up living somewhere they would prefer not to live. The real winners are privately owned large building companies and Banks of course.

    Last time I checked, the definition of Fascism was the merging of Business and Government. In New Zealand however we call this “Democracy”!

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  10. singularian (23 comments) says:

    “The usual cost of a ton of carbon is $25″

    Pretty sure you’re talking about carbon dioxide, carbon being the fourth most common element in the universe it would be madness to price it at $25 per tonne, we would owe the “creator” a shitload.

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  11. artemisia (256 comments) says:

    Risk assessment and risk management should get most attention in a business case. Hardly ever happens. I’ve read plenty and the risk section is blah blah blah. Standard stuff with no sign anyone has given risks much thought. Same with proposed benefits. Who ever goes back to do a proper assessment. Not many, and those that do usually bury the results. I wonder why. And add in assessment of alternatives, including do nothing. The most air time goes to the alternatives the author or the decision makers want.

    The people who sign off on business cases know they will probably have moved on by the time the benefits are assessed or – more likely – the initiative is quietly allowed to fade away.

    And don’t get me started on defining the problem properly. (I recommend Kepner Tregoe BTW.)

    No wonder we get crap.

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  12. Ed Snack (1,927 comments) says:

    Daniel, you should realize, that the major cost increases aren’t coming from the generators but from the government owned and controlled distribution. Generator prices haven’t risen significantly outside inflation but the need to invest in distribution including the huge cost of enabling Manapouri power to be added to the national grid has pushed that portion of electricity costs beyond inflation.

    The really big increases in electricity costs occurred when it was government owned, Labour gouged consumers as a tax increase that wasn’t a tax increase. That government thought about it alright, and we as users got gored.

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  13. Don the Kiwi (1,794 comments) says:

    Ste3e

    Hope you read this. :-)

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  14. tom hunter (5,097 comments) says:

    No, these weren’t unforeseen consequences. They are the consequences that were ignored by Keynesian ideologues who ironically dismissed every opponent of the program as being “blinded by ideology”.

    DPF should put this statement into the original article and do so in huge letters, bolded, with multi-coloured strobe lights around it.

    On a related note: ask yourself how American “Duncan-Garner” journalists dealt with this during its proposal and passage.

    Yes. That’s the media bias that is the problem. It’s why things were “unforeseen” and why the standard response to bad US economic news in the last few years has been “unexpectedly”.

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  15. daniel carter (34 comments) says:

    Tom you’re right, but at least previously the excessive costs we paid went into government coffers which paid health, police, education – all of which have taken an effective cut in funding over 6 years. Now half of it goes to the rich few and overseas. I challenge anyone except those rich few to explain why that’s a good outcome.

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  16. seanmaitland (501 comments) says:

    @daniel carter – simple, the government needed money to spend on infrastructure and the cost of borrowing it was FAR higher than the return on the dividends that they were forgoing.

    I assume you haven’t ever bothered to look up any of that data for yourself though, but love regurgitating the rhetoric you hear from muppets like Cunliffe, Parker and Norman.

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  17. edenman (4 comments) says:

    These Consultants should be called in to check the Auckland rail loop. They would be able to pick holes in the proposed usage and indicate the losses that ratepayers and NZ tax payers would have to cover

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  18. Fletch (6,502 comments) says:

    Electric cars have also been a huge failure –

    Electric car sales are not charging the marketplace. A new study by online automotive research company Edmunds.com suggests the segment may have run out of gas.

    Sales of electric drive vehicles are stuck at about 3.6% of all new car sales for 2014, Edmunds senior analyst Jessica Caldwell said.

    That’s below the 3.7% market share for 2013, and it’s not likely to grow any before the end of the year.

    And that’s during an otherwise robust sales season. Total figures for August were higher than any time in the last decade.

    Automakers sold about 1.6 million vehicles in the U.S. in August, an increase of about 3% from August 2013, according to initial industry estimates released Wednesday.

    “The whole automobile market has grown,” Caldwell said. “We’re not seeing electric vehicles as part of that growth.”

    http://www.latimes.com/business/autos/la-fi-hy-electric-vehicle-sales-20140903-story.html

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  19. OneTrack (3,237 comments) says:

    lastmanstanding – “And before the Lefties start raving on let them name a list of Labour and Green Pollies who have had a successful business career.”

    Parker. Oh, wait …..

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  20. freemark (619 comments) says:

    Oil should only be used for plastics, aircraft, heavy transport, motorsports & export dollars..at least in NZ. Everything else we can run on renewables. The $/watt prices we can get PV Modules in with current high dollar and global market factors pretty much make it a no brainer, even totally unsubsidised with low feed-in tariffs. We need to get some serious battery research going in NZ – we should be attracting the best brains in the World to settle here for a while.

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  21. Griff (8,203 comments) says:

    fletch A huge failure in your tiny mind . All you are reporting is a minor blib in USAs growing sales.
    The global market for plug in cars is expanding rapidly doubling in the last year alone.
    In early 2012, there were almost 100,000 plug-in cars on the world’s roads. A year later the report says, there were 200,000 vehicles. To date, there are now an estimated 405,000 electric cars globally, with the magic 400,000 barrier crossed some time late in 2013 or early 2014.
    http://transportevolved.com/2014/04/16/number-electric-cars-world-doubled-past-year-say-academics/
    http://www.vox.com/2014/7/28/5944065/electric-cars-plug-in-vehicles-rising-sales-US

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  22. Milk Me (157 comments) says:

    I consider myself to be socially responsible in that I decided early on that the world is over populated and therefore I did not have children, plenty of women wanted and still would have my spawn. Besides I cannot stand the noisy stinking little snotgobblers anyway or the people that have them, all they do is ruin the lives of otherwise fun loving people. Instead I spend everything I earn on ME. Boats, cars and planes, love them, so you will never get my gas guzzling V8 from me. Electric cars have their purpose but today I drove down to Christchurch from Picton, thumping along using 18 litres per 100km average speed well over 100kph and it was fun, I only just missed running over a seal on the way to Kaikoura, a shame as it would have made a fine pair of fur boots and a hat.

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  23. Fletch (6,502 comments) says:

    Griff, and yet the CEO of Fiat-Chrysler recently said at a conference that he hopes people don’t buy their electric car, as they lose $14,000 every time someone buys one.

    http://jalopnik.com/sergio-marchionne-doesnt-want-you-to-buy-a-fiat-500e-1579578914

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  24. seanmaitland (501 comments) says:

    @Milk Me – who are you trying to convince? If you are going to have reasons for choosing something, then an idea that is completely wrong is not a very convincing way of going about it.

    NZ has an aging population, where in about 20 years time with most of the baby boomers gone, the overall natural population growth will be in need of more young people.

    If you lived in a third world country then your argument would be valid.

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  25. tom hunter (5,097 comments) says:

    Milk Me’s style and prose is slowly improving but still has some way to go before he reaches the comedic level of Tom Jackson. What he lacks in pithiness he makes up for with eye-gouging excess.

    The only difference is Jackson has been aiming for massive downticks, whereas I’ve given Milk Me an uptick. The bit about missing the fur seal was special.

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  26. burt (8,324 comments) says:

    The problem with Green Parties, demonstrated by Norman tonight on the minor leaders debate is that their priorities are economic, equality, environment. What happened to environment, equality, economic.. I know… that would be a Green party not a Watermelon party.

    It’s also funny as hell to see Normal mouthing off about the emission trading schemes being hopeless and we need a carbon tax. Like ummm, who voted for the ETS and said people who didn’t were climate traitors, deniers.

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  27. OneTrack (3,237 comments) says:

    “Throwing money in the street might make you popular, but it’s still a terrible idea.”

    Cunliffe and Labour don’t agree.

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