StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

And for an Encore, Let's Condemn Office Buildings and Rebuild Them Nearby

05 Aug 2009
Posted by Andrew Samwick

By my reading, Stan did not disagree with anything I posted about Cash for Clunkers.  None of the three criticisms of the C4C program that he addressed were leveled by me.  My criticism is that it is a waste of assets, and that a waste of assets necessarily makes us poorer.  But it is worth revisiting the each of these popular criticisms in turn, to figure out which of them have merit:

1) C4C isn’t going to increase total sales of new cars; it’s just going to accelerate buying that would have occurred anyway.

I agree with Stan and his sample of 2.  It is possible that some people who did not previously believe that they would be better off by paying their own money for a new car will now use the rebate to make themselves better off.  But this is in no way a selling point for the program.  We have destroyed otherwise productive assets (the clunkers).  Nothing about the flow of money associated with that destruction undoes the destruction.  That the rebates are so high that Stan's friends are now making a whimsical purchase just further illustrates the idiocy of the program as a use for government funds.

2) Environmentally speaking, it costs more to make the new car than the savings that will be realized from driving it.

This may not literally be true, as Stan indicates.  But neither is it true that the environmental gain from the C4C program is as high as the simple calculation of (Improvement in fuel economy with the new car) x (Miles driven with the old car).  The more fuel efficient car is cheaper to fill up, so miles driven will go up.  That additional fuel consumption due to the additional miles has to be netted out.  The environmental cost of scrapping the old car also must be considered. 

And I think with the first statement in his reply to this criticism, Stan may be trying to have it both ways.  Will the program boost auto production or won't it?  Stan indicates that, because the cars being sold have already been produced, there is no new environmental damage that is done from producing them.  That's true for those particular cars.  But there will be environmental damage done in producing whatever cars are sent to dealerships to replace them.  To the extent that the program succeeds in its efforts to boost auto production, even if that boost is not one-for-one with the number of cars sold as part of the program, then there are environmental consequences that have to be considered.  Either those costs have to be acknowledged, or the proponents of the program would have to acknowledge that it will have no impact on auto production.  I don't think they want to pick the latter, even if it were true.

3) There’s no evidence we really need an additional $2 billion.

Given that the program is a waste of resources, there cannot be evidence that we need to triple the amount of resources we are wasting.  If there were evidence of anything, it would be simply that if reasonable health insurance cost $4,000 per person per year, then every billion dollars flushed away on this program is another 250,000 people for whom the government couldn't fund a health insurance purchase this year.  The people who think that the government has very important demands on its funds should be the most outraged by this.

2 network effects that are hard to quantify beforehand

I understand your overall criticism, and in some points I totally agree. There are some other psychological effects that are worth considering, though:

1. The program's success demonstrates that people are willing to open up their wallets for a good (or great) deal; rather than sitting on money, getting some circulation going will have a salutary effect. (I'm not sure I buy the notion that there's a load of other stuff people were buying; they were merely paying down credit cards, etc. While that is safe, it also doesn't create any wealth anywhere.) It also starts to change the "no one is buying anything" meme that is causes recessions to perpetuate.

2. The increasingly common sight of fuel efficient cars makes it easier for the middle market and late adopters to get on board. While I avoid phrases like, "Tipping point" there is little doubt that many shiny new fuel efficient vehicles will have some influence over marginal decisions even after the incentives are gone. It just becomes the bright thing to do...a bit like priming the pump, I guess.

Clunker Economics

Bill Gross advocates something similar.

Gross advocated putting dynamite to 1/10 of the U.S. housing stock.

He wasn't kidding.

Just another capitalist with an idea to use government to enrich themselves and destroy wealth for most everyone else.

The Environmental Impact ...

... is even harder to figure than what you suggest. Over the next few years, fuel efficiency standards are scheduled to increase fairly rapidly. Transferring car purchases from 2011 or 2010 to 2009 may actually *decrease* the fuel efficiency of the auto fleet that will be on the roads in 2015.

Implicit in the desire for significantly higher CAFE standards is the presumption that the current new-car market's offerings are unacceptably inefficient. It is exceptionally odd to then characterize subsidizing the purchase of those same cars as being environmentally friendly.

And what the heck is in that white plume that comes out of these cars after you put that silicate gunk in the engine?

Last comment: is there any anticipated impact on the price of used car parts from this bill and its ban on most reasonable recycling of usable parts?

Don't ignore the waste of idle factories

and idle hands that staff them. Don't ignore that even if this merely time shifts demand, that is what the economy needs now. Don't forget that targeted, temporary, and timely is exactly what stimulus demands. Don't forget this produces an investment 5-10 times as much as the cost.

I can't say this is a perfect solution, but this isn't even close to the broken window fallacy.

Re: Don't ignore...

Don't ignore that even if this merely time shifts demand, that is what the economy needs now

At $4,000 a mere time shift of purchase per car? says that 100,000 car sales were delayed to qualify for the clunker credit. NADA says the same thing, there was a signficant drop in sales as people waited for the credit. How does a time shift back pay off?

"Don't forget this produces an investment 5-10 times as much as the cost."

Hello? I'd like to see the analysis behind that one. How does merely shifting the time of a purchase produce any new investment?

And, assuming even the best case, saying a $4,000 credit leads to the purchase of a new car that wouldn't otherwise be sold, how would that lead to anybody "investing" $40,000 in anything? (Buying the car is a consumer purchase, not an investment.)

Hey, don't ignore this -- the very same incentive to buy could have been obtained by simply giving purchasers a direct credit of about $800 on a new car purchase, without destroying the trade-in car, as that's about how much the average "clunker credit" is actually worth to the purchaser after the dealer subtracts the trade-in value of the old car from the credit, and then splits what's left of the credit with the purchaser.

(Remember, the credit payment actually is made to the dealer, not the purchaser -- to stay whole with a conventional trade-in the dealer has to subtract the entire trade-in value of the old car from the credit first. Then he's entirely free to negotiate the sale price up as far as the market will bear to take as much of the rest of the credit for himself as he can. And with that flood of buyers in such a rush, the market was bearing a lot! Is it any wonder why Detroit fell in love with this program?)

That $800 would have incentivized the same number of sales for about 1/5th the cost to taxpayers -- or 5x as many sales for the same cost -- and no productive assets would have been destroyed!

The crushing of all those engine blocks is just wanton destruction.

The bulk of the cost of the credit is going to pay for that destruction -- not to give any break to consumers. If somebody brings in a $3,500 car to get a $4,500 credit, $3,500 goes to destroy the car and then the dealer and car buyer split the rest to pocket around $500 each. For that, taxpayers pay $4,500. Good deal??

If so, then I say we are making a big mistake by operating it on such a penny ante scale. Let's have the government show the nerve to do something that's right on a scale big enough to count for a change!

Let's have it mandate this program for all trade-ins for the next year, maybe two. Destroy 10 million or 20 million old cars just like this -- by taxpayers paying maybe $1,000 more than the market value of each, to motivate 'em to keep the trade-ins coming!

What would the mere $50 billion or $100 billion added to the national debt be, compared to the benefits of accelerating one whole lot of car sales, destroying all those old cars cluttering up the highway, driving the price of cars up way high -- especially, and most regressively, the price of used cars -- and getting the coffers of Detroit filling up with profits again?

If Congress thinks the thing is so good, why does it keep it so tiny?

Environmentally speaking....

"Conservation" = "destroy useful, productive assets with positive market value" only in the NewSpeak Dictionary.

In Europe, where they have more experience with such programs, the greens are on to this.

C4C at our house

I don't know where you get your figures for typical value of the clunkers, etc., as I don't see a link in your post. I'm not sure where Edmunds got their data, because the only polling done on us was a government survey taken when we bought the car (and I don't think it went to Edmunds) regarding when we would have purchased a new car without the $4500 incentive, etc. It was a paper-based survey, so I'm guessing that data hasn't even been entered into the system yet.

We traded in a clunker valued at less than $1000 to get the $4500 off the regular price of a new car (there was no increase in the new car price due to demand, we had reserved the car in advance of the program).

The clunker got 17 mpg, the new car is rated at 50 mph (hybrid car).

We didn't delay the purchase to wait for the C4C program, but we did move up our purchase by about a year (we wouldn't have purchased a new car until fall of 2010, but the $4500 pushed us to purchase now).

As an economic stimulus that benefits the middle class, it was probably better than hundreds of billions spent to bailout AIG.

Re: C4C at our house

I don't know where you get your figures...

NADA and Edmunds counted the drop in "clunkers" brought in as trade-ins when the program was announced, from dealer stats.

As for the rest: Congress has budgeted the average credit as $4,000 (actual credits are $3,500 and $4,500 but I'm dealing with the average). The maximum credit is $4,500, so that's effectively the maximum trade-in value of a car that qualifies for the credit. One can guestimate the average trade-in value of a car brought in for the credit as half that, $2,250.

From there: Again, say one wants to buy a new car worth $25,000 market value, the dealer can sell it for that in cash. One has a clunker with a trade-in value of $2,250, and so can trade it in to buy the new car for a cash price of $22,750.

If instead one uses the clunker credit to buy the same car, the dealer -- because he gets $0 from the trade-in -- to get back just to where he was before, offering a cash purchase price of $22,750, must take the first $2,250 of the credit. (He won't take less of the credit, because that leaves him getting less than the $25,000 he could get selling the car for cash.) Now most of the $4,000 (average) credit is already consumed and neither party has gained anything yet.

But $1,750 of the credit is still available. The dealer and buyer will negotiate a price that divvies it up between them. Supply and demand will determine how that goes...

* If the dealer has lots of other clunker-credit buyers rushing in and only limited credit-eligible inventory, he can raise his cash price above $22,750, by an amount approaching $1,750 to grab the bulk of the credit for himself and increase his net above the car's $25,000 market price accordingly. If one doesn't like it, too bad, the dealer sells the car instead to some other higher bidder.

* OTOH if the dealer has few buyers and lots of eligible cars to sell he'll keep his cash price at $22,750 and net at $25,000 to not lose any sales, and the buyer will get the $1,750 remaining credit.

All news reports say dealers were surprisingly flooded with credit seekers and had low inventories, which was very good for them for grabbing the credit for themselves. But let's say for simplicity's sake the extra credit was split 50-50 -- then the dealer and buyer both benefit compared to a conventional sale by $875.

That would mean the actual incentive to make a purchase received by the car buyer was $875 -- for a tax cost of $4,000. Not very efficient! One would think that even Congress could design an $875 incentive for a cost of under $4,000.

But whatever portion of the credit goes to the buyer, the total to both buyer and seller is unambiguously $1,750 -- at a tax cost of $4,000.

Even assuming that taxpayers should be assessed to give both sides in an ordinary commercial transaction a better-than-market-rate result -- that this is good instead of bad -- giving them a benefit of $1,750 for a tax cost of $4,000 is not good! Sufficiently multiply programs that are operated "for the benefit of taxpayers" like this, and taxpayers will end up facing an explicit and implicit national debt of
$64 trillion.

But it's even worse! Where did the missing $2,250 ($4,000 tax cost minus $1,750 benefit) go? To destroy productive assets worth $2,250.

So the net to society for this more or less average cash-for-clunkers transaction adds up like this:

+ $1,750 to car buyer and dealer (however they divvy it up between them).

- $4,000 tax cost.

- $2,250 destruction of assets.

- $4,500 net, per transaction.

But of course there is one more effect to consider. Destroying productive, operating used cars increases the price of cars generally and the price of used cars in particular -- increasing corporate profits by increasing prices at the cost of consumers. Unless one is a corporatist, this can hardly be a net welfare gain!

In fact, curiously, the inherent regressiveness of destroying used cars to raise their price and put profits into the pocket of big business is going totally unremarked -- especially on the political left. Who needs to buy used cars? Not the rich!

I'm trying to imagine the reaction if Republicans had charged taxpayers to pay for destroying assets relied upon on a daily basis by the lower-income working class ... to increase the price lower-income workers had to pay for them ... to increase the profits of big businesses. I kind of imagine the howls from some liberal quarters would be unrelenting.

But today ... progressives are mute. Not a word about it.

Perhaps this shows that when the rubber meets the road, so to speak, real political control of the Democratic "progressive" left is firmly in the hands of an alliance of big businesses (see: "carbon permit handouts"), big unions, and rich Volvo-driving Sierra Clubbers.

Occassionally, when it happens to be convenient, they let Barbara Ehrenreich and her friends out to speak about the concerns of the lower-income working class, for PR reasons -- when it doesn't interfere with actual vote-buying policy like this.

What I do know

We bought this exact same car (but with fewer options -- this time we upgraded to heated leather seats) two years ago and paid $5000 more for it (we didn't use a trade in and there was no clunker program). The clunker we gave the dealer ten days ago was worth less than $1,000.

From a personal standpoint this was a large discount (for a nicer car) over what we paid for the same car (Toyota Prius) two years ago. And we got a 17 mpg car off the road and replaced it with one that gets 50+ (right now it is showing 53.5 mpg).

We're driving greener, saving money on gas, and when I called the insurance company to remove the old car and put the new one on they quoted me a price that is $43 a year more than what we are now paying (they made a big point of telling me that it wasn't really costing more to put this new car on and take off the old clunker).

We'll save over a thousand dollars a year in gas with this new vehicle. We consider it a nice economic stimulus for our family, as it frees up that money to spend in other places.

If the government can give 700 billion dollars to Wall Street banks they can give my family 4500 dollars to improve our lives, reduce fossil fuel emissions, and save us money on an ongoing basis. Our discretionary income just increased, and we'll use 10-15K we save over the life of the car (in gas) to stimulate the economy in other ways.

On a chart of your emissions

On a chart of your emissions when you experience an improvement is when you'd want to enact this, as Victor says.
There are six classes of cars and as long as you trade up to a lower footprint class you qualify. So someone that went from a Hummer (no longer produced for USA market I think) to a heavy truck, qualifies. You could make the trade two or three categories up...infinite ways to improve.
Is a PR coup.

The same as tax credits for home upgrades

You know, this broken window analogy is strange. We're encouraged to replace windows (that have a low R rating) in favor of more energy efficient windows in our homes.

The payback (return on investment) comes over the next several years, in reduced gas, oil or electric heating bills.

Should we keep those old leaky windows longer because they still function (although poorly) as windows?

At some point you make an economic decision based on returns, and yes, it means that you replace old windows before they rot out because the savings with the new higher R factor windows will offset the cost at some future point.

I'm no fancy economist, but I live in a cold climate, and the savings from these upgrades are not trivial.

Just sayin'.

Clunkers and Broken Windows

I've been wondering when a discussion of this program and the broken window fallacy would occur, so congrats to CGAG for finally bringing it front and center. The back and forth has been intelligent and useful.

Bastiat wrote of the seen and the unseen consequences of an action. In the latter category fall auto mechanics, highlighted at last, last week in the WSJ. They'll sorely miss the work on those autos, many of which likely had many more miles in them. And for people who only buy used cars, they'll be feeling poorer, too.

I was able to give my mechanic some relief last week with a minor repair on a 9 year-old sedan with 150,000 miles. I have hopes for many more miles. This is a spare car, one we use lightly since it's rated at 20mpg. Had it qualified for the subsidy, and had we grabbed it, I expect our aggregate miles would have jumped, and our carbon footprint as well.
It's the paradox of efficiency, perhaps another of Bastiat's unseen things.

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