September 3rd, 2009 
Vijaianand While the Obama administration and auto dealers are claiming a runaway success of the 3 week’s Cash for Clunkers program, there are lot of things went wrong on the side lines. This program lasted only a short time, but it apparently will have a long-lasting negative impact on nonprofit organizations and businesses. The program should be evaluated so that similar programs in the future can be more effective.
As usual, I picked my magnifying glasses to look closer and research deep enough on various areas to identify were all this program created the spark. Just a take ride along with me for quick look back. In my previous post on the same topic, I questioned the credibility of this program on 3 main context like whether it is helping consumer, economy or environment as it promised. Let me address those points again with more facts and figures and in my next post share some more interesting stories.
Economic Sense
Let us take a look at some final numbers released on CARS.gov by the government,
Dealer Transactions
Number Submitted: 690,114
Cars sold: Around 700,000
Dollar Value: $2,877.9M
Top 5 New Vehicles Purchased
Toyota Corolla
Honda Civic
Toyota Camry
Ford Focus FWD
Hyundai Elantra
The program accomplished what it was set out to do, which was to get consumers back into the showrooms and to jump-start new-vehicle sales. It also created lot of buzz around nation on spending with expense of 1 billion tax payers dollars set out by the congress. The funds was reloaded with another 2 billions again. It is all well and good but does it really had an economic impact is the major debate. When the foreign car companies like Toyato, Hyundai and KIA topping the list in sales, how it actually made an effect in US economy is many people question.
Spending 3 billion dollars in 3 weeks to replace 700,000 cars in the road cannot be considered as proper measurement to evaluate the success of this program. Yes, it did create a short spike in the consumer spending and had an impact but it just short-lived. According to an analyst, if we assume an average selling price of $25,000 for the program, and total unit sales of 700,000, the cash-for-clunkers program generated at least $17.5 billion of economic activity, not including incremental sales of additional products, such as extended warranties, alarm systems and financing revenue for the dealerships — as well as roughly $875 million in sales-tax revenue for state governments. That’s a pretty good return on $2.6 billion in government spending.
When we add in the fiscal multiplier effect, the net impact of the program was easily north of $25 billion — if not much higher. Motor vehicle sales in the U.S. account for more than 18% of total retail sales. NADA estimates that dealers generate in excess of $20 billion in annual sales tax revenue from the sale of vehicles. This revenue is an important part of the budgets for state and local governments across the country.
What’s more, the sales represent only a portion of the economic impact. Ford, for example, announced that it is increasing production of some models. GM brought back around 1300 workers to start production on its new car models. However, the impact has a short life expectancy and once the program is over, the impact is pretty much over as well.
Of course, it’s possible that car sales will simply revert to their pre-Cash for Clunkers numbers in September. But that won’t mean the program was a failure. Fiscal stimulus is supposed to be a bridge between a period when people aren’t spending to a more prosperous future, when, with a growing economy and (presumably) an improving job market, people will start spending more on their own, without special inducements. So it will be the next challenge for auto manufacturers and dealers to take this momentum and convert into the actual sales in future months to come.
Consumers Aspect
I argue this program is actually putting many consumers into debt by tempting them to buy newer cars when they don’t have job and cannot afford to spend for big purchases at the first place. But auto dealers have a different point. Let see.
Average Fuel Economy
New vehicles Mileage: 24.9 MPG
Trade-in Mileage: 15.8 MPG
Overall increase: 9.2 MPG, or a 58% improvement
According to stats from automotive dealers on the CARS Program shows clunker consumers getting a 69% mile-per-gallon (mpg) improvement which saves them an average of $750 in gas bills a year by replacing their clunker with a new fuel efficient vehicle. “After gas and repair savings many consumers will spend less to drive a new car then they were spending to keep their clunker on the road,” says Sharon O’Connell, the director of www.CashForClunkersInformation.org. The program worked far better than anyone anticipated at moving consumers out of old, dirty trucks and SUVs and into new more fuel-efficient cars.
Many of those auto purchasers were already in the market for a car, according to the anlalyst. And it’s possible that the incentives have just lured people who would have bought cars later this year into the showrooms earlier–thus stealing sales from future months. The real measure of the effectiveness of the program would be the degree to which it caused people who weren’t even thinking about buying a car to take the plunge.
Based on the types of cars being purchased and his assessment of purchasers, NADA economist Taylor believes that as many as 40 percent of the cars purchased under Cash for Clunkers were bought by people who would not have bought a new car in this calendar year. For a significant number of buyers, he argues, the rebates of $3,500 or $4,500–depending on the car purchased after the trade-in–changed the calculation of whether it made sense to purchase a new car.
My argument on adding consumer debt through this program still holds true and strong. How? As per the analyst, 40% of the people who never even thought about buying a car bought one just because they are getting the credit. I am sure around 80% of them bought via financing adding to their debt. May be they saved up some money and will eventualy save lot more in the long run on gas and auto repair expenses. Still whether they really need this debt at this troubled times is the another big question. Government is suppose to help make people life easier not pile more debts on them!!
In a climate where people are buying school supplies on layaway many consumers need some extra prodding to make large purchases. In August, the Cash for Clunkers program clearly provided the necessary encouragement and I should push for a large number of consumers to buy a car which they could have avoided. We are still going towards spending economy instead of saving.
Enviromental Impact
The last and most important of all, enviromental impact of this program. It is the major push for this program to even get implemented at the first place. They wanted to reduce carbon residues and emission by taking out old cars/ gas guzzlers from the road. But many experts argued it is not going help much because it takes 5-7 years to just offset the carbon residue created by the new cars by their gas savings. Let look at the CARS.gov numbers again.
Vehicles Purchased by Category
Passenger Cars: 404,046
Category 1 Truck: 231,651
Vehicle Trade-in by Category
Passenger Cars: 109,380
Category 1 Truck: 450,778
If congress pushed for greener vehicles, they should have limited this program to purchase only cars with better mileage. You see the figure, around 40% Category Truck(SUV, minivan, trucks) are sold again which are true gas guzzlers even with 22 mpg and around 90% traded-in are trucks. Basically, lot people just traded-in their older truck and got a new similar kinda of toy. That’s what it means. Lets look at some more interesting points I discovered.
According to NADA , as of June 30, 2008, there were about 250 million vehicles in operation. This program only replaced 700,000 cars, which is just 3% of vehicles with little energy efficient ones. The impact is merely a fraction compared to the overall numbers.
Another report by CTA (Center for Transportation Analysis),
Carbon dioxide emissions emitted by United States accounts for 5,982 million metric tonnes in 2005. Transportation share of U.S. carbon dioxide emissions from fossil fuel consumption 2007 – 33.6%
Motor gasoline share of transportation carbon dioxide emissions – 58.6%
The U.S. accounted for 23.5% of the World’s carbon dioxide emissions in 1990 and 21.3% in 2005. Nearly half (44%) of the U.S. carbon emissions are from oil use. The numbers tells us lot of things. Just by replacing fractional number of vehicles won’t have a big impact on the carbon emission.
This program only affects a small portion of economy thorough auto industry by spiking the auto sales, added debt to consumers and only had fractional impact on enviroment. Is it a true success? I know some will argue, you cannot bring a big change all of sudden, changes can only be enacted slowly. But spending 3 billions for small impact is a costly affair. There should be a program which has broader impact similar to banning incandescent lights by 2012, controlling emissions from factories and so forth.
In my next week continuation post on this topic, I will share more on how this program caused uproar and upset many non-profit organizations, small auto sales companies and auto repair businesses by looking at another side of the coin.
Sources – newsweek.com, time.com, nada.com, cta.org, npr.org
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During a town hall meeting on Jul 27th, Fed chairman Bernake said, “The problem we have is that in a financial crisis if you let the big firms collapse in a disorderly way, they’ll bring down the whole system. When the elephant falls down, all the grass gets crushed as well,” Bernanke added. He said he had to “hold his nose” to rescue such institutions during this crisis. As a result, Bernanke said it was his “top priority” to fix the issue of too-big-to-fail. As per him, there is nothing like a company is too big to fail. It just needs to fail graciously without affecting others. To read the full article, go to