Tuesday, August 04, 2009

Cash for Clunkers Is Working

CARS (the Car Allowance Rebate System), more commonly known as cash for clunkers program, has exceeded expectations. Customers bought more cars in July than they have in any month so far this year, and they are buying more fuel efficient vehicles.
Yesterday in the Guardian, I wrote that the cash for clunkers program was "a blunt instrument, economically speaking." But it turns out that the program has had precisely the intended effect on two crucial measures. Auto sales in July climbed above the break-even point for Ford, GM and Chrysler. And customers are swapping gas guzzlers for more efficient vehicles.
All year, car sales as measured by the seasonally adjusted annualized rate (SAAR) has hovered just below 10 million units, which would not be enough to return Detroit to profitability. July sales jumped to 997,824, which translates to a SAAR of 11.24 million—higher than analysts were predicting as recently as last week.
The average gas mileage of vehicles sold was 25.4 mpg, compared to 15.8 mpg for vehicles traded in. 83 percent of trade-ins were trucks, while 60 percent of new vehicles sold were cars. The most popular vehicle was the Ford Focus, which is rated 28 mpg combined city and highway.

If 250,000 new cars are bought under the program, and the average car is driven 10,000 miles per year, car owners will save nearly 60 million gallons of gasoline in the first year. At $2.50 a gallon, the savings to drivers will total about $150 million.
The New York Times reports that Senators Dianne Feinstein and Susan Collins, who had advocated for stronger mileage requirements, have thrown their weight behind a bill to add $2 billion in funding to the program.
As I noted in the Guardian, some of the program's success is simply lucky timing:
Former federal reserve chairman Allan Greenspan said: "If the clunker programme had been put in place six months ago, it would have been a dud." If auto sales continue to recover, the programme may not be needed six months from now.
The free market fundamentalists can't be happy, but this seemingly inelegant market intervention is having a precisely the intended effect on the two measures that matter most.


Anonymous Nancy Willing said...

How about recycling useable parts, Tom?

7:42 AM, August 06, 2009  
Anonymous Edmund Dohnert said...

This Cash for Clunkers is simply a taxpayer financed gift to the auto industry that has little relevance to reducing US oil demand.

In your example of 250,000 15.8-mpg cars being scrapped and replaced with the same number of 25.4 mpg cars, the total yearly reduction in gasoline usage is 60 million gallons, or 1.4 million barrels. As the US currently consumes roughly 9 million barrel per day of gasoline, the YEARLY savings you claim amounts to less than 4 HOURS of current US daily consumption!

And let us not forget that the energy expended in building the clunkers is already gone, whereas additional energy will have to be expended in building the new cars to replace the clunkers. In this regard it would be far better to just let the clunker population dwindle down through natural attrition. Also, poor people tend to depend on cheap clunkers and the cheap used parts they can buy at junkyards. This program certainly doesn't help them, as it will make those parts less available.

This whole thing is nothing more than moving money from our right pocket our left pocket, while dropping about half of it on the floor. Sure it will appear to stimulate the economy, but so will 'free money' of almost any kind.

It's an illusion. This is akin to trying to stimulate the housing industry by giving the buyers of new houses a $45,000 rebate on a new house provided that they burn their old one down.

8:46 AM, August 06, 2009  
Anonymous Nancy Willing said...

I asked around further and was reassured that the good parts are indeed reserved for recycling. So my old 1999 Ford Ranger can still get parts somewhere.

1:33 PM, August 06, 2009  

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