Clunker: Good or Bad?

Now that the dust has settled on the so-called, "Cash for Clunkers" program it is a good time to look back and see if it did what it was supposed to do.

A quick trip to www.cars.gov revealed the first official release from the gov't which briefly described the purpose of the program, "With this program, we are giving the auto industry a shot in the arm and struggling consumers can get rid of their gas-guzzlers and buy a more reliable, fuel-efficient vehicle,” Secretary LaHood said. “This is good news for our economy, the environment and consumers’ pocketbooks.”

So, if I read that correctly the purposes are:
1. Help the auto industry.
2. Subsidize the purchase of new fuel-efficient cars.
3. Remove less economical cars from the road.

The site also includes statistics for the program and as of 25 September are thus:
C.A.R.S. Program Statistics
Friday, September 25th, 2009
Voucher Status (8:15 a.m. EDT) Number of Vouchers Paid: 649,984
Dollar Value: $2,737,444,000
Number of Vouchers Approved for Payment: 14,834 Dollar Value: $ 61,633,000
Number of Vouchers Paid/Approved for Payment: 664,818 Dollar Value: $2,799,077,000

At first glance dividing the dollar value by vouchers would indicate that the cost per vehicle sold was $4,215. But was it really?

Let's consider the situation regarding a consumer purchase at any given moment: 1) Those who are going to buy, 2) Those who might buy, and 3) Those who won't buy. In order to make a correct assessment of the cost per "Cash for Clunkers" transaction we need to understand how many individuals were going to buy with or without the program and how many were in the might buy category.

As Gary Becker noted in his blog, "Hundreds of thousands new cars will be purchased under the program, but many of these purchases would have occurred later in 2009 or in 2010 instead of during the five week window of the clunkers program. There is little value to the economy in subsidizing consumers to buy cars a few months earlier than they would have bought them anyway.

To be sure, some cars would be purchased under the program that would not have occurred during the next 18 months, if at all."

For the sake of argument, let's say that 1/3rd or 33% of the cars purchased in the Clunker program would have been purchased with our without the program and that a full 2/3rd of the cars purchased would not have been without the program.

That changes the dynamic of cost-benefit significantly. The cars purchased falls from 664,818 to 438,779 and price per car increases from $4,215 to $6,379. Was it worth it? Hard to tell. PhD students will be mulling over this public incursion into the private sector for years to come.

Bottom line: The Federal Government shelled out $2.7 billion dollars to subsidize the purchase of 664,818 automobiles. It is very likely that the overwhelming majority of those cars would have been sold without the subsidy over the next 12 to 18 months thus making the value of that subsidy questionable.