News Cut: August 8, 2009 Archive

What's the measure of success for Cash for Clunkers?

Posted at 8:29 AM on August 8, 2009 by Bob Collins (15 Comments)
Filed under: Economy

Philip Greenspun, the MIT prof and computer sciences guru, asks an interesting question today. If the U.S. didn't spend billions on Cash for Clunkers, what could it have spent its money on?

37 percent of Americans don't have broadband Internet at home (source). If we spent the Cash for Clunkers money on Let's Try to Catch up with Korea (95 percent of households with broadband, typically much faster than ours (one source)) a lot of Americans might not have needed to make so many trips in their cars because (1) they could work from home, (2) they could shop from home, (3) they could get information from home, (4) they could find out, from home, that some place they were planning to go was in fact closed.

Cash for Clunkers has been hailed as either an environmental program (generally discredited by most environmentalists) or an economic boost, the effects of which are far from clear.

Some analysts have suggested people who bought cars under the program, probably would've bought them anyway soon. In Annie Baxter's story, Scott Lambert, of the Minnesota Automobile Dealers Association, disagrees:

"Most of the dealers think these are just conservative people who had hung onto their cars for a long time and took advantage of this, and probably would not have come in if not for this program," said Lambert.

The problem is we don't know and never will know. If the unemployment rate drops over the next few months, does that mean it worked? If it goes up again, does that mean it doesn't? If Minnesota's sales tax collections go up, perhaps that's attributable to new cars, but what if it stays flat or goes down? We know that consumers have paid down their debt in recent months and that's now a bad thing. But now they've got car loans, a big sales tax bill, and higher auto insurance payments. Does the injection of cash into the economy now offset their inability to spend more later? Will the number of auto jobs saved/created, offset the number that are on a pace to be eliminated?

In the unemployment figures released Friday, factory employment in the U.S. dropped by 52,000 but some auto workers didn't get laid off for summer retooling. Considering that some union contracts call for them to get paid -- fairly generously -- during layoffs, there may not be an economic bounce from that fact unless jobs were going to be eliminated permanently. And that's still the plan for struggling U.S. auto industry. How do we factor in the big boost in advertising cash to radio and TV stations and newspapers?

What exactly will be the measurement for success of the program?

"There's no real way to calculate it without making a bunch of assumptions," Lee Schipper, a researcher at the University of California, Berkeley, and at Stanford said in a New York Times' attempt to measure the program.

... Seven years from now, when cars have to average 39 miles a gallon, what will we think of a government program that enticed hundreds of thousands of consumers to buy vehicles that got 30 miles a gallon (and that in 2016 will be middle-aged)? Had the program not existed, some of those buyers might have waited until 2012, when the new mileage rules begin to be phased in.

But in the end, "cash for clunkers" may help undo a previous government program: for years, small businesses got a tax break for buying S.U.V.'s, but only if they were the very largest -- at least 6,000 pounds.