Trading Clunkers For Imports

According to the Associated Press, six out of ten cars purchased under the "Cash For Clunkers" program are made by Toyota, Honda or Hyundai, even though the number one vehicle purchased is the Ford Focus (probably not coincidentally, a product of the only one of the Big Three automakers that has not yet gone bankrupt).

This isn't too surprising. One of the reasons that Chrysler and GM were forced to go bankrupt is that they were weak in the fuel efficient vehicle segment, which hurt sales first, when gasoline prices rose, and then again, as thrift and the impact of less widely available credit have replaced performance as the main goal for new car buyers.

Chryler's new alliance with Fiat is supposed to return it to the small, fuel efficient vehicle market, but that won't happen in time to benefit from the Cash for Clunkers program which will be long gone at that point. GM's much vaunted Chevy Volt product also won't be ready for prime time before the program ends.

From the point of view of the fuel efficiency and emissions improvement goals of the program, the brand purchased doesn't matter. This also doesn't matter when it comes to creating consumer level stimulus. The program probably has the unintended effect of improving traffic safety as well since new cars have to meet more stringent safety standards and are less likely to have safety features like bumpers or brakes that are defective due to poor maintenance or prior accidents. And, the program may similarly have a largely unintended effect of reducing car theft, because new vehicles have improved anti-theft features. Scraped car are also among the most completely recycled waste products, so landfills won't be growing as a result, although the energy used to create new cars is considerable compared to the energy costs associated with keeping old vehicles in service. Indeed, the surge in scrap metal inventories that the program produces may subsidize domestic manufacturing generally, to some small extent, by reducing the cost of recycled steel.

As I pointed out in a previous post on the program, it also serves as some very expensive but notable market research for car makers by showing that the sales can be expanded dramatically with a few thousand dollars of price cuts per vehicle. This would suggest that GM and Chrysler, which have newly lowered cost structures should consider cutting their prices to compete, except for the fact that lower prices haven't helped them nearly as much as they have helped their competitors who have been more successful in holding the line on price discounts.

As a program to aid the domestic automobile industry and its struggling dealers, the results are not too impressive.

The program is doing as much to help foreign auto workers as domestic ones. Some Toyota and Honda production is domestic, but the percentage is lower than it is for Big Three automakers, and may decline further if Toyota shuts down a California factory that was once a joint venture with GM. Who knew that Congress loved foreign factory workers? Have the worker of the world united in solidarity to lobby this bill?

Then again, what is the point of providing government subsidies to companies like GM and Chrysler where the government already has a majority or plurality ownership? At the corporate level that is an awfully indirect and circular approach to providing economic stimulus. Forgiving amounts owed to, or reducing the interest due on, the government's bailout loans to these companies would do the job much more directly.

Dealers for Toyota, Honda and Hyundai are also much less in need of assistance than dealers for the Big Three, because these Japanese and Korean brands have far few dealerships and growing market share. Indeed, Hyundai has been among the least hard hit brands in the current car sales slump. Big Three dealers, in contrast, must split the minority of Cash for Clunkers sales that were captured by the Big Three among much larger dealership networks. And, many of the dealers for Big Three brands helped by the Cash for Clunkers program, are doomed to be shut down in any case as part of the respective companies' reorganization plans. For these dealers and their salespeople, Cash for Clunkers looks more like a severance package in lieu of unemployment payments, than it looks like a stimulus package. (As a footnote, the notion that people whose hours or pay are reduced, self-employed people, and fully commission compensated salespeople need economic assistance when the economy is weak, despite the fact that they are not actually unemployed, deserves further exploration.)

Cash for clunkers may hurt GM and Chrysler even more in the long run by finally giving consumers who have clung faithfully to the Big Three in the past a push to favor smaller, more fuel efficient imports, breaking a loyalty bond that will impact not just the current purchase, but future purchases.

To the extent that Cash for Clunkers does have the intended effect of reducing aggregate gasoline consumption, it also reduces gas taxes, which in turn reduces the amount of money available to spend on roads and bridges. This is precisely the opposite of economic stimulus spending, although the impact is spend over many years, so most of this anti-stimulus may not hit until the economy is recovering.

I don't have a good enough grasp of the magnitude of the numbers and the economic incidence of the impacts to know if the Cash for Clunkers program comes out ahead on a cost-benefit basis. There are lots of upsides and lots of downsides, and many of them are hard to measure and value. Slumping car sales probably suggest that there is pent up demand to replace old cars, replacements that would have happened but for the financial crisis, that is being met. This bit of stimulus has made its way into the economy very quickly and with remarkably few administrative costs to the government compared to almost any program but an $x per taxpayer stimulus check, another program that hit at almost the same time, possibly multipling the impact of the Cash for Clunkers program.

The program is also probably preferrable to stimulus motivated spending ideas like funding a backup F-22 engine that have a high probability of conferring zero benefit to anyone other than the already highly paid and easily re-employable R&D employees of the defense contractor with the contract. Other big ticket defense programs also look like make-work programs for already well paid, highly skilled individuals with transferrable skills.

If we want to create jobs quickly with defense spending in a way that doesn't sap critical resources from the butter side of the guns v. butter equation and has a big impact on unemployment, weapons programs are not the solution. From a stimulus perspetive, a far better choice is to expand the size of the active duty Army, which has largely outstripped the ability of callups from the Army Reserves and National Guard to make up for the shortfall. From a military perspective this relieves pressure on what is by far the most overtaxed of the four military services (the other, less taxed servics, are the Marines, the Navy and the Air Force). The cost per job created is quite low compared to the cost of creating jobs with defense contractors. This simultaneously takes workers who are disproportionately not college educated out of the highest unemployment rate labor pools, provides an economic safety net for the families of those who enlist (many of whom include above average numbers of children per family), and makes a long term investment in the employability of those who enlist by giving them skills and discipline. It also takes less time to get people onto the Army's payroll than it does to get procurement programs up and running.