More Unintended Side Effects of Cash for Clunkers

Even when government programs succeed, they fail.

The "Cash for Clunkers" program (CfC) ended ahead of schedule because it ran out of money, but it crammed a lot of auto sales into July and August.  It's obvious that some customers delayed buying cars because they heard the program was about to start and that others rushed to buy when they thought the program would end.

Thus, the government program delayed sales that would have happened in past months and pulled sales that would have happened in the next few months into the present.

We believe that the government didn't create any actual new sales because people would have replaced their dying cars anyway, but that can be debated forever.  Now that the short-term results are in and we have some facts, let's see what CfC actually did.

Detroit Lost Market Share

In "Toyota Tops List of Cash-for-Clunkers Winners," the New York Times reports:

The cash-for-clunkers program turned out to be a boon for Asian automakers and the small cars they specialize in.

While American government officials hailed the monthlong program, which ended this week, as an overall stimulus to the economy, the biggest winner was Toyota, which accounted for 19 percent of all sales and had two of the top three best-selling models. [emphasis added]

It's not at all surprising that a US Government program would benefit foreign car makers over Detroit.  We've reported that the last time our government negotiated a limit on Japanese imports, the program ended up so favorable to the Japanese that they were willing to extend it while GM wanted it ended.  As one would expect from history, CfC benefited foreign businesses more than it helped American firms.

What's worse, CfC helped foreign car makers gain market share.

Detroit's three automakers - General Motors, Ford and Chrysler - accounted for 38.6 percent of the vehicles sold. That figure is substantially less than the 45 percent combined market share that the Detroit companies posted in the first seven months of the year.

While Detroit had a 45% market share in the months before the "cash for clunkers" program, their share during the program was 38.6%, a drop in market share of nearly 7%.  If we ever get back to selling 10 million cars per year, a 7% market share loss translates to 700,000 cars that Detroit won't sell.

That's serious, particularly if people who bought foreign cars for the first time end up replacing them with foreign cars instead of switching back to Detroit.  History shows that when a buyer switches from Detroit to a foreign make, it's extremely difficult for Detroit to get him or her back.

We won't know for a while, but if "cash for clunkers" results in a permanent 7% loss in Detroit's market share, we taxpayers will have a very hard time getting back the billions we poured into GM and Chrysler.  It's more likely that union pressure will force the government to continue to subsidize Detroit as they continue to subsidize Amtrak's Trains to Nowhere.

No Help to Consumers

The Times quoted Ray LaHood, the transportation secretary, as saying, "This is a win for the economy, a win for the environment, and a win for American consumers."

The summer economy may have won in terms of cramming a lot of sales into July and August, but we doubt that it was a win overall because those sales would have happened anyway.

The Times believes that there will be an environmental benefit, "albeit a small one," because the cars which were bought get better mileage than the cars that were turned in.  The trouble is that when driving costs drop, Americans usually make up for it by driving more.  There may be no net environmental benefit at all and driving more will produce more road congestion.

What about benefiting the consumer?  Didn't buyers benefit by paying less because the government subsidized their car purchases?

Not really.  We've reported that when the government threw money at the education system in the form of student loans and Pell grants, colleges raised their prices and hired more administrators to handle the paperwork required by the government loan program.

Given the smell of government money, it would be no surprise if car dealers raised their prices just as colleges did.  Sure enough, a friend who bought a car before CfC wrote:

I purchased a new Honda Accord about a month before CfC in Northern Virginia.  I talked them down from a $24,500 MSRP to $19,800. I talked to the saleswoman during the initial CfC week and she said they weren't going lower than $22,500 on those same Accords, if the person even talked them down.  So poor folks could have had the car for $19,800 in the weeks before the program or they could pay $22,500+ with the program, if they even negotiated that low (which is probably not the case for a lot of folks).  Net difference is around $1,800 savings max - big deal.

If the government paid dealers $4,500 and customers saved $1,800, most of the money went to dealers, not to consumers.  Big deal, as my friend says, but entirely to be expected.

This is consistent with the way our government has worked for a long time.  Tom Pawlenty points out that our educational system is "Cash for Flunkers"; the worse the public schools do, the more money we shower on them hoping they'll use it to improve.  They never do, of course, because then they wouldn't have a reason to demand more money next year.

Instead of spending the extra money on students, they boost salaries and benefits.  Why would we expect any public benefit from any government program?

We know that our government can't even give money away properly.  The Boston Herald reports that the American Recovery and Reinvestment Act of 2009, which no Republican member of Congress supported, is "becoming an accounting nightmare for red-faced feds" because 4,000 incarcerated felons received stimulus checks.

Only five Massachusetts prisoners have enough cash left to pay the government back, the DOC [Department of Corrections] said.

What a surprise!  The convicts spent the money and can't pay it back!  No doubt, being convicts, they know of someplace they could get the money if they really felt they needed it, but government is supposed to be discouraging crime.

Bottom Line

The New York Times report combined with our earlier CfC article gives the overall bottom line:

  • CfC delayed sales into July and pulled future sales into August, but it's not clear that any new sales were generated.
  • Environmental benefits are slight at best.  If people end up driving more as they usually do when driving costs drop, there may be no environmental benefit at all.
  • If gasoline consumption actually goes down, then there would be an environmental benefit, but CfC will have reduced the amount of gas tax money in the highway trust fund which is used to repair roads.  Bad roads lead to delays and congestion, which waste gas and harm the environment.  So we're back where we started.
  • CfC shifted the automobile market against Detroit by nearly 7%.  If their loss of market share is permanent, they'll need more government subsidies in the future, not less.
  • Most of the CfC money went to dealers because they were able to raise their prices.  Consumers benefited relatively little.
  • CfC cleared out dealer inventory.  Normally, dealers have an end-of-year sale to get rid of the old models and make room for the new.  This won't happen now because the old models have already been cleaned out.  Thus, fall buyers won't be able to save money during the traditional model changeover sales.
  • Many of the clunkers were paid for.  The buyers now have loan payments and they'll find that registration and insurance both cost them a lot more because their new cars are more valuable than the clunkers were.
  • Destroying clunkers means that used car prices will go up, and recycled parts for older cars will be less available.  Poor people who buy used cars will end up paying more for the cars they need to get to work and having a harder time fixing them.  Some will lose their jobs because they can't afford to drive any more.
  • The destroyed clunkers reduce the need for independent auto mechanics, since new cars mostly get serviced at the dealership under warranty.  Some mechanics will lose their jobs; some small local businesses will fail.

CfC shows that government can't even give money away and accomplish any sensible objective, as if we needed any more proof of that.  The most important lesson to learn from CfC is that getting government any more involved in health care will be hazardous to our health.  Will the "public option" turn out to be "Cash for Croakers?"

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Economics.
Reader Comments
Correction: On the vote to extend the CfC program with more funding MONTANA's Republican voted FOR the extension after voting against it initially.

In my book it's as though he backed from the beginning -- a HUGE disappointment!
August 31, 2009 10:28 PM
Add Your Comment...
4000 characters remaining
Loading question...