Cash for Clunkers – one year later

It was a year ago that the government introduced the “Cash for Clunkers” program. So did the “Cash for Clunkers” program work? The jury’s still out on this one, apparently. A recent article suggests that the program was a wash. I remember when the Cash for Clunkers program was going on in August and September of last year, many scoffed at the notion that such a program would actually stimulate the economy. An oft-cited criticism was that the program would only “borrow sales from the future”, such that we’d see a big dip in sales in the months after the program had ended. In short, the program would not stimulate new demand for new car purchases overall. My view is that I agree that the program pulled demand forward, creating a large drop in demand for new cars immediately after the end of the clunkers program; however, I feel that there are other considerations to ponder about before arriving at a conclusion. One way to think about whether the program was successful or not is to consider what would’ve happened if there wasn’t the Cash for Clunkers program.

Consider the timing of the Cash for Clunkers program: The program ran during the peak season for auto sales (dealerships in August are feverishly trying to sell off their inventory before the new models arrive in September). Dealerships also probably did not feel a need to discount the vehicles as much as they would’ve without the clunkers program, because they saw the government check as a government-sponsored “marketing fund” for their advertisements, which may have increased their revenues per unit (RPUs). Also, because the program garnered a lot of press, dealerships piggybacked off the buzz by spending more on advertisements, which increased sales during that period (source). And if you were driving a car that’s at least 5 years old–a decent number of folks out there–and you aren’t exactly loaded, wouldn’t you at least be curious to check whether your car qualified for the program? I’d think that it would get more people to flirt with the idea of buying a new car (that would not have even entered one’s consciousness in a bad recession, otherwise), which at the very least helps to divert some of the attention away from all of the economic woes one read about in the news. The consensus out there is that the auto sales and car manufacturing industries during those two months likely would’ve seen lower sales, if there wasn’t a clunkers program. In that scenario, the media would’ve jumped all over the state of the auto sales industry, and report it as a harbinger of worse things to come (e.g., an especially weak retail shopping season). This would’ve further depressed consumer confidence. Perhaps more dealerships would’ve closed. Car manufacturers would be in even worse shape than they are today.

Consider that the Christmas shopping season immediately follows the auto industry’s peak season (which may be a reason why the program was so short?). Perhaps if there hadn’t been this program, consumer confidence levels would’ve been even lower during last year’s Christmas shopping season, resulting in a lower GDP, etc. Some would argue that the clunkers program really hurt retail sales during the Christmas shopping season, I presume, because car buyers who cashed in on the clunkers program have no more money to spend after a car purchase. However, I’d say that only a small percentage of the population (those who bought cars) would be affected whereas a further weakened economy (if one buys the argument that the clunkers program helped) and the resultant decreased spending would’ve affected many more consumers.

Quite frankly, I don’t know whether the program worked. Not ready to side one way or the other just yet. Just some things to consider, that’s all.