September 5, 2014 4:00pm by David Farrar

Cash for Clunkers

John Sununu at the Boston Globe writes:

POLITICIANS HAVE difficulty learning from their mistakes; it’s tough enough to just acknowledge them. Admitting mistakes leaves elected officials feeling exposed and vulnerable. And why bother, when the partisan divide encourages both sides to endlessly litigate the rights and wrongs of past legislative choices?

Cash for Clunkers should be the exception. Enacted in 2009, the $3 billion program was intended to stimulate the economy by offering $4,500 credits for trading older vehicles for newer, more fuel-efficient cars.

I recall the hoopla around that. People said it was visionary. I think some parties even pushed for such a programme in NZ. Yes, here is the Green Party pushing for it.

It was a spectacular failure, at least according to two comprehensive studies. The first was completed last year by the Brookings Institute, a left-leaning Washington think tank. Another, conducted by Texas A&M researchers, was released recently by the National Bureau of Economic Research.

Here’s some conclusions from Brookings:

Using Li, Linn, and Spiller’s (2012) long-term jobs estimate for the CARS program, the program created 0.7 jobs for each million dollars of program cost, resulting in a cost of $1.4 million per job created.

This is presumably what the Greens mean by Green jobs!

Li, Linn, and Spiller’s (2012) estimated reductions in carbon dioxide emissions (including the co-benefit reduction in carbon monoxide, volatile organic compounds, nitrogen oxides, and exhaust particulates) amounts to a cost per ton of carbon dioxide of $91 to $301 stemming from
the program.

The usual cost for a ton of carbon is no more than $25. This was a huge waste of money in an environmental sense.

So why did the programme get accepted and then fail?

First, get caught up in the hoopla. Clunkers produced the type of headlines that politicians dream of: helping people buy cars, better fuel efficiency, the promise of job creation, and the word “cash” in the title. (Spelled with a $, if you please.) It was full of the kind of vague simplicity that has great political appeal, but begins to disintegrate as soon as it comes into contact with the real world.

Second, ignore the reality and complexity of human behavior. Proponents never seriously considered that subsidies would appeal most to consumers who were already considering replacing their vehicles. Both studies showed conclusively that the short-term spike in sales simply represented transactions that were pulled forward in time. Legislators’ belief that a temporary $4,500 rebate would result in sustainable sales growth was wrong from the start.

Lawmakers also failed to consider that the owners of “gas guzzlers” and those able to act quickly on a new car purchase tended to be higher income families. In fact, Brookings’ analysis showed that recipients of the credit were wealthier and better educated than the population at large.

Third, set aside basic economics, including the fundamentals of supply and demand. To justify the fuel savings promised under the program, the clunkers returned to dealers were destroyed, rather than resold as used vehicles. A year later, the resulting shortage of used cars pushed prices up an average of 10 percent.

The emphasis on smaller, fuel efficient vehicles also meant that the cars sold were less expensive than would otherwise have been the case. Consequently, automobile dealers — who actively promoted the bill and lobbied for its passage — saw lower revenues, and less profit, per car. Whether out of desperation or ignorance, they failed to consider the effects of this substitution.

Finally, use the wrong measurement for success. Ironically, early assessments asserted that the program was successful because it was popular. That’s a natural way for politicians to think, but completely meaningless where economics are concerned. (Throwing money in the street might make you popular, but it’s still a terrible idea.) Brookings and the Texas A&M researchers both concluded that across meaningful measures of success — economic growth, job creation, and emissions reductions — performance was abysmal. It was a costly error: by mistaking demand for success, legislators were convinced to throw away $2 billion more on top of the initial $1 billion program.