Cash For Clunkers Pushes August Sales And Stirs Debate

Helped by Cash for Clunkers, which ended Monday, the annualized selling rate for the auto industry in August is expected to be about 15.5 million, according to Wall Street firm Goldman Sachs. That would be a 16% improvement year over year, and nearly a 40% increase from July.

Goldman fully expects a “pay back effect” in September following the program. The firm also expects the monthly selling rate to remain above 10 million for the rest of the year, with a final sales tally of about 10.5 million, with a tally of 12 million next year. Some other analysts have pegged next year’s selling rate at 12.5 million to 13 million.

Consumer spending edged up 0.2 percent in July with help from the popular Cash for Clunkers program, but household incomes, the fuel for future spending increases, were flat.

Despite the big bump, including for General Motors, Goldman says it expects the automaker, just coming out of bankruptcy, to see a 16% drop in sales, compared with August of last year in part because of a pretty robust selling month last summer for the automaker. Ford is expected to see a 37% increase in sales for August, while Chrysler sales should be up about 5% for the month.

There has been much analyzing, debating and arguing over whether Cash for Clunkers was a good idea or good policy.

One stat I saw contrasted Clunkers with the German scrappage program, pointing out that we bumped up sales by maybe 3%, while Germany saw much bigger sales gains.

One of the flaws in comparing the program too closely with that of Germany is that that Germans have had a far greater personal savings rate than the U.S., and that country has not had nearly the housing bubble we have had, crushing home values and setting off a flurry of foreclosures in the U.S.

That is why Germany, whose citizens have been much wiser in terms of savings and personal debt levels, is coming out of the global downturn faster than the U.S. When the government kicked off its “clunkers” program, citizens were not nearly as strapped and savings poor to buy a new car.

When assessing Clunkers, you can look at some cold hard numbers. As colleague David Welch points out in his blog post, J.D. Power and Associates reckons that 70% of the sales made within the Clunkers program “may” have happened before the end of the year anyway.

Given the growing deficit, was the $3 billion spent wisely? Did we just augment or replace incentives that the automakers would have spent anyway? Libertarians really don’t like Clunkers and programs like it.

My position is that “Clunkers” was good policy for a number of reasons.

1. There is no question that the program brought many car buyers off the sidelines, and gave automakers, and dealers, a shot in the arm not only in terms of sales of the vehicles that qualified, but in vehicle sales in general as the program brought lots of new eyeballs to the entire showroom, not just the models that qualified.

2. The $3 billion had direct impact on the economy, keeping people working, increasing production and shift work at auto companies and parts makers. Unlike other pieces of economic stimulus, the money was allocated and went directly into the economy. The money isn’t sitting on a shelf waiting for building permits to make it through local bureaucracies.

3. Clunkers put a spotlight on the whole idea of trading up in fuel economy. Lots of old Explorers got swapped for Ford Focuses and Toyota Corollas. I believe U.S. public policy must move toward engineering a substantial change in transportation. There needs to be more policy that persuades people to choose their vehicles in a smarter way, to leave a smaller carbon imprint. This Clunkers bill was, perhaps, a start of a recurring series of moves that will create a more fertile atmosphere and public discussion about this.

4. Toyota was the biggest beneficiary, topping GM and Ford, when you consider sales of vehicles subsidized. This was no surprise in that GM had lower inventories of qualifying vehicles. Also, there is a fact of life and public perception linking the Toyota brand with fuel economy in a way that GM’s brands have not achieved yet despite solid gains in fuel economy and the fact that Chevy vehicles beat most of their Toyota rivals in fuel economy model for model.

5. Perhaps the undeniable efficiency of Clunkers will influence policy-makers and lawmakers the next time they draft a stimulus package. Economist Martin Feldstein warned us when the stimulus was being debated that it was not targeted nearly enough to consumer spending. His notion, which I agreed with, was that money should have been highly targeted to spending on specific high-impact sectors—cars, major appliances, home improvement.

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