Tuesday, August 4, 2009

Cash for Clunkers: The Money is Actually Being Spent

I think one thing is being missed by economists criticizing the cash for clunkers program (see freakonomics), the money is actually being spent, which seems to be the point of a stimulus to get people to spend money. I’m a little reluctant to trust the estimates of a sales analyst from GM, but one quoted in the LA Times suggests that the cash for clunkers has increased sales 115,000 since the program’s start.

A back of the envelope calculation using an estimate of $27,000 per car (average US car sale price in 2009), suggested the 1 billion dollar program created over 3 billion dollars in sales. The impact of a stimulus is often tied to a concept economists call a multiplier (see detailed description here), in short the multiplier is for each dollar the government spends how many times is that $ spent in the economy. A multiplier of 3 (as in my back of the envelope calculation) would be on the high end of the impact of government. This doesn’t even take into account what the car dealer and companies will do with the extra sales, which calculating the multiplier for cash for clunkers should take into account.

Sure there is a lot of other things to consider, but the money is being spent quickly, that's worth noting.

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1 comment:

rjgitter said...

Just a few thoughts.
1. We don't know for sure whether this is stimulating car sales or just changing when they are being bought. If someone was thinking about trading in their clunker next year, they might buy now. Since not all expected purchases are realized, it might increase some purchasing, but the net effect might be mostly to change WHEN the cars are purchased.

2. One of the arguments for the program is that it improves the environment. Does it? If people use a car longer, it means less manufacturing and hence less transportation of auto inputs. Is there a net gain? Probably. How much? Hell if I know.

3. Why do we subsidize autos, per se? (Disclosure to anyone aside from Seth reading this. I was born and raised in Detroit.) One Arkansas congressman said there were a lot of chicken farms in his district. So why not "Cash for Cluckers?" One reason for the $'s to autos is the gov't has large shares of GM and Chrysler. But, gov't policies based on ownership is one of the fears that opponents of bailouts had.

4. But, I still favor the Cash for Clunkers. Why? Right now confidence is a big thing. If this helps restore consumer confidence and hence spending, it is a good 1-3 Billion spent.