Wednesday, June 30, 2010

Cash for Clunkers

Cash for Clunkers: A Retrospective

Top-down industrial policy carried out through the sheer force of incentives is welcomed by behavioralist Washington.

Little GTO, you're really lookin' fine
Three deuces and a four-speed and a 389
Listen to her tachin' up now, listen to her why-ee-eye-ine
C'mon and turn it on, wind it up, blow it out GTO
— Ronny and the Daytonas

When I look at a 1970 Pontiac GTO, I don’t think of old metal. I think of sideburns, sexuality, and back seats that ensured Gen X got here just fine. I see my parents riding to FM radio on a summer night, racing beneath boulevard lights, or taking on the world. With 455 cubic inches of V8, the GTO is the quintessential muscle car. But it has creases and lines that suggest the curves of a woman. To look at that car is to see a time machine that travels to a place where long-haired gods and goddesses rumble over the earth dazed and confused, longing to be free.

To look at that car is to see a time machine that travels to a place where long-haired gods and goddesses rumble over the earth dazed and confused, longing to be free.

By 1973, muscle cars were still cool. But stagflation had set in after embargoes by the Organization of the Petroleum Exporting Countries, price controls, and wacky monetary policy. Oil and energy prices rose. A few years after that, Shi'ite fundamentalists overthrew the Shah in Iran. Energy prices rose again. Before we knew it, it was 1980. The Carter administration did a lot of backward things, like make people queue for gas. But here's a thought experiment: What if at the height of the energy crisis the president had decided to pay Americans to destroy ten-year-old cars so they would go out and buy new Datsuns? How many of those Pontiac GTOs would be around today? Or Ford Mustangs, or Dodge Challengers? Despite the fact that a 1970 GTO was still considered a pretty cool car in 1980, it had not yet been infused with 40 years of romance. Now, that essence lives in every part—in its "originality."

Classic car enthusiast Gabriel Dellinger explains it this way:

Originality is a major consideration when thinking about a classic car. If a homeowner improves the kitchen or replaced the carpet with new hardwood floors throughout, nine times out of ten, the home's value will increase. Not so with classic cars. “Numbers Matching” is a term thrown around when a serious buyer is looking for a near-perfect car—one that looks just like it did in the ’60’s and ’70’s when it rolled off the line. To the layman, the numbers that match are usually casting numbers and dates, which are found on just about every part. Every alternator, water pump, leaf spring, and transmission can be verified as original equipment. The more items documented according to factory manuals, the better a seller's chances are of getting a good appraisal.

Dellinger described rarity and other factors that go into valuing a car. When I presented him with the thought experiment above, he said: "Imagining Carter destroying classic cars is, for me, sort of like thinking about December 7th, 1941."

Others would say cars just aren't built like that anymore—that Mustangs and GTOs were one of a kind and that recent cars will never have the magic. It is difficult to think of a much more recent used car as ever being a classic. Ten-year-old cars, for example, haven't had enough time to soak up the juju. Nor are they likely to be as rare. But the value of something cannot be determined by politics. And the future value of something certainly cannot be determined today. All value, present and future, lies in the eye of the beholder.

Jack Sprat could eat no fat
His wife could eat no lean
And so betwixt the two of them
They licked the platter clean.

And so it goes for everything. One man's trash is another's treasure. One person's dingy minivan is another's soccer chariot or rolling speaker box. If values didn't work this way, eBay wouldn't exist.

Socio-economic behaviorists in Washington deny the subjectivity of value. Instead, they try to determine what "society" should value and, in the process, overlook distinct values you or I might hold dear. Who would have thought that a half-million myriad preferences of individuals buying, selling, and driving cars in the marketplace—a massive, natural ecosystem—could be annihilated by a single policy? Who would have thought a half-million perfectly good cars would become the detritus of the Skinner Box state?

Washington technocrats took inspiration from Europe when they started the Consumer Assistance to Recycle and Save Program, more popularly called “Cash for Clunkers.” Abwrackpraemie, or "wreck rebate," had been Chancellor Angela Merkel's rather conspicuous economic stimulus measure in Germany. Evidently, it captured the imagination of President Obama's new cadre of functionaries. Germany's system paid "$3,320 to people who scrap a car that's at least nine years old and buy a new car instead," wrote Jack Ewing in Der Spiegel.1 A number of countries, including the United States, followed suit. In the United States, $4,500 was more than enough to make people behave destructively.

One person's dingy minivan is another's soccer chariot or rolling speaker box. If values didn't work this way, eBay wouldn't exist.

Cash for Clunkers had a powerful twofold justification. First, America was in the middle of the Great Recession. Jobless rates were already approaching 10 percent—in Michigan, 15 percent. Second, cleaner air and better gas mileage is good and, for some, the future of the planet hung "in the balance."2 Questions about how many jobs or how much clean air a subsidized Volvo-cide would purchase would conveniently be ignored by millions of car-crazed people with $4,500 coupons burning holes in their pockets. They could rationalize taking the government pellet for the sake of vaguely articulated values like keeping people in jobs and cleaner air. Jobs? Air? A brand new car with better gas mileage? Why not? There were visible benefits to Cash for Clunkers. But as with so many other government stimulus policies, there were tremendous invisible costs and deleterious consequences.

Costs and Consequences

It wasn't easy, but the following is my attempt to fit shards of this broken policy into a kind of "top ten" list of those costs and consequences:

1. The policy concentrated benefits on political interests. Because the stimulus focused on the auto industry, many wondered whether the policy was a means not only to rescue a bloated, wasteful U.S. auto industry, but to pay back the unions—particularly the United Auto Workers—for their support for presidential candidate Barack Obama and the Democratic Party in the 2008 election. The economy and the environment provided a moralistic cover. But keeping Detroit on life support was an industrial policy Democrats couldn't fail to undertake if they were going to maintain perpetual power.

Questions about how many jobs or how much clean air a subsidized Volvo-cide would purchase would conveniently be ignored by millions of car-crazed people with $4,500 coupons burning holes in their pockets.

2. The policy had the effect of sucking revenues from other industries ailing from recession. In other words, if people are paid to spend money on cars, they're less likely to spend money in other sectors. If people have new car payments, they're less likely to visit restaurants, shop for new furniture or a computer, or even give to charity: "There's a whole industry that helps support the charities, including the auctions, tow truck drivers, telephone answering personnel; and all of those people are going to be hurt," said Pete Palmer, a co-founder of the Vehicle Donation Processing Center, which handles the sales of donated cars for charitable organizations. "Somebody has to be pretty darn altruistic to do a car donation over the Cash for Clunkers program if they want the new car," Palmer lamented.

3. The policy destroyed goods that had value, which means it destroyed value. Professor John Quelch of Harvard Business School writes: "A $2,500 incentive would have attracted the older, most fuel inefficient used cars. Instead, a $4,500 incentive attracted many perfectly serviceable vehicles. Because of government concerns over fraudulent recycling of trade-ins, vehicles had to be destroyed." Quelch shows that even smaller incentives would have destroyed perfectly serviceable cars. As we alluded to above, many potential "classic cars" of 2050 have been obliterated. Whatever the incentive, this also illustrates that present and future value can be destroyed by degree.

4. The policy distorted the used-car market by reducing the availability of cars desired especially by the working poor. Why, in the middle of a recession, would anyone want to drive up the price of goods used by society's most vulnerable people? This may be the kind of thing socio-economic behaviorists don't think through; if they do, they're willing to look the other way for the sake of their supplicants. In any case, the mandatory destruction of a half-million used vehicles amounted to the price of basic mobility going up for lower-income people. Used-car customer Jason Boyer of Auburn, Pennsylvania, said: "I saw the cars they were putting in the junkyard, and they were better than what we're driving now,"4 He and his wife had been trying to buy a used car in the wake of Cash for Clunkers.

All of these value-shades—preference rankings followed by actions—are the very stuff of economies.

5. The policies’ stated goals, if met at all, were met inconsequentially. Shikha Dalmia, writing for Forbes, shows improvements in air quality and fuel savings were virtually undetectable: "Even if one accepts [Transportation Secretary Ray] LaHood's numbers, the fuel savings add up to only 72 million fewer gallons of gasoline every year—about what Americans consume in four and a half hours." But Dalmia concluded we shouldn't accept LaHood's numbers, as "the program is effectively paying drivers to trade in their clunkers for—hang on to your recycled hats!—other clunkers." That is, people weren't buying hybrids, but rather SUVs.

6. The policy generated considerable opportunity costs. Even if you grossly overestimate the success of the policy, the costs of forgone uses of the resources are, though impossible to measure, still considerable. In other words, every dollar you spend on x is a dollar you cannot spend on y.

7. The policy successfully purchased a prophecy that would have fulfilled itself within two or three months. Most of the people who participated in Cash for Clunkers would have bought cars soon anyway. As car review company Edmunds famously pointed out, the policy shifting buying patterns forward a few months at most. Here are the results: "Nearly 690,000 vehicles were sold during the Cash for Clunkers program, but analysts calculated that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway, regardless of the existence of the program."5 The analysts also concluded that the program ultimately cost taxpayers $24,000 per vehicle.

8. The policy subsidized people to make unwise purchases. It may take more time to determine this fallout, but—like subprime mortgages and artificially low interest rates—some people had incentives to get into cars they would have wisely avoided.

We might not agree with President Carter's decision to destroy those beautiful machines, but we might agree the justification was actually stronger back then.

9. The policy allowed politicians to claim success despite failure. When any macro-economic policy measure is complicated and convoluted, it's easier to obscure what goes wrong. This is exactly what Congress and the Obama administration did in this case. A lot of politicians deluded themselves so thoroughly that Congress went back for another round, extending the program. The "popularity" of the program, which was defined simply as people's willingness to take free money, made "success" a foregone conclusion. Not everyone was buying it, of course, but Congress was undeterred.

10. The policy was an old-fashioned wealth transfer. "A and B put their heads together to decide what C shall be made to do for D" wrote William Graham Sumner in 1883. "The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C's interests, are entirely overlooked. I call C the Forgotten Man." But let us not forget C. Government resources come from somewhere, as did the cash for all those clunkers.


Some might argue that Cash for Clunkers hastened "creative destruction." But this would be an unfortunate equivocation. The idea of creative destruction is that market capitalism is the best system for supplanting obsolescence, increasing efficiency, and giving rise to better-faster-cheaper goods. Joseph Schumpeter, who best expressed the phenomenon (and coined the term), would have bristled at the suggestion that government largess could assist this process. Like evolution, creative destruction is a blind, undesigned process of Entwicklung. Paying people to destroy value in order to privilege an industry is like paying teenagers to vandalize windows to enrich glaziers.

The policy was able to push enough of a GDP bump to rent the economic headlines for a quarter.

Even small instances of unnecessarily lost value are significant. Take the difference between a $3,000 and a $4,000 vehicle. Between these price tags lie meaningful gradations—at least to most of us down here on earth. I don't mean only that one vehicle or the other may be a better candidate for getting "tricked out,"although that may be true. Rather, it has to do with value-by-shades that isn't discernible to a technocrat who drives a late-model Lexus from his comfortable home in Northern Virginia to a job crunching numbers in D.C. What may, to him, represent the negligible slide of a plotted point could, to the used-car buyer, mean the difference between owning a four-cylinder and six-cylinder truck. One of these will be better equipped to haul materials or pull a boat. Just $300 could be the difference in price between two cute Honda Accords with comparable mileage, only one is an automatic. If the daughter going off to college doesn't know how to drive a stick-shift, it may turn out that her father must spend the next three Saturdays with her practicing the clutch in an empty parking lot. All of these value-shades—preference rankings followed by actions—are the very stuff of economies. Each may seem, in isolation, like a teardrop in an ocean. But taken together, they are as vital as the molecules to the chair you're sitting on.

Value can go deeper than the instrumental.6 In America, the car is itself a metaphor for a human being, and the road is life's journey. Our romance with the automobile springs from a culture of Henry Ford-style entrepreneurship, of big skies, and of liberty-in-mobility. At the dawn of the twentieth century, freedom wasn't just a philosophical ideal anymore. It became practice. Within that collective experience, there are a million different stories of individuals and their cars, from the hatchback just big enough to fit in the picnic basket to the teenager's two-door with a regrettable racing stripe. We ascribe things to our cars, like spirits. They symbolize moments and places to us. Some people even name their cars. What does it take to wipe out millions of these myriad slivers of meaning? Around $4,000 and some sodium silicate.

Welcome Back, Carter

So let’s return to the thought experiment: what if President Jimmy Carter had signed off on destroying all those classic cars? The primary grounds for Cash for Clunkers—the economy and the environment—were certainly in place back then. Indeed, if the justification was an issue of degree and not of kind, Carter might have been more justified. In other words, we might not agree with Carter's decision to destroy those beautiful machines, but we might agree the justification was actually stronger back then (granting the superficial economic and environmental premises). This was, after all, the era of stagflation and smog.

Unemployment had gotten up to 7.5 percent in 1980 and persisted for more than a year. But, worse, inflation had reached a staggering 13.5 percent.7 In terms of energy and pollution, things were far more dire than they are now. Ambient carbon monoxide was 75 percent higher in 1980 than in 2006, for example. Ambient lead was 96 percent higher. Sulfur dioxide was 66 percent higher.8 Indeed, real air pollution is so much lower now than it was in 1980—having fallen steadily in the intervening years—that the Environmental Protection Agency has had, on a numerous occasions, to revise the standards downward. And yet more than twice as many cars are on the road today as in 1980, according to the Bureau of Transportation Statistics. Improvements in air quality between Carter and the end of President George W. Bush are simply staggering.

If the net economic benefits were a mirage and the environmental benefits were imperceptible, how could something like Cash for Clunkers happen so easily? Nobel laureate James Buchanan may have put it best. He calls it “politics without romance":

If the government is empowered to grant monopoly rights or tariff protection to one group, at the expense of the general public or of designated losers, it follows that potential beneficiaries will compete for the prize. And since only one group can be rewarded, the resources invested by other groups—which could have been used to produce valued goods and services—are wasted. Given this basic insight, much of modern politics can be understood as rent-seeking activity. Pork-barrel politics is only the most obvious example. Much of the growth of the bureaucratic or regulatory sector of government can best be explained in terms of the competition between political agents for constituency support through the use of promises of discriminatory transfers of wealth.9

All that was left in 2009 was to send in Washington's finest Skinnerian technocrats—et voila! A striking example of socio-economic behaviorism. Though relatively modest when compared with other stimulus policies of the Obama administration, Cash for Clunkers stood out as a bold experiment in recklessness. By suddenly changing the buying patterns of so many in order to redirect their preferences to goods in a single industry, the policy was able to push enough of a GDP bump to rent the economic headlines for a quarter.

In many respects, the policy was no different from any other subsidy. But Cash for Clunkers was unprecedented in that it was a hasty-but-temporary measure in which top-down industrial policy was carried out through the sheer force of incentives. As with the bailouts of ’08 and ’09, the failures of the policy were hidden well enough to embolden government officials in the future. They could always claim their policies helped to avert economic catastrophe, though they only extended the economic malaise. If nothing else, Cash for Clunkers allowed America's most resource-glutting corporations to slouch onward—to tread on the skeletons of stillborn businesses, to host union parasites, and to elude creative destruction for a few more years.

Max Borders is a writer from North Carolina. He recently contributed a chapter to a new anthology called New Threats to Freedom. He earns a crust as executive editor at Free To Choose Network.

FURTHER READING: Philip Levy examines Cash for Clunkers and the stimulus in “The Straw Stimulus” and John Graham discusses “Obama’s Auto Pitfalls.” Read THE AMERICAN’s auto columns by Ralph Kinney Bennett. John Chapman decried “The Folly of Cash for Clunkers,” while Michael Barone says “Beware the Cost of Unintended Consequences."

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