When the “cash-for-clunkers” program ran out of funding after only a few days, Congress quickly injected another $2 billion into the program (which was first authorized with funding of $1 billion). Auto dealers across the nation were hailing it as a huge success.
The intent of the program was two-fold: to improve the overall mileage of America’s auto fleet by taking old, inefficient gas-guzzlers off the road but, more importantly, to stimulate auto sales and rev up domestic auto manufacturing. And it did both. GM added shifts to its Malibu and Cobalt manufacturing plants to replenish depleted stocks, putting 1300 auto workers back to work.
So the program was a success, right? 700,000 cars and trucks (as reported in the above-linked article) were replaced by more efficient models. Sales of domestically-produced vehicles were boosted from their recession level lows.
So why was the program so unceremoniously terminated Monday by an administration that has played fast and loose with cash to boost the economy? And why am I calling it an abysmal failure? Because it was eroding our GDP (gross domestic product) at a frightening clip, undoing the effects of other stimulus spending. More than anything, the Obama administration would like for 3rd quarter GDP to actually show some growth, however modest. (After all, GDP is the gauge by which the end of the recession will be judged.) But, if it misses that mark, the blame may very well lie at the feet of the “cash-for-clunkers” program.
To understand, let’s do some math. As reported in the linked article, 700,000 vehicles were sold in this program, at a cost to the government of $2.87 billion. But 80% of these vehicles, or approximately 560,000, were imports. (This figure doesn’t match the percentages reported in the linked article because some of the sales by GM, Ford and Chrysler were also imports from Mexico or Korea, like the Chevy Aveo imported from Korea.) If we assume the average value of those imported vehicles to be $17,000, then almost $10 billion worth of vehicles were imported, and every dollar of imports is subtracted from GDP. (Dollars spent on imports are lost and no longer available to spend in the domestic economy.) So, for $2.87 billion in taxpayer expenditures, the government managed to reduce GDP by almost $10 billion. A little of this was offset by boosts in domestic manufacturing, but not much.
And this $10 billion erosion in GDP took place in the course of only about three weeks. At that pace, if kept going, the program would have eroded GDP at a quarterly rate of $43 billion. Actually, the effect upon GDP is doubled when you consider that those imported vehicles could have been produced domestically. In addition to the subtraction for the imports, an equal amount of domestic business was lost.
Making matters worse, the share of the “cash-for-clunkers” that went to domestic auto makers fell below the pre-program market share of those manufacturers. In other words, the program was actually eroding the market share of the big-3, exactly the opposite of what the government – now by far the biggest shareholder in both GM and Chrysler – wanted to have happen.
Now you can see why the program was terminated without any further calls to keep it going. As the administration began to evaluate the data and saw that 80% of the money was being used to boost the economies of Japan and Korea (primarily), their response was surely, “Oh, sh#t!” “This isn’t very smart!”
To its credit, the Obama administration has drawn a line in the sand when it comes to the demise of the manufacturing sector of the American economy – a line that, as owner – it will not allow the domestic auto industry to cross. But, as owner, they are now also faced with the quandary of how to boost domestic auto sales (and thus the entire economy) within the framework of free trade policy it has inherited. Now it can see that stimulating auto sales in a way that doesn’t violate trade agreements doesn’t work. Will it now rely on boosting the quality and competitiveness of American cars? If it does, it will be ignoring decades of experience that proves that that approach doesn’t work either, as imports will simply match them move-for-move. Or will it continue to rely on jaw-boning other nations to start importing more American products? That approach too has been proven a resounding failure. Sooner or later, either the Obama administration or some subsequent administration must come to the realization that failed trade policy lies at the heart of our economic woes.