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By all measures, cash for clunkers has been a wild success. More than 700,000 cars have been sold in about 3 weeks. Even though some claim that only 200,000 of those would not have been sold at some point otherwise, that’s still huge. And all of this has cost $3B of taxpaper money.
The leverage, however, has been huge. If the average sale is $20,000, and the average rebates is $4,000, there’s a 5x multiplier on a boost to the economy. I don’t know what other stimulus funds have had a 5x boost.
I strongly feel we should reduce the cash for clunkers fee to $2,000 for two months, and then $1,000 for two months and allow up to $5B or $10B more, since we can then get 10x or 20x multiplier at that reduced amount.
I feel that we need to find more of this kind of stimulus – if we are going to provide stimulus at all. We gave $50B to the car companies immediately and got nothing like this bang for the buck – for less than 1/5th that amount we could do so much more.
Am I missing something here? I’d love to hear what any downside of this could be.
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Cash for clunkers we have in Europe also, in some countries is 2000€(~2800$) and in other is 1000€ (~1400$).
The multiplier should only be applied to the cars that would NOT have been sold without the rebates. So 200k cars x 20,000$ = $4B
So $2.8B of rebate money produced $4B in economic activity, a 1.4x multiplier.
That still looks like a good multiplier in my books. But your hope that reducing the rebate to get better multipliers might not work, as the additive amount of cars would level off, perhaps faster than the rebate. We don’t know if the multiplier increases or decreases as the rebate is increases, but I am guessing that it increases.
1) Because the CARS program is so discriminatory, it doesn’t have smooth demand creation. People who had vehicles ineligible for CARS face higher costs of supply (because car companies are charging more in offset of the government rebate). As a result, there are certainly some number of sales that WON’T happen because of those people who don’t qualify for the rebate.
2) As you note above, 500,000 cars would have been traded in- absent the CARS program. These 500,000 cars would have generated additional economic activity as they had been sold and used by others to produce goods and services either trough parting or cheap transportation.
I agree with christian that the multiplier is closer to 1.4x, and I’m not sure if the depressed demand and destroyed capital would offset this multiplier. Nevertheless, we should keep those points in mind…
Well of course any program that provides free money will always be a “wild success”. Its funny how even the most liberal neo-socialist Democratic congressperson is praising this program when it is in effect a directed tax cut of sorts. Bill since you are enthralled with the multiplier effect, just think what the effect would have been if half of the $700 billion stimulus package would have been in the form of tax cut rather than inefficient farce that has been proffered? Now the downside of this program is that even with the slow taper you suggest, there may be a new drought in new car sales until the economy is healthy enough to pick up the slack. Its also worth pointing out the error in your math stemming from the fact that a large percentage of cars purchased under the program were Japanese and much of the net profits those manufacturers realized will be repatriated to Japan and not multiply through the U.S. economy.
to bad my clunker didn’t qualify
even though its 20yrs old i still get better gas millage than almost any American car made at the time. gotta love this Japanese engines 
The multiplier should only be applied to the cars that would NOT have been sold without the rebates. So 200k cars x 20,000$ = $4B
So $2.8B of rebate money produced $4B in economic activity, a 1.4x multiplier.
That still looks like a good multiplier in my books. But your hope that reducing the rebate to get better multipliers might not work, as the additive amount of cars would level off, perhaps faster than the rebate. We don’t know if the multiplier increases or decreases as the rebate is increases, but I am guessing that it increases.