More on the economics of the Car Allowance Rebate System (CARS); AKA “Cash for Clunkers”

Yesterday, I blogged concerning The economics of the Car Allowance Rebate System (CARS) and the First-Time-Home-Buyer Tax Credit (FTHBTC).  I brought up the topic of economic stimulus but didn’t follow through on it.  In what follows, I will try to make some assessment of stimulus possibilities based upon data reported in the article entitled “Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold, Reports”.

If you read the article referenced above a bit more closely, you’ll notice the following table which compares (annualized) Actual/Forecast sales with and without Cash for Clunkers:

Month Actual (or Forecast) If no Cash for Clunkers Difference
Jan ’09 9.59 9.59 0.00
Feb ’09 9.14 9.14 0.00
Mar ’09 9.69 9.69 0.00
April ’09 9.20 9.20 0.00
May ’09 9.85 9.85 0.00
Jun ’09 9.67 9.80 -0.13
Jul ’09 11.22 10.11 1.11
Aug ’09 14.06 10.45 3.61
Sep ’09 9.19 10.63 -1.44
Oct ’09 10.40 10.89 -0.49
Nov ’09 10.40 10.82 -0.42
Dec ’09 10.61 10.85 -0.24

The numbers in this table indicate annualized auto sales rates (actual or forecast) on a monthly basis during 2009 (the monthly unit sales is calculated by dividing the annualized data by 12, so this implies that in May 2009, 9.85 million/12 = 820,833 new cars were sold in the United States). 

This table clearly indicates that the primary effect of CARS was to change the timing of vehicle sales, and that it had a very limited effect on total volume; specifically, during the months in which CARS was in full swing (i.e., July and August, 2009), more sales were generated than would have been the case had the program not been implemented. The program stimulated temporarily higher sales rates last summer primarily by motivating people who would have bought cars anyway to simply act sooner.  The overall effect of CARS during 2009 is to increase new car sales in the United States by a total of 1.65%, which translates into an additional 170,000 unit sales (obviously, it will be interesting to see how long it takes for new car sales to revert back to the seasonally adjusted trend line).  After the program expired, the auto industry had marginally worse sales than they normally would have expected simply because some of the sales that “should” have occurred in September through December occurred instead during July-August.  Based upon this analysis, I stand by my earlier assertion; i.e., that as far as stimulus measures go, CARS most certainly had a very low (probably close to 0) multiplier effect upon the overall economy.

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