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A Post-'Clunkers' Slump
Auto Sales Plummet as Some Economists Question Program's Effectiveness

By Peter Whoriskey
Washington Post Staff Writer
Friday, October 2, 2009

After the shopping binge inspired by the government's "Cash for Clunkers" incentive program ended, U.S. auto sales plunged in September and the industry sunk back to the depths from which it started, figures released Thursday showed.

The reports of monthly sales numbers confirmed predictions that some of the spectacular gains of August had merely been achieved by moving up sales that would have happened in September.

The results raised doubts from some economists about the effectiveness of the $3 billion federal program as a stimulus.

General Motors' sales fell 45 percent compared with a year ago, and Chrysler's dropped 42 percent. Sales at Ford did comparatively better, declining just 5 percent. Compared with August, however, Ford's sales in September plummeted 37 percent, slightly more than the other two.

Overall, the rate of U.S. sales, which had been climbing since February, returned roughly to their February level for an annualized rate of 9.2 million vehicles, according to figures from Edmunds.com.

Alan Blinder, a Princeton professor who was among the first to push an auto sales incentive program in the United States, doubted it provided much stimulus, in large part because it was in effect for only a month.

"Most of the idea of any stimulus is to pull spending up from the future, but it doesn't make any sense to design a program that only pulls up spending by one month," said Blinder, a member of the Council of Economic Advisers during the Clinton administration. "Why in the world would you make it a one-month program? The Germans didn't do that. The British do that. When I designed a mock version of this I was thinking of it as a one-year or two-year program."

Was the $3 billion wasted as a stimulus?

"Yeah, mostly," he said. "It provided a lift to GDP [gross domestic product], but it was so fleeting."

Touted as a stimulus program that had the added benefit of reducing greenhouse-gas emissions and the demand for oil, the Cash for Clunkers program offered consumers up to $4,500 for trading in older cars for newer, more fuel-efficient models.

Nearly 700,000 cars were sold, with the average new car acquired with the incentive getting nearly 10 mpg better mileage than those that were traded in, according to results touted by Transportation Secretary Ray LaHood and other program supporters.

Rep. Betty Sutton (D-Ohio), who sponsored the bill, says the results economically and environmentally have exceeded expectations. She said the effects of Cash for Clunkers are evident in her home state where GM added a shift of 1,000 workers to the Lordstown Plant after calling back 2000 workers to get assembly lines for the Cobalt back up and running. A Cleveland steel mill hired back another 800, she said.

"We knew it would spur sales, and it did -- in a fast and furious way," she said.

Economists differ, however, over how effective the incentive was in creating sales that would not have happened in the near future anyway.

The White House Council of Economic Advisers estimated last month that the program would raise car sales for the year by 330,000, but other groups offered estimates that were both higher and lower.

Sutton and some economists also say the program boosted consumer confidence.

"In a long-term theoretical sense, Cash for Clunkers doesn't do a whole lot for the economy," said Zach Pandl, an economist at Nomura Securities. "But it did instill a sense of confidence that we can exit this recession."

The debate over its economic benefits goes on in tandem with complex arguments over whether its environmental benefits were worthwhile.

Using what he calls some "very optimistic" assumptions, University of California at Davis professor Christopher Knittel calculated that the clunkers program eliminates carbon dioxide emissions at a cost of about $207 per ton.

That looks very pricey compared to the costs in the European market, where a permit to emit a ton of carbon sells for about $20, he said. Whatever the merits of the program as a stimulus, Knittel concluded, "it was a very expensive way to reduce greenhouse-gas emissions."

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