"Cash for Clunkers," Part 2
Who benefits?
7 Aug 2009 in Regulatory Economics, Regulatory Policy
By a vote of 60-37, the Senate yesterday followed the House and shifted $2 billion in "stimulus" funds to replenish the coffers of the Cash for Clunkers program. It is now forecast to last through Labor Day. Of course, previous predictions about market demand have proved to be wrong and the analytic basis for the revised estimate is not clear.
The program is balanced between two competing Democratic factions. The upper Midwest faction, led by Michigan Sens. Debbie Stabenow and Carl Levin, are mostly concerned about selling cars because they host automobile manufacturing. The bi-coasal faction, led by Sens. Dianne Feinstein (D-CA) and Susan Collins (R-ME), want to increase the fuel economy of the automobile fleet because their electorates are "greener" and cars are not manufactured in these States.
A modest 4 mpg increase in fuel economy is required to be eligible for $3,500, but a significant 10 mpg increase is needed to collect $4,500. Feinstein and Collins wanted, but did not succeed in getting, the program changed to impose a 6 mpg standard for eligibility, plus broadening the program to make used vehicles eligible. The program's application only to new vehicles, they said, disadvantaged "lower-income consumers who are disadvantaged under the current program." (The administrative complexity of such a change would have been great, as used vehicles are sold both by car dealers and private parties.)
Opponents of the program generally, such as Sen. John McCain (R-AZ) have complained that it is popular because "people like free money." Like Feinstein and Collins, Sen. Tom Coburn (R-OK) also objected to the program on equity grounds:
"Why destroy a perfectly good car?" the senator pleaded to his colleagues. "We will take a perfectly good automobile that somebody less fortunate could utilize for years . . . and instead we're going to destroy it. We will destroy the opportunity for somebody less fortunate to have that automobile."
The government has disclosed few data about the program, so rigorous empirical analysis isn't yet possible. Casual (but careful) empirical research suggests that car dealers, not consumers who participate in the program, are the principal beneficiaries.
Before the program began, automobile sales were seriously depressed. As has been reported, the program has dramatically increased sales, even to the point where dealers are running short of inventory. This is a clue that dealers, not consumers, are benefiting: as inventories shrink, dealers' regain the ability to hold the line on prices. We've observed this in the Washington DC market.
"Internet prices" are not the best prices consumers can get, and many dealers' internet prices are misleading because they exclude typical charges such as freight. Nonetheless, they provide a useful guide to short-term dynamics in the auto market.
In early July, typical "internet" prices for qualifying vehicles were at or below invoice. Dealers were earning very little money on each sale. Within the first few days of the program's inception, however, the number of customers increased dramatically. Then a crisis atmosphere arose because of fears that the program would run out of money. These are ideal conditions for dealers to raise prices, and that is exactly what we've seen. Internet prices for typical replacement cars have risen. For vehicles in short supply, prices have risen all the way back to MSRP. Thus, dealers are capturing the value of the Cash for Clunker discounts, not consumers.
There is an exception to this pattern. Luxury makers typically have a small number of models that qualify -- MSRP has to be below $45,000 -- so they've been left out of the bonanza. Internet prices for cars listed just below $45,000 and qualify for the program do not appear to have increased. Advertised prices remain at or below invoice. For the relative handful of consumers who are in the market for a sub-$45,000 vehicle and have an eligible "clunker," it is likely that they, and not the dealers, are capturing the subsidy.
The car business is widely regarded by consumers with serious skepticism, and what we've seen does not provide any evidence to contradict that perception. We found several dealers tacking on extra charges once it became clear that a "clunker" was involved in the transaction. One dealer, Checkered Flag Audi in Virginia Beach, is trying to promote the Cash or Clunkers discount on an A4 Cabriolet (VIN WAUDF48H09K010057) that is ineligible under any circumstances; it's MSRP is $45,775. This dealer has four other A4s with qualifying MSRPs, for which it is promoting the full $4,500 discount even though a "clunker" would have to get no more than 13 mpg combined to be eligible.
During yesterday's floor debate, Sen. Coburn acknowledged, "I've not heard from a dealer in my state who is not for this program." Given the likelihood that dealers, not consumers, are the ones benefiting from the program, that may be no surprise.
