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The Hidden Payoff from Cash for Clunkers

The final scorecard is out on the Cash for Clunkers program: In return for taking on $2.88 billion in additional debt, Uncle Sam helped the auto industry sell 690,000 new vehicles. Whether this was a winning trade is debatable, as this MoneyWatch story points out and this post How Would We Figure Out Whether Cash For Clunkers Makes Sense? by economist Brad DeLongBut as a morale builder, it was hard to fault.

Economists note that almost all transactions that happened under Cash for Clunkers would eventually have happened anyway. Maybe the program converted some used-car sales into new-car sales, which means a little more use for the car makers’ factory capacity and a few more laid off autoworkers put back to work. And as White House economic adviser Brian Deese puts it in this WSJ interview, there may be some stimulus value to drawing some sales from the future when (we hope) the economy won’t need juicing, into the present, when it desperately does. But all that is offset by the increased budget deficit, the destruction of usable inexpensive cars, and the heavier debt burden on the new car owners.

For my money, though, the most overlooked benefit of the program has been its effect on the intangible economic force John Maynard Keynes calls “animal spirits.” For weeks, the news and blogosphere have been loaded with images of busy car salespeople explaining that they were selling out of the Ford Focus (when did you think you’d hear that?). Car shoppers appeared on camera with an acquisitive gleam in their eyes that has been in hiding since 2007. And we were treated to the vision of a federal stimulus program that actually seemed to be working. If you wanted to persuade consumers that the economy really is starting to recover, you couldn’t buy more convincing advertising.

Animal spirits, by their nature, aren’t easily measured. But Tuesday’s consumer confidence survey results did register a far greater rebound in optimism than economists expected. (The survey was taken in early to mid-August, when it was becoming clear that Cash for Clunkers would burn through another $2 billion, easy.) Interestingly, consumers say they believe that the economy is still in terrible shape. But their faith in the future has risen to levels not seen since before the recession began. Faith doesn’t easily yield to a cost-benefit analysis, but It’s hard to overstate its economic importance, as Nobel prize-winning economist George Akerlof points out in this video.

Obviously, Cash for Clunkers didn’t account entirely for the jump in consumer confidence, and there’s no guarantee that it won’t fade again, especially if unemployment refuses to fall. But confidence is a necessary condition to arecovery. So to the extent that the clunkers program gave Americans a reason to believe that things can eventually return to normal and to have some faith that government stimulus can work, it was a pretty good investment.

Article Courtesy of Eric Schurenberg, CBS

John Paul Strong

John Paul Strong combines his two decades of automotive marketing experience with a team of more than 150 professionals as owner and CEO of Strong Automotive.

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