Clunkernomics Update

by BILL WADDELL

A few days ago a post I wrote included what was really a throw away line, "Buying America's assets and scrapping them in order to spend money borrowed from our grandchildren to replace them will go down in the history books as one of the dumbest ideas ever."  Let's review the Cash For Clunkers program so far - almost $.8 billion gone - $2.2 billion yet to go - to see if that line still fits.

Toyota has surged ahead of Ford for the top spot in cars being purchased with the cash we taxpayers gave them for their clunkers.  The top ten list in order is now: (1) Toyota Corolla (2) Ford Focus FWD (3) Honda Civic (4)Toyota Prius (5) Toyota Camry (6)Hyundai Elantra (7) Ford Escape FWD (8) Dodge Caliber (9) Honda Fit (10) Chevrolet Cobalt.  Toyota is still the big winner with 3 of the top 5.  GM still remains in the top 10 by the skin of its teeth.

Since Toyota has still not laid off a single American employee (just a few hundred temps in Texas so far), the purchase of Toyotas will generate zero jobs.  In fact, the entire program is generating no jobs - and is very unlikely to.  Many of the purchases so far seem to be people who were going to buy a car anyway - so the taxpayers subsidized them to no one's advantage but their own.

The actual increase is most likely from people who would have bought a car later in the year, and simply moved their purchase up a few months to take advantage of the program.  That means today's increase will directly correspond to next month's decrease - so all we have done is interrupt the relatively level load of the factories with a costly blip.  At least that is what the automakers believe.  They have switched to 10 hour days to meet the surge with overtime, rather than recall laid off employees.  They fear a trough in demand once the program runs out and they do not want to re-layoff people.

In the height of irony, at least one dealer, a guy named Richard Bazzy from Pittsburgh thinks lean is responsible for the problems he is facing in getting enough cars to sell.  "He says the company's new system to keep inventory lean isn't working. 'You've got to get these cars built,' he said."  The true lean company - Toyota - is the one that kept all of the people on the payroll and is not facing this recall versus overtime dilemma.  But he is far from the only one to think lean means nothing more than keeping less inventory.  Nor is he the only one who thinks the manufacturers would be better off keeping a glut of inventory on hand - and eating all of that wasted expense - just in case Congress throws another counter-productive stimulus plan at the industry.  Like Kevin said the other day, Mr. Bazzy works in a top line obsessed industry.

The charities are complaining - the government is paying $4,500 for cars many people would have otherwise donated to charity for the tax write off.  The supply of donated cars is drying up.  So the net effect is that the government is taking cars from people who could only afford a charity fixer-upper, and giving the money to someone who can afford a new car.  One of those 'unintended consequences', I suppose.

The dealers are running into cash flow problems as a result of having to provide zero interest loans to the US government for an undetermined period of time:

"Despite the sales success of the program, little of the federal money has made it to dealers so far. Springer of Anderson Ford said he hasn't seen 1 cent yet. 'Right now it's a dealer program, not a government program,' he said. Williamson Honda's Olsen had 110 completed cash-for-clunkers deals as of Wednesday morning -- only three of which had been approved by the government. Waiting to get reimbursed, he said, has 'been a little bit unnerving.' But Olsen thinks things will move more smoothly now that the additional $2 billion has been approved.   Ballard of Performance Toyota is a little less sure.  Like Williamson, Performance has made more than 100 clunker deals and has been reimbursed for very few."

So no new jobs, factories working overtime despite an overall drop in business of 25% to handle a government initiative to move car purchases up a few months, charities out of luck, dealers footing the bill ... I think I will stand by my assertion - this is a real dumb idea.

Apparently Debbie Stabenow, Democratic Senator from Michigan disagrees  with my take on things. She called Cash For clunkers "the most effective stimulus we have passed this year."  Or maybe she agrees, and is merely commenting on what a waste the rest of the trillion dollars in stimulus smoke and pork spent this year has been.

Comments

[Mark Graban]

There is no objective truth anymore. Of course Stabenow likes the plan, it's "her side's" plan. No surprise there.

Did you see that the government sales data is actually very misleading about what cars are the top sellers? It's actually SUVs and Trucks:

http://money.cnn.com/2009/08/07/autos/cash_for_clunkers_sales/?postversion=2009080704

With different transmission variations, the government counts each variation as a different model. So combining variations, the Ford Escape is actually the #1 seller.

It seems extremely wasteful to destroy a vehicle that's running to have people buy a new one. The carbon footprint (the fixed cost, environmentally of a new vehicle is very high if you count the manufacdturing and transportation.

I heard a story that said, for many vehicles, you'd have to drive it for 5 years for the incremental environmental green-ness to make up for the initial manufacturing.

So this program probably isn't even very good for the environment. Stupid government at its worst.

[Richard]

I normally find myself nodding at Evolving Excellence when it lands in my inbox but this time there's a bit more frowning going on.

Maybe Toyota didn't lay off any staff but there is a whole supply chain to Toyota of tyres, steel, aluminium, electronics, seats, etc that probably did - they've all got supply chains into them etc etc.

There's also the folks simply moving their purchase forward - if that's the case then that sounds like a stimulus plan that's working. If I'm flatlining now then I'd like my stimulus now - not in six months.

Having got that off my chest I was back to nodding again with the environmental impact piece - though would love someone to do the maths - miles per gallon of a ford focus (~40?) compared to miles per gallon for a clunker (~15) x how many? What does that mean for CO2 etc

[Bill Waddell]

Hello Richard - Thanks for the comment.

Since I get the inside information when someone comments , I know that you don’t work in manufacturing and I apologize for assuming all of the readers have the same understanding and not making the issue clearer.

Let me explain it this way:

A factory operates at its most efficient when it is ‘level loaded’ – it is expected to produce the same amount of product every day. Let’s say a factory is making and selling about 1,000 cars per week, every week.

Because the demand, or ‘load’ on the factory is constant, it needs the same number of people every day, the same quantities of parts, and so forth. It is all very constant and smooth.

When the factory knows that there will be a spike in demand – say a week in which it will need 1,500 cars some time out in the future – it can build a few extra every week and build up the additional demand in inventory, then sell the extra inventory when the spike in demand arrives. That way, it can continue to operate in that efficient level mode.

The problem with the Cash for Clunkers program and your comment, “There's also the folks simply moving their purchase forward - if that's the case then that sounds like a stimulus plan that's working. If I'm flatlining now then I'd like my stimulus now - not in six months.” Is that our hypothetical factory is being told to go from 1,000 cars per week to 1,500 cars per week right now – and that additional 500 cars will come from the demand that was expected in the future.

So our factory that has been working at 1,000 per week must ramp up quickly to 1,500 to meet this new requirement – and since that demand was just pulled in from the future, the factory will then drop down to 950 cars per week.

This presents a real problem for the factory. It has enough people to make 1,000 per week. In immediate future, it needs enough people to make 1,500, but soon after it only needs people to make 950. So what does it do?

To keep the math simple, let’s assume it takes one person per car. The factory has 1,000 employees, suddenly it needs 1,500, but afterwards it will only need 950 since overall demand was not increased - we just moved some of it up.

The answer the politicians expected in devising the stimulus was for the factory to hire 500 more people to meet the new demand. But if the factory did so, it would very soon have to let those 500 people go, and in fact would have to let go of 50 of the people who were there at the beginning.

This is obviously not a very good scenario, so what the car companies are doing is building the extra demand with a great deal of overtime. They do not want to hire extra people to meet the Cash For Clunkers demand, then have to turn around and lay them off again in a month or two. Unfortunately, the more Cash For Clunkers is simply moving sales up by a few months, the more likely it is that many of those emloyees who are working overtime now to meet the demand will be laid off this Fall when demand is down.

The auto companies knew this was likely to be the impact of Cash For Clinkers, which is why they were somewhat lukewarm about the idea. It helps them get rid of excess inventory, but it does not really create any new demand, and forces them to operate their factories in a very inefficient manner.

Toyota was a different matter. They kept their employees and had enough people to make 25% more cars than they were selling. They have been able to meet the Cash For Clunkers demand without having to work overtime, or hire new people. Some of their suppliers operate with a similar ‘lifetime employment’ principle, but you are correct in that many of their suppliers do not. Those suppliers have been thrust into the same inefficient operating situation I described.

I hope this clears my post up a bit. Again, thanks for the comment.

[Mark Graban]

The problem with sales pull ahead is that it's fake stimulus. When sales bottom out later, then we need additional stimulus.

GM was in that trap with incentives. They'd offer incentives and pull ahead sales to hit their number. And they'd promise "no more incentives" and they'd of course have to go back to the well for the next month or the next quarter.

It's not an inherent problem with government, but a problem with trying to hit numbers and gaming the system.

[Chris]

@Richard: Don't use 40 for the Focus' mileage - mine only gets 30 on a good day (tires fully inflated, new air filter, and cool enough day I don't need the A/C) and that's on a model that has the manual gearbox and no electric anything...

[Andy Wagner]

Bill,
I'm waiting for the environmental impact study that shows smashing perfectly servicable low mpg cars and replacing them with new higher mpg cars has a higher "carbon footprint" than making less new cars.
Crushing cars and stamping steel doesn't come "carbon free".

-Andy

[Richard]

Chris - Assume you are talking US Gallons? (Though have checked and even using an Imperial gallon Focus doesn't seem to be as economical as I'd guessed)

[miket]

If anything its possible this program is level loading lol. sales are way down now because of the reccesion, and when things turn around people who were putting of big purchases for a long while because of fear they could lose their job or what not could go in droves to buy new cars.

How much time did the automakers have to prepare for this program? Congress never does anything that fast.

[Anon]

A beer game effect is probably about to kick in, since inventories are now very low with the artificial kick in demand. Automakers will react and then, what, inventories will be too high? That will necessitate another "stimulus" or incentives deal... the cycle repeats.

[Jim Neligan]

The success or failure of this 2 billion dollar program has not been determined. None of us want to see government waste or deficits. The alternative was to do nothing and risk a slower recovery or longer recession. If you so sure this was a waste, tell me what the more effective (correct) approach to stimulating the auto industry would have been using the same 2 billion tax dollar budget and time line.

[Bill Waddell]

Jim,

The premise of your question seems to be that doing anything was better than nothing. In fact, there is nothing the government could have done on the timeline Obama arbitrarily set, or with the $3 billion they threw at Cash For Clunkers – or any other amount they chose. The money should have been kept to reduce the deficit.

The problem the auto industry has is the unavailability of credit for car buyers. Before the economic collapse, credit was way too easy. No matter what your income (or lack of it) and no matter what your credit rating, you could get a car loan. Banks only held on to the loans for “A” credit buyers. The “B”, “C” and “D” credit loans were made at high interest rates, then bundled and sold on Wall Street. The same thing was going on with home loans and credit cards.

When people could not make the payments they were able to get consolidation loans, and second mortgages – borrowing more to pay off the debts they already could not pay. The entire house of cards collapsed last Fall. No one is lending to the B, C, and D credit rated people any more because no one on Wall Street is foolish enough to buy those loans any more. Lehman Brothers collapsed specifically because they had bundled and invested in billions of dollars worth of these shaky loans. Lenders also will no longer make car loans to people who do not have sufficient income, unlike the old days.

So Cash For Clunkers provided down payment assistance, but people who do not have “A” credit cannot get loans to finance the rest of the car; and people with “A” credit but not enough income cannot get loans.

Cash for Clunkers only gave down payment assistance to “A” credit people with a good income – a very narrow part of the car buying public. It did not – and could not possibly have – expanded the market, because the market is constrained by lack of credit and income – not lack of down payment cash. It was well intended, but did not address the real problem.

The only thing the government could have done to ‘stimulate’ the auto industry would have been to guarantee risky loans – but that is what got us into trouble in the first place. So the government can and should do nothing, but wait for the economy to reach the point at which people have saved enough to start buying with the excess, and to be able to afford cars without shaky loans. The economy will not fully recover for many years, and the government needs to accept that – no matter how much they politically need to generate instant results.

Bill Waddell

[Dave]

Let me get this straight. Your premise is that all the vehicles bought were "pull aheads". There was a percentage, the estimates say 40%, but not all. You quoted the Government Math on which cars were the top sellers and not the method that the industry used so your assumption on the top sellers was incorrect. You also assumed that the 25% increase from Toyota came only from putting their people back to work to keep up with demand. Where is the data to support that supposition? They imported more from Japan and the models like Corolla they put the plants on O.T. to make more. A major component of the economy is consumer confidence. One way to drive that is to try and "prime the pump." That is what Cash-for-Clunkers was trying to do. Several dealers I have spoken with have said it has helped increase foot traffic and it is better than before the program started. The sucess or failure will not be known for months. Like you preach in lean, don't look at short term results and make decisions based strictly on them.