Streetsblog Capitol Hill

"Cash for clunkers," the White House's much-touted program encouraging trade-ins for more fuel-efficient autos, had an "uncertain" impact on economic recovery, according to a new audit from the independent Government Accountability Office (GAO) -- largely because it remains unclear how many of the car sales it spurred would have occurred without taxpayer subsidies.

The GAO report casts doubt on several of the Obama administration's claims about the success of the "clunkers" plan, including the extent of its economic benefits and the emissions savings achieved by replacing older autos with more gas-sipping vehicles.

While the GAO's nonpartisan auditors concluded that "clunkers" program achieved its overall goal of promoting economic growth, they could reach no consensus on how to measure that stimulative effect. A laudatory "clunkers" report from the White House Council of Economic Advisers reached similar conclusions concluded that 64 percent of "clunkers" sales were "incremental," meaning that the trade-ins would have occurred regardless of whether government subsidies were on offer.

The U.S. DOT, using its own surveys, concluded that 88 percent of trade-ins under the program were effectively pushed forward in time; however, the GAO questioned the reliability of that data because the department "did not follow some generally accepted survey design and implementation practices." (ed. note. Streetsblog Capitol Hill contributor Ryan Avent made similar observations in August.)

Apart from its effect on vehicle sales, the trade-in program was also credited by the administration with increasing the U.S. gross domestic product. But the GAO found that assertion equally difficult to prove, citing interviews with auto executives who confirmed only that "clunkers" sales decreased their inventory. "[I]t is not clear how much of the reduction in inventory led to increased automobile manufacturing and, therefore, a positive impact on Gross Domestic Product," the auditors wrote.

The GAO found more holes in the administration's assertions about pollution savings achieved by the $3 billion "clunkers" plan.

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Back in the days of "cash for clunkers," which saw the Obama administration send nearly $3 billion in taxpayer-funded rebates to boost the sagging auto industry, our Ryan Avent and several other economics wonks pointed out an inconvenient fact: Many participants in the program would have bought cars anyway, and the rebates only pulled their purchases forward in time.

Now it seems that the tax credit for new home buyers, opened up to even existing homeowners as part of an $11 billion expansion passed in November, is having a similar effect on the homebuilding industry.

As MarketWatch reports from the Las Vegas International Building Show, homebuilders are still mourning the housing bubble that popped so perilously as subprime mortgages imploded, but they are cautiously optimistic about this year as compared with 2009. Still, mitigating factors persist -- and here's one:

Payback from the expiration of the home-buyer tax credit. "The tax credit is pulling people forward who were in the market anyway. So the sales pace isn't quite as vibrant as suggested by the raw data. There could be a payback that materializes (in July) when the current version expires," Sullivan said.

Unless, to the chagrin of environmental groups and many, many voters who rent, Congress decides to extend the sprawl-enticing tax credit one more time in the summer. Lawmakers are often reluctant to let temporary tax credits fade away when industries are lobbying in favor of their extension -- even if the underlying economic logic is demonstrably shoddy.

And if Transportation Secretary Ray LaHood's comments at the Detroit Auto Show this month are any guide ("You see no criticism of 'cash for clunkers' in America"), even the auto rebates could make a return.

Chuck Grassley (IA), the senior Republican on the Senate Finance Committee, today asked the U.S. DOT to answer a question Streetsblog Capitol Hill first wondered about months ago: How did Citibank, the beleaguered recipient of a $45 billion government bailout, snag a contract to administer the Obama administration's "cash for clunkers" program?

In a letter to Transportation Secretary Ray LaHood, Grassley asked for a complete rundown of the process used to select Citibank -- which had to ramp up staffing to process "clunkers" claims after delays in reimbursement frustrated auto dealers -- as well as four other contractors who worked with the U.S. DOT.

The Iowa senator, known in Washington for his high-profile inquiries into government waste, painted a picture of all-consuming haste within the administration to promote auto sales, with fraud-protection concerns falling by the wayside.

"Cash for Clunkers was set up very quickly, and there hasn’t been an accounting of the administrative costs of the program," Grassley said in a statement released by his office. "My concern is the waste, fraud and abuse that may have resulted from the vulnerabilities that can come with such a quick start."

Grassley made contact with the U.S. DOT after his aides spoke with the agency's independent inspector general (IG) about the handling of the $3 billion, taxpayer-funded "clunkers" rebates, according to today's letter. Although the IG "pointed out many additional ['clunkers'] program vulnerabilities," the senator wrote, "I am concerned that the DOT may not have fully complied with [the recommendations]."

Late Update: A U.S. DOT spokeswoman replied to Grassley's letter, defending the department's protections against fraud and abuse:

The overwhelming consumer response to [the 'clunkers' program] required the DOT to rapidly expand capacity in order to process more than 670,000 dealer transactions made in less than thirty days. Throughout the life of the program, the DOT took measures to prevent fraud, waste and abuse. While there was no time to allow vendors to competitively bid for the processing work, those selected received contracts based on other recent competitively bid government contracts for similar work.

The DOT has spent $77 million so far on administrating the "clunkers" program, less than the $100 million that was set aside for such purposes. The legislation implementing the "clunkers" rebates required the government to set up its system within 30 days.

Even Later Update: Rep. Bruce Braley (D-IA) responded to Grassley's letter with a strong defense of the auto-buying program's economic and environmental value (both of which have been disputed by economists):

 

“’Cash for Clunkers’ was a wildly successful program that strengthened the economy, reduced our dependence on foreign oil and most importantly, helped middle class families save money,” Braley said. “Hundreds of thousands of people took advantage of the program, strengthening small businesses around the country and giving a strong and sudden much-needed boost to the economy in Iowa.

Check out Grassley's full letter after the jump.
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Rep. Betty Sutton (D-OH) was one of the prime movers behind the economically and environmentally misguided "cash for clunkers" program, but she is switching gears to help save transit in Lorain County, Ohio, where bus service could be canceled in 2010 after voters rejected a sales tax increase to raise operating funds.

The local Chronicle-Telegram newspaper reports that Sutton is seeking approval from congressional leaders for the county to reprogram $1.5 million in unspent stimulus money:

Sutton sent letters this week to David Obey, D-Wis., chairman of the U.S. House Committee on Appropriations, and Jim Oberstar, D-Minn., who chairs the U.S. House Committee on Transportation & Infrastructure, seeking approval for LCT to use $1.5 million in untapped American Recovery and Reinvestment Act of 2009 funds to operate the bus system.

“We hope new appropriations bills can be OK’d by year’s end that will let us use this unspent capital money,” Cordes said. “We’re trying to avert a total shutdown.”

Officials have said it is vital for the county to maintain some form of public transportation to remain eligible for federal transportation funds.

The inability of many localities to spend federal aid on transit operating costs -- thus creating jobs for drivers, maintenance workers, and other day-to-day staff -- has left many rail and bus networks facing punishing service cuts.

Congress agreed in June to let states use 10 percent of their stimulus grants for operating assistance, but Sutton's move could open the door for that number to increase in the coming weeks.

One of the themes of the financial and economic crisis we've faced over the past two years is that government, pressed into responding to serious economic pain, has often found itself supporting the activities that got us into this mess in the first place.

Irresponsible behavior by banks led them to the brink of collapse -- a collapse which would have sent the global economy into a terrifying period of decline -- and so the government stepped in to prevent bank failures (after learning a lesson from the dreadful experiment with Lehman). But these interventions have put banks in a situation where they stand to gain enormously from taking large and dangerous financial bets.

Similarly, government policies such as low gas tax rates and import protections on light trucks encouraged the development of a bloated domestic auto industry focused on the production of inefficient SUVs.

When high oil prices and deep recession then threatened to push General Motors and Chrysler into bankruptcy, leading to hundreds of thousands of lost jobs, the government felt it had no choice but to step in to keep the companies afloat.

Now the government owns large stakes in companies that will only profit if the American public goes car-buying crazy over the next few years.

The list goes on. The economic crisis that currently afflicts us has made it clearer than ever that we need to change the way we do many things, but because the economy is in such difficult shape, it is hard to pursue anything other than policies designed to keep the economic engine from stalling out completely. Big transitions must wait for later.

Can the same be said for sprawling urban development? Have government interventions essentially bailed out the very places that proved most vulnerable amid oil shocks and housing busts?

Chris Leinberger argued that very point in a recent blog post at The New Republic's Avenue:

While there is no federal or private ... dataset that identifies where exactly in metropolitan areas the most mortgage defaults are, local analyses and some news reports indicate the bulk of the problem is on the fringe...Thus, some of the biggest beneficiaries of federal efforts to stem foreclosures and keep families in their homes are those located in exurbia.

He has a point. Foreclosures have been concentrated on urban fringes, so federal efforts to modify mortgages and otherwise reduce defaults have tended to direct more aid to exurbs than inner suburbs and city centers. In addition, rates of home ownership and car ownership are higher in the suburbs than in city centers, so federal housing subsidies (including the new home-buyer tax credit and low interest rates generally) and automobile subsidies ("Cash for Clunkers") have had a geographic bias toward suburbanites.

To a certain extent, this has been unavoidable. Most Americans live in auto-oriented areas in suburban places, and a large share of those Americans are facing financial difficulty. Any measure that helped stressed households, including checks of equal value cut to all workers, would tend to benefit suburbanites more than urban dwellers.

One should also be careful not to oversell the value of the interventions. Efforts to reduce foreclosures have actually had pretty depressing results.

But certainly the government might have done things differently -- and pursued policies designed to help households as much as possible -- rather than those aimed at keeping households in homes they couldn't afford, or moving families into homes in unsustainably sprawling locations. So it's important to ask: What can we expect for exurban areas and how will the government's policy choices affect them?

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Last week, I left my Washington home, walked to the nearby Metro station, rode a train downtown, walked to the National Press Club, and settled in to hear Steven Rattner, former head of the Obama administration's auto task force, declare that "no one has yet invented a substitute for the automobile."

This was like declaring in an airport terminal one's hope that man may someday enjoy heavier-than-air powered flight, but most of the heads in the audience nodded in agreement.

Rattner was there to speak on the topic of the administration's automobile bailout and rehabilitation strategy. He was hopeful but realistic; he recognized that General Motors and Chrysler face an uphill battle, but he believes that the government was able to do enough to give the firms a shot at returning to profitability.

Why that should be a concern of the government is another question altogether, and it's not one with which Rattner really engaged. Understandably, I think, the administration agreed that GM and Chrysler really shouldn't be allowed to fail in the depths of recession.

And then I believe they determined that if they were going to keep propping up the companies, they ought to at least shepherd them through a balance sheet-clearing bankruptcy and reorganization, in the hopes that the companies might eventually make money.

But what Rattner was careful not to address was this: Saving the car companies will not protect American automakers' market share, will not save the city of Detroit, and will not really save that many jobs.

The line I quote in the first paragraph was made in the context of an argument about annual auto sales, and why sales totals are likely to return to levels typically observed before the recession. Sales of light vehicles grew to a peak of 17 million in 2005 before declining and then plummeting to their current level, in the neighborhood of 9 million (save for the month of August, thanks to "cash for "clunkers).

According to Rattner, GM will break even at a level around 16.5 million car sales. Maybe we'll get there. Population continues to grow.

On the other hand, households may find themselves holding on to automobiles longer (particularly since household debts may remain a problem for the next decade). They may also find themselves buying fewer cars. America is aging, and households with retirees may not want a car for each commuter. More families might opt for one vehicle, and use car-sharing services when another vehicle is necessary.

But now we find ourselves in a world in which GM shareholders -- among which number you and me and every other taxpayer -- need sales to move above 16.5 million to get the company back to profitability. That's a strange place for us to want to be.

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One thing the government's CARS program -- a.k.a. "cash for clunkers" -- has clearly stimulated is commentary. For a policy involving a shade under $3 billion in federal spending, it has enjoyed no shortage of media coverage.

In part this is because the program looks like a big success, and certainly congressional leaders and the White House have not been bashful about touting it as such. The original $1 billion allocation for the program was exhausted within days, and as sales data for August begins to emerge it is clear that car sales experienced a banner month.

Was CARS a good policy, all things considered? Let's look at a few of the latest numbers on the program.

There were approximately 1.17 million vehicle sales in August, which works out to a seasonally adjusted annual rate of about 14 million vehicles. June's sales rate was under 10 million and near the recession low, while last August's rate was also about 14 million. Meanwhile, the August norm in good times was about 16 million.

What does that say about the value of the program? Well, let's say that August sales would have matched June's sales in the absence of CARS. They almost certainly would have been higher given economic improvements between June and August, but for argument's sake, let's say they were the same. We can then estimate how many additional sales CARS produced and the actual subsidy per new sale.

Here's economics blogger Calculated Risk:

If Edmunds.com is correct, and total sales were 1.17 million...in August, then the tax credit only generated about 320 thousand extra sales. Of course some regular car buyers might have put off a purchase to avoid the rush in August, so this isn't perfect, but instead of costing taxpayers $4,170 per car (as announced by DOT), the cost to taxpayers per additional car sold was close to $7,200.

In other words, CARS just didn't generate that many new sales. Much of the subsidy went to buyers who would have purchased anyway.

As it turns out, much of the subsidy also went to people who weren't interested in purchasing GM or Chrysler vehicles. While year-over-year sales figures rose in August for Ford, Honda, and Toyota, sales declined by 15 percent and 20 percent respectively for Chrysler and GM. To the extent that CARS was designed to help struggling American automakers, it doesn't seem to have had the desired effect.

Particularly worrisome is today's report that sales fell precipitously in the last week of August -- after the CARS program ended. Rather than generate momentum for the automobile industry, CARS may have primarily moved sales around. To a certain extent, it might also have been counterproductive. How so?

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When Congress tripled the size of the "cash for clunkers" program in July, both Congress and the White House billed the $3 billion program as a boon for struggling domestic automakers. But when those Detroit car companies released sales figures today, the numbers didn't quite match up to the hype.

General Motors and Chrysler, which required a combined $65 billion in government loans before declaring bankruptcy, reported August year-to-year sales declines of 20 percent and 15 percent, respectively.

Detroit media reports focused on GM's 30 percent sales increase between July and August 2009, but the company's car sales were down 1 percent even after being "bolstered" by the taxpayer-funded "clunkers" rebates.

Ford, the lone U.S. automaker that did not require a government rescue, reported a 17 percent year-to-year sales increase in August. As the New York Times reported, the company was pleased by one sales jump in particular:

At Ford, sales of the F-series, a large pickup truck popular among building contractors, rose for the first time since October 2006, a positive sign for the automotive market and the broader economy, the company said. Ford sold 13 percent more of the F-series and 57 percent more of a smaller pickup, the Ranger.

“It may be a glimmer of hope,” Ken Czubay, Ford’s vice president of marketing, sales and service in the United States, said on a conference call.

The F-150, the most well-known of the F-series trucks, gets an average of 16 miles per gallon (mpg) of gas. The Ranger gets between 16 mpg and 23 mpg, depending on the engine and transmission. "Glimmer of hope," indeed.

One day after the Obama administration announced it would end the "cash for clunkers" program for good, the auto-state lawmakers who championed its creation have largely aligned with the decision and refrained from pushing for a third installment of the taxpayer-subsidized auto-purchase rebates.

Rep. Sander Levin (D-MI) told the Detroit News that Congress should add $1 billion more to the "clunkers" pot, but widespread complaints from auto dealers who are footing the bill for the rebates amid slow government reimbursement have led to frustration from some of the program's fans on the Hill.

Rep. Betty Sutton (D-OH), the original author of the "clunkers" provision that ended up becoming law, said in a statement today that "the multiple goals that we set for the program were indeed accomplished," suggesting the rebates have run their course. Sutton added:

I look forward to working with the Administration and my colleagues in the House and Senate on future initiatives that will continue the momentum gained through the ["cash for clunkers] program toward an improved and stable economy.

The relative quiet from the Michigan delegation on the auto-industry benefit may not last long. With Congress poised to work next month, lawmakers could attempt to restart the program against the administration's wishes. But for now, it appears that "clunkers" is in its last throes.

(ed. note: Your regular companion at Streetsblog Capitol Hill will be taking some time away from the Potomac next week. Posting will continue on a lighter schedule; look out for thoughts from inestimable contributor Ryan Avent and the good folks at the Streetsblog Network.)

The U.S. DOT began signaling yesterday that it would bring the "cash for clunkers" program to an end amid growing unease from auto dealers about the government's slow pace of reimbursement and General Motors' decision to begin fronting "clunkers" repayments to its own salesmen.

But with auto-industry forecasters predicting a cool 1 million new sales this month for the first time in a year, dealers are loath to abandon the "clunkers" concept that has stoked Americans' desire for new vehicles -- with minor fuel-efficiency gains and expensive environmental payoffs.

A group of auto retailers have begun promoting the "Auto Stimulus Plan," a rebate system paid for by dealers themselves.

The private "clunkers" spinoff offers several features that the government plan was criticized for lacking. It allows consumers to buy used cars, and its rebates are tiered in proportion to the level of fuel-efficiency improvement that is achieved by the trade-in.

The specifics of the Auto Stimulus Plan vary based on state regulations. But a trade-in that provides 2 miles per gallon in greater fuel-efficiency would earn a rebate of 10 percent of the older car's value, and a 5-mpg improvement would earn a 20 percent rebate, according to a recent Associated Press report.

Unlike the Obama administration's "clunkers" program, which was questionably touted by the president and his allies as a boon for the environment, dealers involved in the private version make no bones about their priorities.

"[O]ur primary goal is to help consumers that don't qualify for the government's program and to stimulate the economy through improved sales, jobs, and spending," Scott Gruwell, an Arizona-based GM dealer, said in a statement today announcing that the Auto Stimulus Plan would continue despite the demise of the "clunkers" plan.