Edmunds made the following statement:
"Edmunds.com .... has determined that Cash for Clunkers cost taxpayers $24,000 per vehicle sold...Nearly 690,000 vehicles were sold during the Cash for Clunkers program, officially known as CARS, but Edmunds.com analysts calculated that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway, regardless of the existence of the program.
Ironically, the average transaction price for a new vehicle in August 2009 was only $26,915 minus an average cash rebate of $1,667.."This analysis is valuable for two reasons," explained Edmunds.com CEO Jeremy Anwyl. "First, it can form the basis for a complete assessment of the program's impact and costs. Second—and more important—it can help us to understand the true state of auto sales and the economy. For example, October sales are up, but without Cash for Clunkers, sales would have been even better. This suggests that the industry's recovery is gaining momentum.""
Putting the numbers aside the issue is quite a simple one. There would have been some systemic buy rate with or without the program and that the program increased the buy rate and thus the true costs per new sale should be, per Edmunds, the total rebates spent divided by the incremental sales.
Well this is a typical marginal sales analysis. Anyone who has ever been in retail knows that you advertise to get new sales and that you look at the cost of the new sales based upon the advertising. You may use average costs but the marginal costs are the true costs. Simple Business 101. Anyone who has ever had a real job will catch that point. Thus to a great degree Edmunds had a point.
For example, consider a company which has sales of 100,000 units per month. and the units sell for $10 each, thus a sales of $1 million per month It pays its sales people a 4% commission and it wants to motivate more sales. Thus it agrees to pay 5% per month. The old plan had $40,000 in sales commissions and with the new plan the sales go to 120,000 units but now the sales commission is $60,000. In the first case the average cost of sales was $0.04 and now it is $0.06. Yet for the new 20,000 units sold it really cost $20,000, or $0.10, or 10% commission! That is the point Edmunds is making and that is exactly the point the White House Blog seems to miss as well as Ms. Romer's brain trust at CEA.
The White House Blog then decides to get into the fray. They post a Blog entry, Busy Covering Car Sales on Mars, Edmunds.com Gets It Wrong (Again) on Cash for Clunkers, by one which states:
"On the same day that we found out that motor vehicle output added 1.7% to economic growth in the third quarter – the largest contribution to quarterly growth in over a decade – Edmunds.com has released a faulty analysis suggesting that the Cash for Clunkers program had no meaningful impact on our economy or on overall auto sales. This is the latest of several critical “analyses” of the Cash for Clunkers program from Edmunds.com, which appear designed to grab headlines and get coverage on cable TV. Like many of their previous attempts, this latest claim doesn’t withstand even basic scrutiny...
The Edmunds’ analysis rests on the assumption that the market for cars that didn’t qualify for Cash for Clunkers was completely unaffected by this program.
In other words, all the other cars were being sold on Mars, while the rest of the country was caught up in the excitement of the Cash for Clunkers program. This analysis ignores not only the price impacts that a program like Cash for Clunkers has on the rest of the vehicle market, but the reports from across the country that people were drawn into dealerships by the Cash for Clunkers program and ended up buying cars even though their old car was not eligible for the program...."
Well the highlighted comment is confusion on the part of the White House Blogger between average and marginal costs. Yes indeed if one looks on an average basis the cost was whatever you spent but marginally is was many time more. Why the Blogger uses the Mars reference is beyond me except it appears as a very childish thing to do on a White House site, yet it may be a generational thing. Since the Blogger appears to know little if anything of economics and business is can be forgiven as childhood enthusiasm.
Now the the CEA report the blogger refers to. This is another Romer Report, of whose credibility we have been questioning since her initial prognostication on the economy in January. The Report states:
"On the other hand, Macroeconomic Advisers argues that “almost all the sales under this program just moved forward transactions that would otherwise have taken place over the next several months.” They therefore expect only a very small effect on the path of GDP. This is clearly a worst-case scenario, and appears to require extreme assumptions about both usual clunker-replacement demand and the payback effect.
In contrast, IHS Global Insight has estimated the CARS program will add about 600,000 net sales to the market this year, more than in even our most optimistic scenario, which puts the figure at 560,000. If their forecast turns out to be correct, the impact on GDP and employment will be larger than we have projected.
A final point of comparison is a mid-August assessment by J.D. Power, a leading auto industry forecaster, that the net boost to auto sales for all of 2009 from the CARS program will have been 300,000. This compares with our baseline scenario of a 2009 boost of about 330,000."
Yes, the data is correct but again the point is marginal versus average costs. Was the program useful, I would have to say yes in that it did increase auto sales, yet was it costly, yes, as are all the Stimulus programs. Was the program necessary, perhaps. Time will tell. Yet the White House Blog should get a bit more professional and less childish in its analysis of its critics.
Posts
