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The New Economy

Cash for clunkers: Real stimulus or political boondoggle?

The debate over cash for clunkers is the first skirmish over the legacy of Obama's stimulus program.

By Contributor / November 3, 2009

Allison Barton and Bailey (left) wait in the back of their 1997 Chevrolet Tahoe, which they were trading in for a 2009 Chevrolet Traverse from salesman Moses Buraleh, right, at Jim Ellis Chevrolet in Chamblee, Ga., during the final days of the 'cash for clunkers' rebate program. Dueling reports on the program's cost mark the opening salvos of discussion on the legacy of the stimulus.

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Those gas-guzzling, rusted jalopies that Americans ditched for new rides under the cash for clunkers program this summer were supposed to find a quiet resting place in junkyards across the country as the US economy accelerated forward into recovery. But the clunkers refuse to die.

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Instead, they have become the subject of increasingly heated debate over how much the cash for clunkers program cost the US taxpayer. On Tuesday, the National Automobile Dealers Association (NADA) fired the latest salvo, issuing its estimate of $4,587 per new car traded in for clunker. That's less than a quarter of the $24,000 per new car that automotive website Edmunds.com estimated last week.

To recap the recent clunker cost warfare: After Edmunds.com published its estimate, the White House rebutted it, saying it was an attempt to generate publicity. Then Edmunds rebutted the White House's rebuttal.

This maneuvering is simply the first skirmish over what will surely become a decades-long debate over the legacy of President Obama's stimulus package. Did it rescue the economy or was it a costly boondoggle? At stake is the political credibility of the administration's economic plans. How the public comes to view the clunkers program could become the lens through which it perceives all its stimulus efforts.

"The question is: Is it worth it?" says Edmunds' CEO Jeremy Anwyl. "That's not really for us to say. That's where the debate needs to shift. And not just about clunkers but for the entire stimulus program."

Because the administration turned an acid pen on Edmunds, Mr. Anwyl wonders whether it hasn't just brewed up more trouble. "All [the White House] did was they threw down the gauntlet to any blog or economist looking for notoriety," he says.

The crux of the current debate turns largely on how one estimates the car sales that would have happened even without the cash for clunkers program.

NADA chief economist Paul Taylor used a simple methodology. He subtracted the number of cars analysts expected to be sold in July and August (1.6 million) from the total actually sold (2.3 million) and divided by the $3 billion cost of the program. Voilà: $4,587 per clunker, barely more than the largest rebate offered. Edmunds took a more complex approach, which concluded that more than 1.6 million cars would have been sold during that time, as the Monitor's Mark Trumbull reported (see link above):

Edmunds’ used a team of statisticians, who examined sales trends for luxury vehicles and others not included in the clunker program. They used those trends to gauge where sales would have been for the industry, absent any stimulus program. These “informed estimates” were independently verified, Edmunds says, by examining transaction data.

Mr. Taylor calls these estimates bunk.

“The Dow Jones and broader market indexes made strong recoveries over the summer, assisting luxury light vehicle sales. But there is a fundamental difference between what drives luxury car sales and non-luxury sales,” says Taylor, according to the NADA release. “An improving stock market, for example, may boost luxury car sales but it has little effect on non-luxury sales. Job growth, income growth and housing affect non-luxury vehicle sales. And in each of those categories the numbers are not good. Unemployment is up. Income is down. And housing prices continued to fall through July. This has not been the kind of economic environment that encourages a purchase by the average car buyer.”

What's next? Keep an eye on the emerging debate over how much the administration spent to create jobs. Then duck, because the brickbats will fly.

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David Grant is a Monitor contributor. Have your say about Clunkers in the comments below or find us on Twitter.

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