Reply #23: Calculating the Clunkers’ Real Cost to Taxpayers [View All]

[Demeter]

http://www.cjr.org/the_audit/calculating_the_clunkers_real.php

Calculated Risk has a smart bit of economic analysis on the real cost to taxpayers of the Cash for Clunkers and housing-credit subsidies—calculations I haven’t seen anywhere else.

CR notes that the real economic benefits of the subsidies come only from the sales they spur over and above what would have occurred without them. Some lucky folks who were going to buy anyway will happily snap up the cash but they’re a wash. It’s impossible to determine these number for sure, but you can get a pretty good estimate by looking at previous months’ data.

For August, CR estimates Cash for Clunkers prodded an additional 320,000 car sales and calculates that the “cost to taxpayers per additional car sold” at $7,200. That looks a lot worse than the $4,170 per car number put out by the government.

Home sales are far worse:

With 1.9 million first-time buyers, the total cost of the tax credit will be $15.2 billion. Divide $15.2 billion by 350 thousand (CJR: the number of additional buyers), and the program cost $43.4 thousand per additional buyer.

Excellent work.

The press ought to learn from CR here and include this kind of analysis in its stories on these credits.

I won’t hold my breath.

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http://www.calculatedriskblog.com/2009/09/houses-and-autos-cost-of-tax-credit-per.html

Houses and Autos: The Cost of a Tax Credit per Additional Units Sold

by CalculatedRisk on 9/01/2009 01:14:00 PM

To calculate the cost of a tax credit per additional unit sold, we need to sum up the total cost of the credit - as an example $2.877 billion for Cash-for-Clunkers according to the Dept. of Transportation - and then divide by the estimated increase in sales because of the credit.

Remember some cars or houses would have been sold anyway (even though they still receive the tax credit), but it is the additional sales that matter. That was the purpose of the tax credit! (update: Shnaps notes that the auto credit had an additional benefit of better mileage)

We have two examples today.

First, for autos, if sales in August had been about the same as June (pre-tax credit), there would have been 850 thousand light vehicles sold (NSA). This is about a 9.7 million SAAR.

Next we add in the tax credit: Although the DOT reported close to 700 thousand car sales associated with the Cash-for-Clunkers program, probably about 550 thousand were in August. If these were all additional sales, then the total sales (NSA) for August would be about 1.4 million, or almost 16 million SAAR.

If Edmonds.com is correct, and total sales were 1.17 million (NSA) 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.

The numbers are much worse for the first-time home buyer tax credit. The NAR reported this morning:

NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.

I believe the NAR underestimates first-time home buyers, especially considering the definition for the tax credit is anyone who hasn't owned a home in three years - not really a "first-time" buyer. I also think the NAR is overestimating the number of additional buyers.

But using their numbers ...

With 1.9 million first-time buyers, the total cost of the tax credit will be $15.2 billion. Divide $15.2 billion by 350 thousand, and the program cost $43.4 thousand per additional buyer. The actual number could be much higher if there were fewer additional first-time buyers than the NAR's estimate - or if the overall cost is higher (more buyers claiming tax credit).

This is the actual cost per additional home sold. And since buyer interest will fade (like with the Clunkers program), the cost per additional house will increase sharply if the program is extended.

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A FOLLOWUP COLUMN:

http://www.cjr.org/the_audit/calculating_the_benefits_of_ca.php

Yesterday I tipped The Audit’s cap to a nifty bit of analysis from Calculated Risk pointing out that the real cost of the Cash for Clunkers and first-time-homebuyers subsidy programs were far higher than what’s been reported.

But Michael S. Cullen in comments and reader Doug Smith in an email both point out that CR’s analysis is only of the cost side not the benefit side, which is true, though it in no way takes away from CR, who explicitly said he was only tallying costs, not doing a cost-benefit analysis.

So what about that upside?

Daniel Gross at Slate took a stab at that last week:

If we use Taylor’s estimate, about 250,000 extra cars were purchased (40 percent of 625,000). And if each cost $29,000, those sales generated about $7.3 billion in revenue in the space of a few weeks. That’s a pretty good return on $2.6 billion in government spending. Let’s be more conservative. Say only 20 percent of the clunker traders were extra demand, and the cars they bought cost $25,000 each. That’s still an extra $3.125 billion in sales for dealers. What’s more, the sales represent only a portion of the economic impact. Ford, for example, announced that it is increasing production of some models.

But CR estimates 320,000 additional sales in August alone— so let’s do our own math with those numbers.

If the average sales price for those cars was $26,300 (that’s what Comerica Bank said the average sales price for a new car was in the second quarter), that gives you $8.42 billion in additional sales in August alone. That’s almost triple the $2.88 billion the government spent on the whole program.

But as Smith points out, there’s a multiplier effect on economic activity. Those sales filter through the economy in the form of increased bonuses for salesmen, saved jobs at auto plants, more hauls by truckers, etc. When they spend money, it in turn saves jobs in other industries, who in turn spend money and save jobs in other industries, and so on. I’ve got no idea what a multiplier effect might be for this (have at it in comments), but manufacturing jobs have the highest multiplier of any industry.

That’s not to mention the boost in taxes to state and local coffers, who will take anything they can get these days.

The true extent of the economic benefits of Cash for Clunkers won’t be known until sales numbers come in for September and October. There’s no doubt that many of the sales were just pulled forward a couple or three months by the subsidy, the question is how many. And to prove there are always unintended consequences with anything, the program seems likely to make it more expensive for poor folks to buy cars. Also, there’s the opportunity cost: What else would have or could have been done with that $2.9 billion? And some of the manufacturing benefits went overseas. It’s unclear how much since many foreign cars are now made in the U.S.

But the calculation also doesn’t account for the non-economic benefits of the program, as Justin Hyde of The Detroit Free Press pointed out to me on Twitter.

The new cars bought with the subsidies get 9.2 mpg more—a 58 percent jump—than the cars traded in. Those drivers will not only be spending less on gas (perhaps $600 a year), they’ll be polluting less, though that benefit is pretty microscopic.

The benefits of less pollution aren’t anywhere near enough in and of themselves to justify the spending—the dollar-to-carbon-saved ratio is high.

Consider them an added bonus. Oh, and getting those heavy cars off the roads makes them safer for the rest of us.