Walter Olson brings back the “Cash For Clunkers is why used cars have become so expensive” argument:

Guess what’s the newest trouble to hit the car business? As news outlets around the country are reporting, the price of used cars has lately soared to a modern-day record, with some cars commanding more used than they sold for when new. News accounts commonly finger the Japanese earthquake and high gas prices as reasons, but there are some problems fitting either reason to the case. While the earthquake affected the supply of new cars, it’s the previously driven kind that has scored the more impressive price jump. And while the rise in gas prices would explain a relative shift in buyer demand from SUVs and trucks toward smaller vehicles — which has indeed happened — the strength of the used-vehicle market lately has been such that even the thirstier vehicles have advanced in price, $4 gas or no.

No doubt there are multiple reasons for the price spike, including the severe general slump in new-auto sales in recent years, which has reduced the volume of newer cars coming onto the resale market. But — as Washington scrambles to take undeserved credit for whatever passes for normalization in the auto business these days — it’s worth remembering that an artificial scarcity of used cars isn’t just bad for the poor as a group: it’s bad in particular for the upwardly mobile poor, since in most of the country landing a job means needing to line up transportation to get to that job. When it suddenly costs $6,000 instead of $3,000 to get wheels, the move from unemployment to a paying job faces a new and discouraging barrier.

At least he points out that there are “multiple reasons,” which is something that a lot of C4C critics have glided over in the past. Even so, he acts like C4C is the driving factor when there is comparatively little reason to believe it’s more than just a contributor. I wrote about C4C here and here. My basic view is that Cash For Clunkers was an idiotic proposal, a poor way to go about reducing emissions and destroying a lot of capital along the way, but that it’s hard to blame all – or most – of the increased cost of used cars on the law. I previously pointed out that some of the cars where the price increase is the highest, late-model used cars for instance, were not the ones taken off the road. While it’s possible that there is a cascading effect (people can’t buy a targeted, fuel-inefficient vehicle and instead buys an ineligible care taking that one off the road) you would still see the biggest impact on the cars that were targeted and more impact on cars from that period and not more recent cars. Instead, it’s the other way around, suggesting that the biggest reduction in used car availability (where increased demand is meeting decreased supply) is a result of people buying late-model used rather than new vehicles and – more likely – holding on to the car that they have.

Olson cites this article, among others:

Bill Visnic, analyst and senior editor at Edmunds.com, said the auto industry went from selling 16.5 million new cars annually before the recession, down to 10.5 million in the depths of the crisis. He said the average age of a used vehicle on the road today is in excess of ten years old, as well, meaning that overall more consumers are keeping their older cars.

“About five million people or so dropped out of the market,” Visnic said. “A vast number of those people would have been trading in a used car when they bought a new one. That’s a big whammy when the replacement rate has been lagging so much.”

Consumers looking to buy used cars will find that prices are up markedly, Visnic said. The Wall Street Journal reports that prices for used cars are up 5% this year at wholesale auto house Manheim. He said the Car Allowance Rebate System, which was introduced in 2009, also set off the price hike in the used market. The government program dubbed “Cash for Clunkers” offers economic incentives to U.S. consumers for turning in their used cars for a newer, more fuel-efficient vehicle. In turn, instead of ending up on the used car lots across the country, those vehicles went to junkyard graves.

So there has been a reduction of 6 million car sales per annum. Cash for Clunkers may be responsible for – at maximum – 1/7th of that. That assumes that everyone who totaled their car in 2009 would have sold it in 2010. Given that a frequent (and valid!) criticism of C4C is that it didn’t even increase the sale of new cars because it merely time-shifted purchasing (they bought in 2009 what they might have waited a couple years to get rid of), it seems likely that a lot of them would still have the car.

Be that as it may, it is likely that it is contributing to the problem to at least some extent. The “lost capital” that I lament is going to have some effect. And it is another reason to dislike this bit of free pudding policymaking. But there are a lot of other factors at work (an economy that went to hell, primarily) that swamp the effects of the policy.


Category: Market, Road

About the Author


9 Responses to Cash and Clunkers III

  1. web says:

    In a recession, auto mechanics tend to do fairly well because more people stretch their car purchase a few more years and pay for a few more repairs on it. An outfit here in Colosse that specializes in rebuilding transmissions and engines is apparently doing booming business since they can keep a moderately nice car going for 1/4 or less the price even of a “new to me” late-model used vehicle.

    The end result then is that cars don’t enter the “used car” market with as reliable frequency – they’re more likely to run till they are totaled out in an accident, or die in a “not effective to repair” manner.

    This would be true whether C4C had been implemented or not.

  2. Peter says:

    I had called upon a considerable number of auto repair shops as part of my recent job with ABC Insurance Company. It’s anecdotal, of course, but more than a few proprietors complained about the state of business. It’s hard to know which complaints were genuine and which ones were attributable to the general reluctance of business owners to admit to good conditions in front of an insurance agent (out of fear that they’d be pressed to buy more policies).

    My new job with JKL Sales Corporation gives me an insight into another major economic sector, sorry I can’t be more explicit. Based on my very preliminary impressions it would appear that this sector is in surprisingly healthy shape.

  3. Barry says:

    “…the price of used cars has lately soared to a modern-day record, with some cars commanding more used than they sold for when new.”

    This is only true in the sense that there have got to be some valued old niche models no longer in production, which bring in a high price (e.g., Shelby Cobra?).

    In terms of the vast majority of used cars, this is not true, for obvious reasons.

    I’ve rarely seen a CATO guy say something on economics which is trustworthy.

  4. Barry says:

    And when I went to read the article, it’s based on (a) earth-quake caused supply shortages, (b) a surge in the desirability of especially fuel-efficient cars. The article also doesn’t say that this is a general trend.

  5. trumwill says:

    Barry, the other articles do say that it’s a trend. The question is why. I believe it mostly to be an uptick in thriftiness.

    Oddly enough, it’s not just the “classics” where the used cars are costing more than the new, once you factor in financing. Granted, it’s rare, but it’s happening.

  6. Barry says:

    Will, I read a couple of the other linked articles. One puts a lot of weight on declining fleet sales in the past few years. In the end, this guy looked at phenomenon, looked past several good causes, and wrote a screed on something he disliked. It’s extremely bad analysis, and would be subject to criticism even in journalism, let alone somebody at a ‘think tank’ who who is a ‘Policy Fellow’ listed in a page titled ‘Policy Scholars’.

  7. trumwill says:

    It’s extremely bad analysis,

    I agree. The focus on C4C as the root of used car sales price hikes has been maddening to me, which is why I keep posting on it. Is it a factor? Supply-demand curves would say yes. But there is precious little indication that it is a primary one and actual reasons to believe that it’s mostly other factors (that the largest increases are late-model cars, for example, and not old and fuel-efficient cars that C4C targeted).

  8. Mike Hunt says:

    Peter: my recent job with ABC Insurance Company… My new job with JKL Sales Corporation

    The Onion headline:

    Autistic salesman can only work at companies with three consecutive letters in its name.

  9. Barry says:

    And dyslexic salesman can only work at a company with one letter in the name – or two of the same, three of the same,… 🙂

Leave a Reply

Your email address will not be published.

If you are interested in subscribing to new post notifications,
please enter your email address on this page.