Real economic stimulus: lower barriers to purchase

There is much being written about C4C (Cash for Clunkers). As I had noted in my own previous article, we did take advantage of it. So my writing is biased to some degree. I am personally opposed to wealth transfer as I noted. Those who busted their rear ends to make money ought to be able to keep it and spend it as they see fit. Barring that, if the government decides that stimulating a particular part of the economy is good, they can make things happen, in a big way. The problems with C4C are different than many people suggest. Some of the analyses are so far off … its hard to see how their assumptions could be valid. What we know is that 4 days into the system, all the money was used up. Here is some simple math with no assumptions, which limits the ways it can go wrong. If each transaction resulted in $3500 “rebate”, $1B USD would require 286k transactions. If each transaction resulted in a $4500 “rebate”, $1B USD would require 222k transaction. So in the 4 days that this program lived, somewhere between 222k and 286k vehicles were swapped out. The assumptions built into the article above are

It should be obvious that this assumption did not hold for C4C. Moreover, with, again, trivial mathematics, we can show the hypothesis put forth in the article is wrong. And we can estimate by how much they are wrong (and why it is good they are wrong).

The article posits some on the 10-20% increase of sales over the 200k replacement over 3 months. That is, for the roughly 91 days in the quarter year, you expect about 2198 sales per day (on average) for the type of replacement that the C4C program wanted to accelerate. The article posits that this 10-20% increase, lets call it 20% for simplicity, will add about 440 cars per day to the purchases, over the course of the 91 day quarter year period. In the space of 4 days, something between 222k and 286k cars were sold. Thats between 56k and 72k cars per day sold. The null hypothesis (no affect) suggests that we would see 2.2k sales per day. The article hypothesis (20%) suggests we would se 2.6k sales per day. The actual observed? 55-72k per day. Obviously their hypothesis is not well supported by the data. Of course it gets worse (for their hypothesis). If these purchases are driven (pun intended) by the program, they should fall off when the program ran out of money (as it did on Thursday). From what I heard, they have indeed fallen off, as dealers aren’t able to offer these discounts anymore. The dealers all told us how fast cars were flying off the floor. The numbers back them up. So the signal is not 440 cars per day as surmised by the article, but simewhere between 53k and 70k cars per day. Or 133x to 175x the hypothesized signal level. Which was sustained during the lifetime of the program. It should be obvious now that the article is incorrect in terms of real costs, as their conclusions are incorrect, based upon assumptions that were not borne out. But their model is essentially correct. The $250M spent per day by the government generated 53-70k additional car purchases. Lets use an average selling price of $20k for each new car. Some might be $15k, some might be higher. 53-70k additional car purchases resulted in between $1.06B to $1.4B additional revenue per day. With a 6% sales tax here in Michigan, and for the moment, using that as an average, this resulted in $63.6M to $84M in additional sales tax revenue to the states. Per day. Over 50 states, thats $1.27M to $1.68M per day. 55k car purchases per day would be 20.1M per year. 70k car purchases per day would be 25.6M per year. These are unsustainable numbers … but what if the program was crafted differently? Lets get to that in a moment. There are a few lessons that should be derived from this First: Cars cost too much. That this program generated the sales they did means that at a higher price, the consumer is far less likely to purchase. Auto companies need to drive their prices down to create cost effective transportation. Second: There was a real measurable ROI from this program, a real tangible return to the states in sales tax revenue, as well as a return to many other stake holders. $250M/day generated $1B at least in economic activity. Looks like a 300% immediate ROI to me. No waiting, very little risk. Third: Economic stimulus can work if correctly crafted and executed (this program was poorly crafted, and terribly executed, but still managed to stimulate). The trick is to increase the incentive to purchase by lowering the effective cost. Simply throwing money at programs is a recipe for failure. Ok, onto the program. It was obviously an economic stimulus, heavily modified by various political constituencies. Its that latter part we need to make go away. Some folks in our country despise SUVs with a vengeance. They cannot stand the thought of “clunkers” or “gas guzzlers” running around on the highways. They believe (with near religious ferocity) in AGW and other … well … for lack of better terminology … belief systems. In their mind SUVs are driving up the temperature of the atmosphere by COx emissions, and creating acid rain from the NOx and SOx emissions. I won’t argue the (de)merits of their case. I will point out that they used the stimulus to push their particular agenda. Which, curiously, hit a real need, but not the one they thought. Call it an “adverse effect”. Sort of like the ‘failed’ blood pressure medication which has an … er … interesting side effect in middle aged men. Like Pfizer, we need to learn from this stimulus (no pun intended). I am happy that I will get 30 MPG on the highway. This does mean a) fewer trips to the gas pump, b) less outlay of our budget for gas. In a holistic sense, if enough people take advantage of it, it could reduce overall fuel needs, lessening our dependence upon foreign sources of oil. This has benefits in terms of homeland and national security, in addition to market forces driving demand for oil down. Ok. This works to everyone’s advantage here in the US. So what if we ignored the political agenda side? What if we made this $3500 available to anyone who wants to buy a new car? Sort of like Germany? Before you accuse me of wanting to provide a stimulus to the auto industry and their new owners (the government and the unions), note that this has network effects. Increasing this demand increases factory orders. Which increases work production schedules. Which increase sales and wage taxes. Which helps states. Which also translates into employed workers spending money in the economy. You can’t get this benefit by pouring the money down a black hole. You have to jumpstart sales. I mentioned this in the past.

Imagine doing that for HPC. Create a 10% rebate coupon from the government to have people buy new (power efficient) machines to replace older less efficient machines. Offer this up to any/everyone who uses it. Advantage. Lots of economic activity. Lower power consumption, lower cooling and power costs, less foreign oil used. Tax base sees economic activity, and network effects. Disadvantage: capital outlay, but not nearly as much as the other (failed) stimuli. What I am saying is you have to stimulate demand, so that purchases happen. You can do that by lowering the pricing using a rebate mechanism. Demand higher efficiency servers/systems. Remove the lower efficiency systems. Put a ramping declining sunset in (from 10% to 0% in 18 months in graduated steps). Reduce the associated capital taxation rates. Provide incentive to use shared resources (on-demand computing). This works, and works well. You get a good ROI. You have to act fast, and you have to adapt to changes. But hey, what do I know?