Cash for Clunkers destroyed so many used cars that the average price of used cars rose $1,800

Cash for Clunkers destroyed so many used cars that the average price of used cars rose $1,800

Cash for Clunkers was a Clunker






The Cash for Clunkers program, formally known as the Consumer Assistance to Recycle and Save (CARS) Act, was a nationwide vehicle scrappage program. Signed into law on June 24, 2009, the program incentivized households to replace used, fuel inefficient vehicles with new, fuel efficient vehicles. Specifically, the program offered consumers a rebate of $3,500 or $4,500 towards the purchase of a new fuel efficient car provided they scrapped a used vehicle. Transactions became eligible for rebates on July 1, 2009 and ended on August 24, 2009. Over the eight weeks of the program, Congress allocated a total of $3 billion toward the subsidies. More than 677,000 vehicles were purchased under the program. (1)

Turns out the program was a clunker according to economists at Texas A&M University who found the program, which was designed to increase spending on new vehicles had the opposite effect, costing the automobile industry billions in lost revenue. (2)

A major objective of the program—and arguably the primary one—was to provide economic stimulus to US vehicle and parts manufacturers (and therefore the US economy) by shifting expenditures “...from future periods when the economy is likely to be stronger to the present…” However, another priority of the Obama Administration at that time was to improve fuel efficiency of the US vehicle fleet, as echoed in President Obama’s 2009 statement that “Ending our dependence on oil, indeed, ending our dependence on fossil fuels, represents perhaps the most difficult challenge we have ever faced.” As a result, the policy was written to achieve multiple goals: to accelerate the purchase of new vehicles to increase revenues to the auto industry, and to increase the fuel efficiency of the fleet by requiring new vehicles purchased under the program to have sufficiently high fuel economy. (2)

The Texas A&M economists reported the increase in sales during the two month program was completely offset during the following seven to nine months, consistent with previous research. However, they also found the program’s fuel efficiency restrictions induced households to purchase more fuel efficient but less expensive vehicles, thereby reducing industry revenues by three billion dollars over the entire nine to eleven month period. So, instead of buying expensive hybrids such as the Toyota Prius, most people fulfilled the fuel requirement by purchasing economy cars. The Toyota Corolla was the top-selling vehicle under the program. (1)

Everyone knew the program would borrow from sales that would have occurred in the future. The question was by how much? In 2009, President Obama’s Council of Economic Advisors assumed that it would lead people to buy cars five years sooner than they would have otherwise. But three academic studies found that the program borrowed sales from six to ten months in the future. (1)

The Texas A&M study came to roughly the same conclusion, showing that over a nine to eleven month period, including that two months of the program, Cash for Clunkers reduced the amount of money spent on new cars by two to four billion dollars. They attributed this to the fuel efficiency restrictions imposed on new vehicles that could be purchased with the subsidy, which induced households to buy smaller and less expensive vehicles. In short, by lowering the relative price of smaller, more fuel efficient vehicles, the program induced households to purchase vehicles that cost between $4,000 and $6,000 less than the vehicles they otherwise would have purchased. This highlights the conflict between the stimulus and environmental objectives of the policy. (2)


Thus, while the stimulus program did increase revenues to the auto industry during the two-month program, the environmental component of the bill actually lowered total new vehicle spending over less than a year by inducing people to buy more fuel efficient but less expensive cars. More generally, the Texas A&M findings highlight the difficulty of designing policies to achieve multiple goals, and suggest that in this particular case, environmental objectives undermined and even reversed the stimulus impact of the program. (2)

What about environmental savings? Canada researchers found that the program resulted in a reduction in gasoline consumption of 884 to 2,916 million gallons, which is equivalent to about 2.9 to 7.9 days worth of current US gasoline consumption. They also found that the program resulted in a reduction of carbon dioxide emissions of only 8.58 to 28.28 million tons. (3) For comparison, the 28 million tons of savings represent about one day of China’s emissions. (4)

Lastly, Cash for Clunkers destroyed so many used cars that the average price of used cars rose $1,800. (5)

Jack Dini
Livermore, CA

References

Kathleen Pender, “Cash for clunkers cost dealers,” San Francisco Chronicle, August 14, 2014
Mark Hoekstra, Steven L. Puller and Jeremy West, “Cash for Corollas; when stimulus reduces spending,” Texas A&M University, July 2014
Ted Gayer and Emily Parker, “Cash for Clunkers: an evaluation of the car allowance system,” Brookings Institute, October 31, 2013
“List of countries by carbon dioxide emissions,” en.wikipeida.org, August 26, 2014
John Stossel, No They Can’t, (New York, Threshold Editions, 2012), 41