Cash-for-Clunkers: ~$3bn Well-spent?

Posted on 08/09/2010

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Upon signing the Cars Allowance Rebate System (or “Cash for Clunkers” program) into law in August 2009, President Barack Obama stated:

Now, more American consumers will have the chance to purchase newer, more fuel efficient cars and the American economy will continue to get a much-needed boost.

Administration officials were quick to proclaim the program a success:

“This is a wildly successful program,” said Transportation Secretary Ray LaHood on ABCNews.com‘s “Top Line”. “In four days, when we had $1 billion. we sold 250,000 cars. Now, who’s to say that’s not successful?”

However, the success of a particular government policy should not be measured by the speed at which taxpayers’ money is spent (CautiousBull reckons he could give away money just as quickly), but rather by the returns that are achieved. Atif Mian of the University of California, Berkeley and Amir Sufi of the University of Chicago Booth School of Business have recently published a working paper entitled “The Effects of Fiscal Stimulus: Evidence from the 2009 ‘Cash for Clunkers’ Program” in which they attempt to estimate exactly this.

They conclude that “the ‘cash for clunkers’ program, a program that cost $2.85 billion, had no long-run effect on auto purchases… [but instead created] a strong inter-temporal substitution.” Ie. the cash for clunkers program led

President Barack Obama is joined by Vice Presi...

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consumers to bring-forward auto purchases that would have otherwise been made at a later date, creating a sharp decline in sales at the expiry of the program. They go on to suggest that the program also had no impact upon the wider economy: “we also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.”

Mian and Sufi also fail to show whether or not the cash-for-clunkers program had any effect on employment in auto-manufacturing areas.  Although they did find a slight increase in employment in auto-manufacturing areas during the time period in question, the multitude of government aid aimed at the automotive industry meant they were unable to disentangle the effects of the separate programs.

Consequently, Cautious Bull must agree with the Wall Street Journal, which at the time called the program “one of Washington’s all-time dumb ideas.”

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