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October 31 2013

Cash for Clunkers: The Real Lemon

Patrice J. Lee

In 2009, Congress approved nearly $3 billion dollars for the popular “Cash for Clunkers” program as part of its federal stimulus plan. A new report finds that the program did little to stimulate additional car buying and created fewer jobs than was expected.

The Car Allowance Rebate System (CARS or Cash for Clunkers) was hailed as a savior at that state in the Great Recession. To refresh your memory, CARS incentivized people to trade in old cars which then had to be destroyed for credit toward a new one. If a consumer purchased a fuel-efficient vehicle she received a higher credit. 

Because of the predicted boost in car purchases, hiring in the auto industry was expected to rise – serving as a bright spot in the midst of plummeting employment. However, a new Brookings report confirms what other reports have said: Cash for Clunkers didn’t stimulate new sales, but shifted the timing of sales that would have occurred later and subsequently, it didn’t result in tens of thousands of new jobs.

The Detroit News reports:

A Brookings Institution study found the $2.85 billion program “provided a short-term boost in vehicle sales, which were pulled forward from sales that would have occurred in subsequent months. There was a small increase in employment but the implied cost per job created ($1.4 million) was far higher than other fiscal stimulus programs.”

The study — from researchers Ted Gayer and Emily Parker — said the “Car Allowance Rebate System,” or CARS did little to boost employment. This is at least the fourth major study since 2012 that has raised questions about the value of the program.

The White House Council of Economic Advisers in 2009 had estimated far more jobs as a result of the program. The program “estimated that cash for clunkers will create 70,000 jobs in the second half of 2009.”


The study noted that during “Cash for Clunkers,” the program accounted for 31.4 percent of total auto sales. Vehicle sales fell by 38 percent in September after the program expired. The study and several other studies suggest the program pulled ahead a $2 billion increase in third quarter Gross Domestic Program from the next six months. It also argues that the program “provided a short-term boost in vehicle sales of approximately 380,000 vehicles, which were pulled forward from sales that would have occurred in subsequent months.”

This program is a great demonstration of how well-intentioned government policies can really muck up the economy. Policymakers schooled in the Keynesian economics have the faulty notion that they can stimulate economic activity through government spending. These days it’s the Federal Reserve printing up boatloads of money and holding down interest rates.

In the Cash for Clunkers case, Congress and the White House wasted billions of taxpayers’ money to attract buyers to move up their purchases. That was a change in the timing of consumer activity, not new activity. Don’t tell that to the White House which waged battle with auto experts Edmunds.com back in 2009 after an Edmunds report found the program was not the stimulus it was made out to be.

And what gets left out of the Cash for Clunkers story is one unintended consequence: it hurt charities benefiting the poor and sick. CARS robbed charities of millions of dollars in income they typically generated from reselling donated vehicles to fund their programs. Goodwill Industries, the National Kidney Foundation and myriad local organizations were affected, but that was just swatted down is “negligible” by the White House.

One lesson for future policymakers from this experiment: when you get a dim idea that involves tinkering with specific industries to stimulate economic activity – don’t!

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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