A little over a year after Cash for Clunkers ended we now know what many of us had suspected all along, the program was a big waste of taxpayer money.  For several reasons:

1) Every car sold under cash for clunkers cost taxpayers between $5,000 and $24,000;  

2) The $4,500 subsidy was too high. We could have accomplished the same result for less;

3) There are hidden costs that hurt the very poor the most;

4) The environmental benefit was negligible.

Estimating the number of cars that were sold due to Cash for Clunkers in July and August of last year, and that would not have been sold in the absence of the program, is a difficult, but important, task. The number tells us the cost to taxpayers per car sold.  Three main studies shed light on this question.

Based on a survey of 36,000 car buyers in last July and August, the Maritz Automotive Research Group generously estimates that 542,000 extra cars were sold under cash for clunkers, at a taxpayer cost of about $5000 per car sold.

Edmunds.com analysts calculated the number of non-qualifying cars sold during the period and applied this number to the historic relationship of seasonally adjusted car sales of those sold under Cash for Clunkers, to the conclusion that only 125,000 extra cars were sold due to Cash for Clunkers. In this case, cash for clunkers cost taxpayers a whopping $24,000 per vehicle sold!

Most recently, researchers from the Universities of Berkeley and Chicago estimated that an extra 360,000 cars were sold that would have otherwise been sold within seven months of the program ending (by March 2010). The estimate is based on a comparison of DMV data on the number of existing clunkers in a city and the number sold under Cash for Clunkers. This September study finds that every car sold under Cash for Clunkers cost taxpayers an extra $8000.

No matter which of the above estimates is the most accurate, taxpayers got a bad deal. George Mason University economist, Russ Roberts highlights that $4,500 was too big a subsidy and that we could have achieved the same effects with a much smaller amount. When the $1billion program ran out of money within only 4 days, did the “clunkheads,” as he refers to our elected officials, reconsider the subsidy amount in response to the unambiguous market signal? Of course not, they just increased the budget by another $2 billion.

Additionally, there are hidden costs an analysis of Cash for Clunkers should consider.  Cash for Clunkers required that eligible clunkers had to be functioning at the time of the trade-in; the program, thus, destroyed around 700,000 productive cars. The result is an increase in the price of used cars. Edmunds.com reports that prices for some larger models increased by over 30% and that smaller economy cars increased an average of 10%. The very poor are hurt most by this outcome.  The Chicago Tribune calls the result a perverse form of redistribution:

People who can’t afford new cars pay more so that people who can afford new cars pay less.

Lastly, the warm, fuzzy feeling of having at least done something good for the environment gets cooled off pretty quickly when one looks at the environmental impact of Cash for Clunkers. Jeff Jacoby points to two findings that demonstrate the negligible impact:

Researchers at the University of California-Davis calculated that the reduction of carbon dioxide attributable to the program cost no less than $237 per ton. In contrast, carbon emissions credits cost about $20 per ton in international markets.

Using Department of Transportation figures, the Associated Press calculated that replacing inefficient clunkers with new cars getting higher mileage would reduce CO2 emissions by around 700,000 tons a year – less than Americans emit in a single hour. Likewise, the projected reduction in gasoline use amounted to about as much as Americans go through in 4 hours. (And that’s only if you assume –contrary to historical experience – that fuel consumption decreases when fuel efficiency rises.)

I propose to rename the program Wasting Cash on Clunkers.