Economic Analysis of the Car Allowance Rebate System ("Cash for Clunkers")

U.S. Council of Economic Advisors
September 10, 2009

"The analysis contained here is necessarily speculative, because little can be said with confidence about two key questions: what is the time frame over which the 'payback' effect will occur, and what would the pace of clunker-replacement-induced demand for new cars have been in the absence of the program? The pace of motor vehicle sales and production in coming months will help narrow the range of plausible interpretations of the effects of the program, as will data from the Department of Transportation on the results of a survey of CARS participants who were asked about what their car-buying plans would have been. There may also have been important but harder to measure economic benefits of the CARS program that are not captured in our analysis, for example on consumer confidence. And of course, the program’s environmental benefits are not accounted for in our analysis.

We nevertheless believe that our analysis offers a reasonable starting point for assessing the program’s economic impact. At a minimum, it shows that if the sales payback is not immediate and complete, the program can be expected to have produced a noticeable impact on GDP growth."

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Library Topic: Cash for Clunkers

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Quotes on Cash for Clunkers from politicians and economists familiar with the effects, and reasons behind, the rebate system.

Commentary or Blog Post

Cash for Clunkers is a generic name for a variety of programs under which the government buys up some of the oldest, most polluting vehicles and scraps them.

Nothing about the flow of money associated with that destruction undoes the destruction. That the rebates are so high that Stan's friends are now making a whimsical purchase just further illustrates the idiocy of the program as a use for government funds.

German Chancellor Angela Merkel's cash-for-clunkers scheme has boosted auto sales, saved factory jobs, and rid the roads of gas guzzlers. But the costs are high.

University of California Professor James Hamilton posits that the destruction of "clunkers" is not a way towards making the nation wealthier. He also doubts the stated environmental benefits of the program.

The program has been popular with consumers and car dealers. Congress initially allocated $1 billion to the program, and this funding was expected to last through November 2009. Yet the program apparently committed the entire $1 billion after only four days in operation, and many interested consumers have not yet been able to consummate a deal.

Matthew DeBord provides links to a wide range of opinions on the successes and failures of "Cash for Clunkers", from The New York Times to the Cato Institute.

Before government extends Cash for Clunkers to more products, it might be a good idea to examine the original. The fact that Washington and the buyers who took advantage of Cash for Clunkers are gaga is hardly evidence that it was in the public interest.

Reason Magazine's Katherine Mangu-Ward discusses a particular instance of fraudulent behavior under the "Cash for Clunkers" program.

On June 24, 2009, President Obama signed into law the Car Allowance Rebate System (CARS, commonly known as 'Cash-For-Clunkers'), one of several stimulus programs whose purpose was to shift expenditures.

The government's Cash for Clunkers program has rescued many auto dealerships from an otherwise moribund summer, creating what one dealer calls 'a whole buying atmosphere.'

As Cash for Clunkers motors through its final day, it's time to ask the question: Just how effective was the government rebate program in getting gas guzzlers off the road?

"Here's an idea: Let's give $50,000 to anyone looking to upgrade to a brand-spanking-new, environmentally friendly home. All we ask in return is that you burn your previous residence into a heap of smoldering cinder."

Under the program, the government would buy back old cars at above market prices and scrap them. According to Blinder, this would accomplish a policy trifecta.

Politicians, automakers and car dealers are banking on American consumers to trade in older gasoline guzzlers for new lean, green machines, lured by payments of up to $4,500 from the government.

It's over, finished, done. And quiet returns to the auto showrooms of America. Cash-for-Clunkers has outlived its funding. But left us with a host of useful lessons.

Fox rounds up thoughts of prominent economists, such as Princeton's Alan Blinder and author Steven Levitt. Fox concludes that the program's "economic verdict is... complicated."

It seems almost petty to join in the loud kvetching that has erupted in the blogosphere--at least in its more economically literate portions--since Congress reauthorized the so-called Cash for Clunkers program last week.

Edmunds.com, the premier online resource for automotive information, has determined that even if Cash for Clunkers reaches its budgeted cap, the program will only help drive about 50,000 incremental new car sales, so each one will cost taxpayers a whopping $20,000.

The Atlantic's Andrew Sullivan criticizes the Republican reaction to the "Cash for Clunkers" program.

"'The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies,' write economists Glenn Hubbard, Greg Mankiw, John Taylor and Kevin Hassett in a paper released by the Romney campaign. But the paper only mentions two studies, and one of them, by Amir Sufi and Atif Mian, is about Cash for Clunkers, a tiny subprogram of the stimulus.

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If you think the Cash for Clunkers program is confusing for dealers and buyers, you should try figuring out its impact on fuel use or carbon emissions. Despite the environmental accolades showered on the program, its environmental effects will be negligible.

Chart or Graph

Edmunds furthermore argued that, had the CARS program not existed, the pace of sales would have been higher, about 10.8 million.

Figure 1 shows aggregate auto purchases for the economy going back to 2004.

The cost of reducing emissions under CARS is much higher than in the EU.

Figure 2 shows that there was a large degree of variation across U.S. states in purchases under the CARS program. Each state is shaded by the ratio of total purchases under CARS scaled by 2004 auto purchases.

"I think it is pretty clear that we spent a few billion dollars making some used car owners happy (by overpaying for their vehicles) but did absolutely nothing to move the trend line in auto sales, as the program appears to have just pulled forward purchases rather than stimulated new ones."

"[O]verall, Cash for Clunkers cost taxpayers $2,000 for each of the 665,000 cars that qualified. Even though this wordplay is tired and overused, I'm going to say it: Cash for Clunkers was a clunker."

Analysis Report White Paper

Burton Abrams and George Parsons of the University of Delaware evaluate the efficiency of the recently introduced 'Cash for Clunkers' program and conclude that the cost exceeds the benefit by approximately $2000 per vehicle.

These programs simply accelerated a change of preference that was already on its way when they were implemented.

It is far too early to ascertain the full impact of the program against its stated goals. It is not too early to assess the impact of the program on automobile sales.

We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

Congress gave in to pressure to expand CARS despite the fact that it will accomplish little if anything to prevent climate change or reduce Americans' dependence on foreign oil.

Video/Podcast/Media

The Cash for Clunkers program, which wrapped up Monday, was designed to help struggling Detroit car companies. But the biggest beneficiaries, according to the government, were foreign brands.

The Los Angeles Times reported Thursday that the government's hugely popular Cash for Clunkers program is leaving some of the most polluting automobiles on the road. Cars built before 1984 are excluded from the program because of lobbying efforts by classic car interests.

The federally sponsored 'cash for clunkers' program allows consumers to trade in their gas guzzlers for more fuel efficient cars, and receive up to $4500 from the government. Alan Blinder pitched the idea last year as a way to reduce auto emissions and bolster the economy.

Reason.tv parodies a car-dealer advertisement for the "Cash for Clunkers" program.

"A program to give consumers cash for their old clunkers took gas guzzling cars off the roads in Germany and boosted new car sales. As Randall Pinkston reports, U.S. is trying this program out."

"Senator Jim DeMint (R-S.C.) on the many problems with the Obama Administration's 'Cash for Clunkers' program."

President Barack Obama praised members of Congress from both parties for rushing to pump new money into a popular cash-purchase program that is running out of money.

Peter Schiff explains Cash for Clunkers 9/19/09 in Valley Forge, PA.

Primary Document

We nevertheless believe that our analysis offers a reasonable starting point for assessing the program’s economic impact. At a minimum, it shows that if the sales payback is not immediate and complete, the program can be expected to have produced a noticeable impact on GDP growth.

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