Revisiting Cash for Clunkers

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In 2009, President Obama and the Democrat Congress colluded to pass the Car Allowance Rebate System (CARS)—better known as CASH FOR CLUNKERS. As part of this economic/environmental stimulus program, car buyers who traded-in their gas guzzlers could get a $3500 or $4500 government cash voucher, depending on MPG ratings. The program was supposed to get inefficient polluters off the road and “jumpstart the economy.” Several studies, including one just published by Mark Hoekstra and colleagues at Texas A&M (http://papers.nber.org/tmp/22808-w20349.pdf), should put the final nails in the coffin of this ill-fated idea.

CARS was discussed extensively on this blog. There were several problems from the outset

  • CARS was arbitrary. Only those who owned a vehicle worth less than the $3500/$4500 voucher amount would benefit from the program. Cars worth more could be sold outright or traded anyway.
  • CARS encouraged debt with marginal buyers. By providing an inflated trade-in value of $3500 or $4500, low-income consumers were encouraged to purchase a new car. Dealers and banks are eager to provide financing because the vouchers provided a sufficient down payment, even though low-income buyers were more likely to default down the road.
  • Only certain new cars qualified, so most buyers had to incur debt to benefit. Consumers only received the voucher if they purchased a new car, something less desirable for low-income Americans.

Many on the left (and sadly a few on the right) initially called this program a success because many Americans predictably took the free money. U.S. Transportation Secretary Ray LaHood called it a “wildly successful run.” But clear evidence points to the failure. The Hoekstra study—and others—underscores the flaws.

  • About 677,000 vehicles were sold in the U.S. as part of the $2.9 billion CARS program. Vehicle sales to buyers with marginal incomes rose about 50% during the period, but according to a University of Delaware study, each vehicle traded in actually cost the government a net of about $2000.
  • Some dealers appear to have raised prices on eligible vehicles because the subsidy was sufficient to attract buyers. In other words, part of the subsidy benefitted dealers, not consumers.
  • According to the analysis by Hoekstra and his colleagues, most of the sales were “pulled forward” and would have occurred anyway, and the entire increase due to CARS was actually offset by declines 7-9 months after the program ended. Not surprisingly, U.S. auto sales declined by 23% the following month, led by GM and Chrysler with drops of 45% and 42% respectively.
  • Because CARS encouraged buyers to purchase higher MPG vehicles, most of the cars sold in the program were less expensive, low-margin models. Customers spent about $4600 than they would have if the program did not exist, resulting in an annual decline in auto industry revenues by about $3 billion a year.
  • CARS resulted in an increase in used car prices. Older vehicles with values in the “clunker” range rose in value because they could be exchanged for government vouchers. As more Americans participated in the program, the supply of “cheap cars” declined, raising prices on the market.
  • The program destroyed functioning vehicles. Typically, low-MPG vehicles are not driven as much anyway, but they provide essential transportation to low-income, occasional drivers. These vehicles were eliminated from the market, forcing prospective customers in the used car market to spend more.

CARS was a classic attempt by central planners to “fix problems” in the market, pick winners and losers, and stimulate the economy overall. Washington has passed many such programs, including the infamous “shovel-ready jobs that ended up not being shovel-ready.” Their proponents always claim success when the funds are flowing, but usually disappear when the unintended consequences become apparent. These programs squander tax revenues (or create more government debt) in the short term and disrupt markets over the long term. Fundamentally, they are part of the cronyism that is plaguing our nation.

1 Comment

1 Comment

  1. JKW  •  Aug 18, 2014 @11:43 AM

    This is a clear case of government’s inability to control the marketplace. Taxpayers waste a fortune and it never works.