Was “Cash For Clunkers” a Clunker?

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Economists question how much mileage we got from Cash for Clunkers (Bob Travaglione/www.FoToEdge.com)

Cash for clunkers may have been a total wreck. Ever since the program, which offered consumers cash for a new car when they traded in an old, low-gas-mileage vehicle, rolled off Washington’s policy lot last year there has been debate as to its effectiveness. Car sales shot up. But the program cost $2.8 billion. What’s more, many of the vehicles that consumers bought with their government incentive were either not American made or all that fuel-efficient. Still, it has been generally assumed that the program, despite being expensive, helped car companies and boosted the economy and jobs. Now that assumption is under attack as well.

A new paper by two economists, one from Berkeley and one from Booth School of Business at the University of Chicago, argue that Cash for Clunkers might not have done as much for the economy as was originally thought. Here’s the paper’s summary paragraph:

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; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. The effect of the program on auto purchases was significantly more short-lived than previously suggested. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

So will this end the calls for targeted stimulus plans, like Cash for Clunkers or the homebuyer tax credit, or even Obama’s recent proposal to give an immediate write off for corporation investments? Probably not. Here’s why:

It is clear that cash for clunkers boosted auto sales. How much is under debate. The question is how many people bought cars that might have bought cars anyway had the program not been around. A March study by the Maritz Automotive Research group found that the program boosted auto sales by 542,000. That means tax payers spent a little over $5,000 to generate each additional car purchase. Not bad considering how many people had to be employed to produce a little over a half a million cars.  Other studies have put the number of additional cars sold as low as 125,000. Based on that estimate the program cost tax payers $25,000 per car sold, and looks far less efficient. Either way, though, the program boosted sales, and likely, however limitedly, employment.

Not so fast says Atif Mian and Amir Sufi, the two authors of the new study. The authors do believe that the number of additional cars sold during the seven month program was a hefty 360,000. But they say those additional sales had little effect on jobs or the economy. How did they determine that? Mian and Sufi looked at the cities with the largest and lowest number of clunkers registered with the state’s DMV before the program started in 2008. What they found was that cities with a lot of clunkers didn’t seem to do any better economically during the time the program was enacted than cities that had a fewer number of clunkers. Mian and Sufi did find that employment in places with a lot of auto jobs did jump during the program, but they say that it is hard to identify whether that boost came from cars for clunkers or the general auto industry bailout by the US government.

How can that be? Miam and Sufi says that the sales gains from Cash for Clunkers were quickly reversed. After the program was over, auto sales slumped, compensating for the additional cars sold during the period. One could argue that auto makers and dealers knew that the short-lived program would only produce a short-lived boost to sales, and therefore never staffed up. Here’s what the economists say:

Our results reveal a swift reversal in auto purchases at the expiration of CARS, which highlights a strong inter-temporal substitution that quickly “crowds out” the initial effect. Our evidence suggests that the ‘cash for clunkers’ program, a program that cost $2.85 billion,
had no long run effect on auto purchases.

Does that mean Cash for Clunkers was a failure? No, says Alan Blinder, the economics professor at Princeton who first thought up the program. He hasn’t seen the new paper, but he says anyone who criticizes Cash for Clunkers as having just pulled sales forward is missing the point. He says Cash for Clunkers was never meant to boost auto sales long-term. The whole point of the program was to assist the economy and auto manufactures when they needed help the most, which was in early and mid-2009. Blinder does wish the program had run longer, like say 18 months, instead of 7. He says any program that runs only seven months is not likely to have any measurable effect on the overall economy. Nonetheless, Blinder says Cash for Clunkers proved that the government is able to boost consumption when it wants, and therefore the economy, through targeted programs. And that is enough of a reason to call Cash for Clunkers a success. “With many government programs we look through the microscope to find out what change resulted,” says Blinder. “People responded massively to Cash for Clunkers. The effects of the program could be seen in every neighborhood.”

The stimulus wars continue.