Cash for Clunkers was a Lemon

According to this recent article on Foxnews.com, the Cars Allowance Rebate System (CARS), also know as the "Cash for Clunkers" program, that was introduced by the government a few years ago has fallen quite short of its anticipated impact on the environment and to the economy.  The program offered an amount from $3,500 - 4,500 off the price of a new car if it had a higher fuel economy than the owner's current car to be traded in.

The government spent nearly $3 billion on this initiative only to find that the results were far less significant than expected.  Not only was the total emissions reduction not substantial, but the overall impact on the automotive industry and the economy as a whole was somewhat of a bust.  Further analysis of the CARS initiative shows that many of the sales of new cars were simply pulled forward from a future date in which the sale would have been made anyway.  So the demand curve for new cars would have shifted to the right in the short run, but then would have reverted back to the left in the long run which would have basically equaled the same net result without the program.

The article also discusses the impact of employment and job creation in the short-term, which according to the author, could have been realized through tax cuts to employers' and employees' payroll taxes.  If anything, we can see that billion dollar initiatives don't always have the long-term impact that they're touted to have at the time of implementation.


Bomber said...

I agree that the overall success of the "Cash for Clunkers" campaign was short lived, but hesitant to agree that the government feels it under-performed. Just as we saw during the recent recession in the housing market, the government program did much of what it set out to do. It stimulate car sales and increased dealership profits through a shot in the right arm as sales dipped below 10 million.

According to TIME Business, the program was able to convert otherwise unqualified car buyers in to new car owners, which created a positive trend. As for borrowed future sales, many buyers were not purchasing in 2009 as a result of the 2008 uncertainty, and may not have otherwise purchased. Tax cuts are another story for another day, the end.

Dave Tufte said...

BOHICA: 100/100.

OMG. Don't get me (or any economist) started about cash for clunkers.

First off, I don't think you should call it an "anticipated" effect on the economy. I think what you mean is "advertised". I would classify most of the predictions of the beneficial effects of this program to be out and out lies.

The bit about pulling transactions forward in time is straight out of Chapter 3 of Png and Lehmann.

Dave Tufte said...

Bomber: 44/50 (stimulated not stimulate, into not in to).

Bomber, the prediction and the evidence are that it didn't stimulate car sales. Instead it just shifted them in time. If this is true, then profits did the same thing.

Now, here's a more philosophical question. Why is it good to "... convert otherwise unqualified car buyers in to new car owners ..."? It's hard to even conceive of what evidence might be used to support such an unqualified statement.

But, let me give you an analogy. People would have said, circa 2005, that mortgage finance was converting otherwise unqualified home buyers into new home owners. How did that work out for the country?