Global Crisis Blog

“Cash for Clunkers” Was Itself a Clunker

By Shlomo Maital


Ford Explorer 4WD: Most popular “cash for clunkers” vehicle – green?  fuel efficient???

America’s “Car Allowance Rebate System” (CARS), or “Cash for Clunkers” was a $3 b. fiscal stimulus program giving Americans each $4,500 for scrapping old cars and buying new ones.  The program began officially on July 1/2009 and ended on Aug. 24.  When the initial $1 b. appropriated by Congress was exhausted, an additional $2 b. was allocated.

Of the new cars sold under the program, Toyota sold 19%, GM 18%, Ford 14%, Honda 13% and Nissan, 9%.  Japanese and Korean car companies gained significant market share as a result of the program, at the expense of embattled American firms. (A similar program in Japan excluded US vehicles.)   According to Wikipedia,  “a study published after the program by researchers at the University of Delaware concluded that for each vehicle trade, the program had a net cost of approximately $2,000, with total costs outweighing all benefits by $1.4 billion.”

Democratic politicians claimed Cash for Clunkers was a big success, citing all the new car purchases it created (690,000 dealer transactions).  But writing in The American, the journal of the American Enterprise Institute (a right-wing pro-free-market think tank), Max Borders lists 10 separate reasons why the program was a major badly-planned failure.

1. The policy concentrated benefits on political interests. Because the stimulus focused on the auto industry, many wondered whether the policy was a means not only to rescue a bloated, wasteful U.S. auto industry, but to pay back the unions—particularly the United Auto Workers—for their support for presidential candidate Barack Obama and the Democratic Party in the 2008 election.

2. The policy had the effect of sucking revenues from other industries ailing from recession. In other words, if people are paid to spend money on cars, they’re less likely to spend money in other sectors.

3. The policy destroyed goods that had value, which means it destroyed value. Professor John Quelch of Harvard Business School writes: “A $2,500 incentive would have attracted the older, most fuel inefficient used cars.  Instead, a $4,500 incentive attracted many perfectly serviceable vehicles. Because of government concerns over fraudulent recycling of trade-ins, vehicles had to be destroyed.”

4. The policy distorted the used-car market by reducing the availability of cars desired especially by the working poor. Why, in the middle of a recession, would anyone want to drive up the price of goods used by society’s most vulnerable people?

5. The policies’ stated goals, if met at all, were met inconsequentially. Shikha Dalmia, writing for Forbes, shows improvements in air quality and fuel savings were virtually undetectable: “Even if one accepts [Transportation Secretary Ray] LaHood’s numbers, the fuel savings add up to only 72 million fewer gallons of gasoline every year—about what Americans consume in four and a half hours.”

6. The policy generated considerable opportunity costs. Even if you grossly overestimate the success of the policy, the costs of forgone uses of the resources are, though impossible to measure, still considerable. In other words, every dollar you spend on x is a dollar you cannot spend on y.

7. The policy successfully purchased a prophecy that would have fulfilled itself within two or three months. Most of the people who participated in Cash for Clunkers would have bought cars soon anyway. As car review company Edmunds famously pointed out, the policy shifting buying patterns forward a few months at most. Here are the results: “Nearly 690,000 vehicles were sold during the Cash for Clunkers program, but Edmunds.com analysts calculated that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway.

8. The policy subsidized people to make unwise purchases. It may take more time to determine this fallout, but—like subprime mortgages and artificially low interest rates—some people had incentives to get into cars they would have wisely avoided.

9. The policy allowed politicians to claim success despite failure. When any macro-economic policy measure is complicated and convoluted, it’s easier to obscure what goes wrong. This is exactly what Congress and the Obama administration did in this case. A lot of politicians deluded themselves so thoroughly that Congress went back for another round, extending the program.

10. The policy was an old-fashioned wealth transfer. “A and B put their heads together to decide what C shall be made to do for D” wrote William Graham Sumner in 1883. “The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C’s interests, are entirely overlooked. I call C the Forgotten Man.” But let us not forget C.  Government resources come from somewhere, as did the cash for all those clunkers.