How to Judge “Cash for Clunkers”

clunker.jpeg(Photo: NYT)

At this point, it’s difficult to know exactly what the government’s "cash for clunkers" program is supposed to accomplish.

Claims about its economic and environmental benefits are increasingly detached from reality, and the chief advantage of the program would seem to be that it "worked," in the sense that it was popular among those looking to buy a car.

To add to Elana’s post yesterday on the "myths" circulating about the program, let me offer a few thoughts on how best to think about whether the program has provided actual net benefits.

The first thing to consider is what would have happened in the absence of the program. Vehicle sales rose fairly strongly in July, and this will no doubt be attributed to the "clunkers" rebates.

But during the recession, sales hit historic lows. Replacement rates for vehicles sank to unsustainable levels, suggesting quite a bit of pent up demand in the economy.

With economic recovery and continued improvement in credit markets, sales were sure to begin rising, with or without a government subsidy.

"Cash for clunkers" may have altered the timing of purchases, but in all likelihood most of these buyers were going to be in the market soon anyway.

What about the efficiency savings generated by the program? To generate its 0.5 percent of oil consumption savings estimate, the study Elana cites used the following assumptions:

The projection assumes some 250,000 "clunkers" with an average 15 miles
per gallon efficiency are traded in for vehicles rated at an average 25
mpg, and travel an average 10,000 miles per year.

Given that far less than a 10 mile per gallon improvement is required to get a $3,500 voucher for a car or any voucher on an SUV or truck, it’s not clear that this is an appropriate number to use. And even when efficiencies do improve significantly, the increase in mileage can’t be solely attributed to the program.

Moreover, most of the clunkers being traded in this summer will have been purchased at a time when oil prices were lower than they are at present. Real oil prices in 2003 were half their current level; those in 1998 were one-fifth of prices now.

So in all likelihood, efficiencies for new vehicle purchases would be, on average, higher than those of trade-ins even without the program.

Where the program has succeeded in creating new sales, the environmental benefits are even sketchier than Elana relates. Once the energy emissions from producing a new automobile to replace a functioning old one are taken into account, the meager savings from the program may vanish entirely.

In assessing "cash for clunkers," we should also compare it with potential alternative policies. Money for the program might instead have been used to close budget holes at transit agencies, limiting service cuts, or to fund other green measures like weatherization programs.

As economic stimulus, the plan likely performed poorly relative to alternatives. As mentioned above, it is questionable whether the program generated many new sales.

Those currently in the market for a new car are probably not among the hardest hit by the recession and will be less likely to use a marginal dollar. That means that the subsidy provided by "cash for clunkers" may simply be replacing private spending rather than facilitating spending that wouldn’t otherwise take place.

Unemployment benefits, on the other hand, overwhelmingly add to consumption; recipients would be spending less, in absolute terms, without the benefit.

Perhaps with more stringent efficiency requirements — particularly for truck purchases — the policy would have performed better. As it stands, "cash for clunkers" primarily served to give people who didn’t need the help money to buy cars they were going to buy anyway.

  • By getting older (but fixable) cars off the road, Cash For Clunkers may have actually denied current and future jobs to auto repair personnel.

  • It’s good to hear Ryan weigh in. It would go a long way if mainstream environmentalist groups were to use their political clout to carry this message to the Senate. We all understand that the CARS program we have now is not at all the same thing we thought it would be six months ago.

  • rlb

    Cash for Clunkers is a way to prop up the auto industry. From an economic perspective, the auto industry is the most important industry in the country and has the most jobs attached to it. People who supply parts for the auto industry that would have been out of a job a few months from now may not be as a result of cash for clunkers. This is why cash for clunkers exists. The environmental consequences of cash for clunkers are laughably secondary.
    Granted, transit workers may soon be out of a job that may have been saved were that billion dollars placed somewhere else.

  • Ian Turner

    At this point I’d say it’s pretty clear what the program is supposed to accomplish: It’s supposed to get incumbents reelected.

  • I’m an elitist non-driver–so I can only judge this from the outside looking in–but to me it seems nothing more than a clever variation on Bush’s $300 rebate checks from a few years back. Except this time it’s targeted at certain voting blocks (the lower middle class, union laborers) who voted pretty reliably for Mr. Obama.

  • The most ironic thing about cash for clunkers (well top 2) is the program doesn’t allow purchasing bicycles, which are rated at 900 MPG(equivalent) Highway and 250 City. The larger of the CARS bonuses (or whatever you want to call it) will buy 9 nice bicycles equipped for city riding and capable of carrying about 300 pounds of payload (rider and cargo). As a point of comparison, this is about the same capacity as a tricked out Suburban, except when equipped to carry 8 passengers and a driver, you can’t carry a whole lot of stuff, so with 9 bicycles you actually have more cargo capacity than a 9 passenger Suburban, with an energy efficiency of 250 PMPG(equivalent), compared to the Suburban which even with the “small” motor only gets 162 PMPG City, and how often do you see a fully-loaded Suburban running around?

    The other in the top 2? If your clunker is too old you can’t get anything for it.

  • Well, if the purchase of a new car is advanced by one year, then that’s 10,000 miles at 10mpg that is saved on gas. As you mention, the other environmental cost is break even, as the new car would be manufactured to replace the clunker one year down the road no matter what. So 250 million gallons is saved by the program.

    The other benefit is that the economy is in dire need of stimulus now. Like, 12% unemployment in CA. And the $4,500 subsidy turns into a, say $25,000 purchase, then that’s a pretty good way to stimulate the economy. The whole issue of stimulus is too find “bang-for-the-buck,” ie to give money where it will be spent. In this case, it’s spent right away, and 5 times over.

    @Rhywn: that’s “bang-for-the-buck” is THE difference with Bush rebates: you can save a rebate, put it in your retirement, or just on a CD, and there’s no effect whatsoever on the economy. You can’t save with C4C, you must spend.

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