Was Cash for Clunkers a dud?

A new paper says that while the targeted stimulus program increased sales, those purchases would have occurred anyway.

By Kim Peterson Sep 16, 2010 3:03PM

Car insurance © Dynamic Graphics/JupiterimagesIt had a clever name and sold a believable idea, but in the end, Cash for Clunkers may have been a dud.

Remember that program? Get a nice chunk of cash -- as much as $4,500 in some cases -- for trading in an old car with poor gas mileage for a fuel-efficient model. It ended up costing the government nearly $3 billion.

Did it deliver on its promises of rallying the economy? Did it help car dealerships just as sales were plunging? A new paper by two economists suggests that Cash for Clunkers didn't help as much as the government hoped.

Here's the finding of the two economists: Yes, Cash for Clunkers did induce Americans to buy an additional 360,000 cars in July and August. But almost all of those purchases were pulled forward from the very near future.

In other words, Cash for Clunkers buyers would have ended up getting a new car anyway.


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In fact, the authors write, "the effect of the program on auto purchases is almost completely reversed by as early as March 2010." So Cash for Clunkers was a flash in the pan in an otherwise dreary industry.

The economists then compared cities with a higher exposure to the program (as measured by number of "clunkers" registered with departments of motor vehicles). As it turns out, cities with more clunkers didn't do any better with jobs or economy compared with cities with fewer clunkers.

So on a local level, the effect of Cash for Clunkers was nil. But what about for the auto industry? Yes, the economists say, auto jobs did improve during that time, but it's unclear whether that was from the car industry bailout or from Cash for Clunkers, according to Time magazine.
By the way, many in the program were trading in Fords and other domestic cars for foreign vehicles -- opening up another can of worms as far as whether that helps or hurts the U.S. economy.

The economist who came up with the idea for Cash for Clunkers told Time magazine that the new paper is off-base. Alan Blinder said Cash for Clunkers wasn't supposed to have a long-term effect; rather, it was to help the economy and carmakers in early  to mid-2009.

"People responded massively to Cash for Clunkers," he told Time. "The effects of the program could be seen in every neighborhood."

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