Almost anything would have been better stimulus than ‘Cash for Clunkers’

When the Obama administration first proposed its "cash for clunkers" plan in 2009, the reaction was generally favorable. Congress would spend $2.85 billion to encourage drivers to swap their old gas-guzzlers for newer, more fuel-efficient cars.

An old car dropped in an industrial trash bin advertising the Cash for Clunkers program at Battlefield Ford in Culpeper, Virginia, Aug. 1, 2009. ( Jonathan Ernst/Reuters)

An old car dropped in an industrial trash bin advertising the Cash for Clunkers program at Battlefield Ford in Culpeper, Va., Aug. 1, 2009. (Jonathan Ernst/Reuters)

The program had something for everyone: It would lend a hand to the ailing U.S. auto industry. It would tamp down on oil consumption. And, once launched, the program proved so popular with consumers that it burned through $1 billion in its first five days. Sure, a few critics argued that the program wouldn't be very cost-effective, but no one was really listening.

But, as it turns out, the critics were on to something. A new analysis from the Brookings Institution's Ted Gayer and Emily Parker found that the program was fairly inefficient as economic stimulus and mostly pulled forward auto sales that would have happened anyway. It also cut greenhouse-gas emissions a bit — the equivalent of taking up to 5 million cars off the road for a year — but at a steep cost.

"Cash for Clunkers" wasn't good stimulus

Gayer and Parker find that Americans traded in nearly 700,000 old cars ("clunkers") through the program between July 1 and Aug. 24, 2009. Vehicle sales did rise during that period. But a detailed study suggests that consumers just bought some cars slightly earlier than they otherwise would have. Cumulative purchases over the year were basically unchanged:

(Brookings)

(source: Gayer/Parker)

Other studies have reported similar numbers. A 2011 analysis from Resources for the Future compared U.S. car sales under the program with those in Canada (which didn't have a clunker program) during the same time frame. That study found that 45 percent of cash-for-clunker vouchers went to consumers who would have bought new cars anyway.

Gayer and Parker estimate that pulling these vehicle sales forward probably boosted GDP by about $2 billion and created around 2,050 jobs. That means the program cost about $1.4 million per job created — far less effective than other conventional fiscal stimulus measures, such as cutting payroll taxes or boosting unemployment benefits:

Estimates on cost per job for those other programs come from the Congressional Budget Office. (Credit: Brookings/by Christopher Ingraham )

Estimates on cost per job for those other programs come from the Congressional Budget Office. (Credit: Brookings/by Christopher Ingraham )

Why does this matter? It was just one tiny program, after all. Yet inefficient stimulus programs add up. One recent study by economists Gerald Carlino and Robert Inman found that the 2009 Recovery Act could have been fully 30 percent more effective in boosting the economy if it had been better designed (i.e., more focused on things like aid to states and payroll tax cuts).

What about the environmental benefits?

Now, there were some bright spots. By allowing people to upgrade their vehicles, the "Cash for Clunkers" program did improve the overall efficiency of the U.S. vehicle fleet and cut carbon-dioxide emissions by between 8.58 million tons to 28.3 million tons, the Brookings study found.

To put that in perspective, that's equivalent to saving one to three days' worth of U.S. oil consumption — or taking as many as 5 million cars off the road for a year. That's hardly going to halt global warming by itself, but it's not nothing either.

Yet economists usually want to know the costs of these environmental benefits, too. And Gayer and Parker point out that this is a fairly inefficient way to reduce emissions — costing somewhere between $91 and $301 per ton of carbon avoided.

As the chart below shows, "Cash for Clunkers" was a more cost-effective way to reduce carbon-dioxide emissions than, say, the ethanol tax credit. But it was less cost-effective than, say, a simple carbon tax would have been:

(Brookings)

(source: Gayer/Parker)

The 2011 Resources for the Future study found that Cash for Clunkers increased average fuel economy in the United States by just 0.65 miles per gallon. But, similarly, that study found that there were far cheaper ways to achieve similar savings.

There are a couple reasons the savings might have been so small. For one thing, the fuel-economy requirements were relatively lax: A person could, in theory, trade in a Hummer that got 14 mpg and get a $3,500 voucher for a new 18-mpg SUV. What's more, the gain in efficiency would be partially offset by the energy costs involved in manufacturing the new car.

Defenders of the program could argue that it at least had some impact — and it helped stabilize the U.S. auto industry, which was in an utter tailspin at the time. What's more, it's not as if more cost-effective environmental policies were on the table during the scramble to stimulate the U.S. economy in 2009.

Those are all arguments worth considering. For their part, Gayer and Parker are mainly pointing out that this is worth keeping in mind for next time. "In the event of a future economic recession," they conclude, "we would not recommend repeating the [Cash for Clunkers] program."

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