If you listen to big government fans, you’ll often hear how much better it is for the economy for the government to spend money — much better than letting the taxpayers spend that money themselves — because the government is able to get a much higher “multiple” for every dollar that it spends. The “Cash for Clunkers” story may support that theory, but only if you reverse the sign: the program may have been more economically helpful to the auto makers and the taxpayers if they’d just piled up a few billion bank notes and set them on fire. The program ran for two months, and the government doled out $3 billion in subsidies to new car buyers (their old cars were destroyed). The new car owners benefitted, although it seems to merely have brought forward intended new car purchases in most cases, and the auto makers seemed to benefit by moving out a lot of unsold inventory.
However, a new National Bureau of Economic Research working paper shows that the program actually ended up costing the auto makers between $2.6 and $4 billion. Coyote Blog quotes the WSJ‘s summary:
The irony is that the goals were to help Detroit through the recession by subsidizing sales and to please the green lobby by putting more fuel-efficient cars on the road. By pulling forward purchases that consumers would make later anyway, the Obama Administration also hoped to add to GDP. Christina Romer, then chair of the Council of Economic Advisers, called Cash for Clunkers “very nearly the best possible countercyclical fiscal policy in an economy suffering from temporarily low aggregate demand.”
The A&M economists had the elegant idea of comparing the buying behavior of Texas drivers who owned cars that barely qualified for cash (those that got 18 miles per gallon of gas or less) and those that barely did not (19 mph). Using state DMV sales records, this counterfactual allowed them to isolate the effects of the Cash for Clunkers incentives and show what would have happened without the program.
The two groups were equally likely to purchase a new vehicle over the nine month period that started with Cash for Clunkers, so the subsidy did not create any extra auto business. But in order to meet the fuel efficiency mandate, consumers who got the subsidy were induced to purchase smaller vehicle models with less horsepower that cost on average $2,500 to $3,000 less than those bought by their ineligible peers. The clunkers bought more Corollas, and everybody else more Chevys.
Extrapolated nationally, auto revenues may have plunged by more than what the government spent. And any environmental benefits cannot be justified under the federal social cost of carbon estimate of $33 a ton. Prior research from 2009 and 2013 has shown that the program cost between $237 and $288 a carbon ton.
By taking all those used cars off the road and destroying them, the program also created a nasty price spike in the used car market (which hurt the poor almost exclusively). As P.J. O’Rourke said:
… cash for clunkers was just sinful. You’re taking a bunch of perfectly good vehicles, inexpensive vehicles that could be used by people without much in the way of material means, and crushing them. If someone took a valuable resource — something that could really be useful to people — and destroyed it, they’d be in jail if they were private citizens.
Steve Chapman probably put it best back in 2009, “Cash for Clunkers has been a thrilling moment for advocates of expanded government, who say it proves what we can accomplish when our leaders put their minds to it. They are absolutely right. The program proves the federal government is unsurpassed at two things: dispersing money and destroying things.”