Cash-for-Clunkers Was a Clunker

Cash-for-Clunkers Was a Clunker

CC0 Public Domain

Keynesian economics is fundamentally misguided because it focuses on how to encourage more spending when the real goal should be to figure out policies that result in more income.

This is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income (i.e., wages, small business income, corporate profits, etc) rather than on “gross domestic product,” which is a measure of how our national income gets allocated (consumption, investment, government, etc).

Simply stated, Keynesians put the cart before the horse. Consumption doesn’t drive growth, it’s a consequence of growth.

But let’s set all that aside because we have new evidence that Keynesian stimulus schemes aren’t even very good at artificially goosing consumption.

Three economists (from MIT and Tex A&M) have crunched the numbers and discovered that Obama’s Cash-for-Clunkers scheme back in 2009 was a failure even by Keynesian standards.

The abstract of the study tells you everything you need to know.

The 2009 Cash for Clunkers program aimed to stimulate consumer spending in the new automobile industry, which was experiencing disproportionate reductions in demand and employment during the Great Recession. Exploiting program eligibility criteria in a regression discontinuity design, we show nearly 60 percent of the subsidies went to households who would have purchased during the two-month program anyway; the rest accelerated sales by no more than eight months. Moreover, the program’s fuel efficiency restrictions shifted purchases toward vehicles that cost on average $5,000 less. On net, Cash for Clunkers significantly reduced total new vehicle spending over the ten month period.

This is remarkable. At the time, the most obvious criticism of the scheme was that it would simply alter the timing of purchases.

And scholars the following year confirmed that the program didn’t have any long-run impact.

But now we find out that there was impact, but it was negative. Here’s the most relevant graph from the study.

It shows actual vehicle spending and estimated spending in the absence of the program.

For readers who like wonky details, here’s the explanatory text for Figure 7 from the study.

The effect of the program on cumulative new vehicle spending by CfC-eligible households is shown in Figure 7. The figure shows actual spending and estimates of counterfactual spending if there had been no CfC program. Cumulative spending under the CfC program was larger than counterfactual spending for the months immediately after the program. However, by February 1 the counterfactual expenditures becomes larger and by April has grown to be $4.0 billion more than actual expenditures under the program. It is difficult to make the case that the brief acceleration in spending justifies the loss of $4.0 billion in revenues to the auto industry, for two reasons. First, we calculate that in order to justify the estimated longer-term reduction in cumulative spending to boost spending for a few months, one would need a discount rate of 208 percent. Given the expected (and realized) duration of the recession, it seems difficult to argue in favor of such a discount rate. Second, we note that Cash for Clunkers seems especially unattractive compared to a counterfactual stimulus policy that left out the environmental component, which also would have accelerated purchases for some households without reducing longer-term spending.

By the way, the authors point out that Cash-for-Clunkers wasn’t even good environmental policy.

One could also argue that this decline in industry revenue over less than a year could be justified to the extent the program offered a cost-effective environmental benefit. Unfortunately, the existing evidence overwhelmingly indicates that this program was a costly way of reducing environmental damage. For example, Knittel [2009] estimates that the most optimistic implied cost of carbon reduced by the program is $237 per ton, while Li et al. [2013] estimate the cost per ton as between $92 and $288. These implied cost of carbon figures are much larger than the social costs of carbon of $33 per ton (in 2007 dollars) estimated by the IWG on the Social Cost of Carbon [Interagency Working Group, 2013].

So let’s see where we stand. The program was bad fiscal policy, bad economic policy, and bad environmental policy.

The trifecta of Obamanomics. No wonder the United States suffered the weakest recovery of the post-WWII era.

P.S. David Letterman had a rather amusing cash-for-clunkers joke back in 2010.

by Dan Mitchell

  • ECwashr

    Yet another embarrassing total FAILURE by HUSSIEN Obama!! What a DISGRACE!!

  • jerry1944

    It also made it be hard to get parts to repair older cars now with all those that got crushed . and i still have a clucker

  • epauls

    “Cash for Clunkers” obviously was a DUMB scheme. At the time I thought it was only a joke as it was obviously a scheme by a very dumb person or a crook. People who traded in their clunker purchased the most expensive replacement they could swindle…the sales tax on the expensive auto and the auto insurance on the expensive replacement placed the purchaser in a BAD financial position. I wouldn’t call this a FAILURE; but I would call this a SWINDLE. The governments were part of the swindle to obtain more sales tax.

  • Clete Tacker

    My girlfriend had an old Ford minivan worth about 1,500.00 bucks, she was about to trade it in for a newer car when we heard about the cfc, we thought it was a joke, but we waited just the same. A month later it went into effect and the cfc program paid her just over 3,000.00 for the old turd when she traded it in. She bought another Ford as they didn’t take the Oliar bailout taxpayer money, we hated to do it but we figured if someone was stupid enough to pay over twice what the van was worth why not, essentially she got some of her income tax back in the form of a stupid liberal program as we were about to trade it anyway.

  • Frederick Douglass

    You do not get rich by destroying wealth. Cash for Clunkers destroyed a lot of wealth.

  • Just Me

    Everyone take a deep breath. This article has a huge hole in it for one specific reason. You find the reason by taking a look from 50,000 feet. These programs had nothing to do with economics, Keynsian or otherwise. Obama had zero interest in stimulating the economy. He had even less interest in helping Blacks, the poor, and even the Democraps. He and Hitlery, Alinsky and their ilk had a much more nefarious purpose for doing cash for clunkers.

    Think about it: What did “free” cellphones do? They enabled the government to know everything at all times about the people they gave the phones to. This was in 2009, before tracking systems were as sophisticated as they are now. Just like Facebook shows the government who is connected to whom, the phones provide phone numbers, daily patterns, even access codes to bank accounts and other internet services. Can they get these other ways? Sure, but this was a slam dunk.

    Freebies also make people beholden to the people in power who will continue to give them things as long as they keep voting them into office. Phones gave the govt control over these people just like EBT cards do. You want to control people? Control how they get food and how they communicate. You want to test their stress levels? Turn off the EBT card, turn off the phone. “Ooops! Our bad. Sorry, it’s on again!” Remember when that happened with EBT cards? That, my friends was a test.

    Now – let’s move onto the cars. You have the CIA creating a program where they can listen in to your conversations while you are in your car. Problem, it works mostly on OBD2 and OBD3 (On Board Diagnostic programs.) OBD1 and before are too ‘clunky’ to allow the govt to listen in and control the workings of your computer-run car. The later model you have, the higher the technology inside. The higher the technology, the better to spy on you…

    Think I’m joking? The week before Cash for Clunkers came out, a buddy from a 3-letter Fed agency sent me a note about how they can control a car “from the sky” if it has OBD2 and above they can turn your car off without your knowledge or permission. I asked a car dealer about it and he said, “Yeah! We love it. This is why we loan to anyone. Miss your payment and we shut it off from here, locate it with built-in GPS and go get it.”

    Adding to this concern was the death 4 years ago of Michael Hastings, the journalist from Rolling Stone who was doing exposés on Obama and CIA Director Brennan. Of course if you research it, you will find the obligatory “there’s nothing to see here, move on” type articles in the mainstream press saying there was no foul play. Yet if you dig far enough, Mercedes said they didn’t think their car went that fast, the explosion was bigger than most in fire departments had seen, and Michael took a route he usually doesn’t take. There are also some emails he sent to friends indicating he was worried. So you do your own math. I went back and read what the 3-letter agency guy sent me, and I think this was the guvmint getting rid of someone and experimenting with what they can get away with. Hey, go watch House of Cards… it’s the clinton whitehouse all over the place.

    So – TL;dr: Free phones aren’t free, Cash for clunkers got rid of cars they couldn’t spy on. People are stupid.

  • D Bryan Loudy

    This was perhaps one of the craziest schemes ever. Being a member of the working poor, I was driving a “true” clunker and had very little money to do any better. It broke my heart to see people of means turning in their vehicles only to be crushed, and buying new cars. The cars they crushed were so much better than the one I had to drive. It didn’t get the clunkers off the road at all because the poor people were not a part of this program. It was mandatory that the traded cars be crushed. At that time, I spoke with one dealer who was absolutely livid about the whole thing. He was required to hold these trade-ins somewhere at his own expense until the vehicles were picked up for the crusher, causing a stock pile of unsaleable cars on his lot. At the time we spoke, he didn’t even know how long those vehicles would remain his responsibility. Cannot tell you how disappointed I was during that whole fiasco.

    Also, I tried the Obama phone. There are a lot of problems with the service; mainly that if you purchase any minutes with your own hard earned money and do not use the minutes by the end of the month, your minutes are deleted. To a very poor person, that is just insane…well, maybe to any person. I mean, why not at least let those minutes roll over? The whole idea, I thought, was to help the poor…not so much. If you try to put extra money in escrow to be changed into minutes at a later time and do not realize your minutes have lapsed, you are then charged 10 cents a minute, quickly eating up the money in escrow…Had that happen to me and believe me, that hurts, financially.

    Seems the drug dealers and such are the only ones who benefit much from these phones. I understand they have hand fulls of these phones they use in their “business”.

    To me, all this just seems to be hypocritical…Helping the poor? Eh, not so much, but is sure sounds good, right?

  • R. T.

    A total failure took good used cars and junked them , driving up the price of used cars and limiting the availability of good used cars ,so people that could not afford a new car could not afford a good used car if they could find one !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • justinwachin

    At the time I had several clunkers I would have eagerly turned in but they did not fall within the program’s eligibility guidelines. I had planned to replace them with a new small truck. In my case both clunkers were polluters in the truest sense of the word. I kept spare oil and power steering fluid in each to replace what leaked out or was burned off.

    I eventually sold one vehicle to someone who has used it for daily travel. The other went to a salvage yard several years later when its fuel pump finally failed. I never purchased the new small truck. I bought a 20 year old used one off Craigslist a few years later for a fraction of what I would have paid for a new truck. In my case Cash For Clunkers would have caused me to buy a new vehicle I would not have purchased otherwise.