Cash for clunkers: still looking pretty good

I’m not sure why it’s so hard for people to admit that the Cash for Clunkers program basically worked.

I mean, I know it seems like the ultimate boondoggle: let’s pay people to buy new cars! And let’s layer over some fairly lame mileage requirements to give the program a green patina! I myself was somewhat skeptical (although certainly not dismissive) of the idea when it was first mooted.

Now a new study from the University of Michigan (pdf) performs a regression analysis to predict what the average fuel economy of cars bought this summer would have been in the absence of the cash for clunkers program. The study concludes that C4C raised the average fuel economy of vehicles purchased by 0.6 – 0.7 miles per gallon.

Cue Edmund’s Green Car Advisor:

> Neither of the study’s authors discussed whether the slight improvement in average fuel economy that resulted from the clunkers program justified its cost to American taxpayers.

> However, another study concluded the program was a very expensive way to reduce carbon-dioxide emissions. Sivak and Schoettle’s work seems to support the earlier study.

But…the whole idea of a stimulus program is to spend taxpayer money. Early word suggests that the stimulus benefits of the program were modest but real. The fuel economy improvements are just a nice side benefit of the program, and it makes little sense to judge the program solely or even primarily by the criterion of carbon abatement cost.

Further, a 0.6 mpg jump in fuel economy isn’t really so slight. From 1987 to 2008, the average fuel economy of the U.S. fleet improved by only 1.2 mpg. *1.2 mpg over a span of 21 years!* In comparison, a 0.6 mpg jump in two months doesn’t seem so small. (Admittedly, there’s a difference between the average fuel economy of the entire fleet and the average fuel economy of new cars sold, but the comparison still provides some needed context.)

Joe Romm points out that the future gas savings will have some follow-on benefits:

> Let’s assume the new cars are driven nearly 20% more over the next 5 years, and that the average price of gasoline over the next five years is $3.50. Then we’re “only” saving 140 million gallons a year or roughly $500 million a year. **The $3 billion program “pays for itself” in oil savings in 6 years. And most of that oil savings is money that would have left the country, so it is a (small) secondary stimulus.**

Cash for clunkers wasn’t a perfect program or even necessarily a great program. But it did what it was supposed to do, offered some real environmental side benefits, and didn’t cost a whole lot. And now that we see how responsive consumers are to incentives offered at the time of car purchase, let’s get started on that feebate progam. Whoooo! Feebates!

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  1. Brian - September 15, 2009

    There are a number of arguments against this program”s effectiveness. Among them:
    1) spending US taxpayers’ money on the world’s most quickly-depreciating assets is probably not the best idea from a financial perspective
    2) long-term MPG increase is debatable at best since the incentive to buy high-MPG cars was temporary
    3) using taxpayer dollars to bump revenues at companies partially-owned by the US government is basically a second, hidden bailout
    4) The stimulus is, by definition, unsustainable and the temporary uptic in GDP growth belies the true economic condition
    You could have spent the same amount of money in a number of ways to get a longer-term economic benefit with the same or greater environmental effects.

  2. Adam Stein - September 15, 2009

    I really don’t want to get into a huge back-and-forth on this, but all four of these arguments seem to mostly miss the point of what a stimulus is: a short-term injection of cash into the economy to goose demand. No one has made any claims about long-term MPG increases.
    More generally, “this money could have been better spent elsewhere” arguments don’t do much for me. Of course it could have been spent in better ways. It could have been spent in worse ways, too. On the merits, this program seems to have done OK.

  3. Virginia - September 16, 2009

    You make a good point that the program should not be judged only on its fuel economy savings.
    But your data on the fuel-economy savings are not convincing. First of all, that difference between the improvement in the whole-fleet fuel economy (1.2 mpg over 21 years) and the improvement in the “summer cars sold” fuel economy (0.6 mpg) is NOT so trivial you can dismiss it in a parenthetical statement. There are 250 million cars in this country. Cash for clunkers resulted in about 700,000 cars sold.
    Second, where are you getting your assumptions about how much these cars will be driven? One of the critiques of the program is that people who could afford to take advantage of it, but still had an old clunker on hand, were probably wealthier families trading in their old 2nd car and not their primary vehicle. If the primary vehicle was already a relatively efficient commute vehicle, and they now decide to drive the new +1 mpg SUV that replaced their old clunker SUV, there may be a decline in actual miles-driven fuel efficiency. I know this is speculative, but people’s behavior matters–and I don’t see what these optimistic extrapolations about the oil savings are based on.
    I was against C for C at the beginning because it didn’t include used cars, which I thought made the vouchers less valuable and failed to stimulate the small-business economy (e.g., the dealers as opposed to the manufacturers). I also thought the mpg savings were picayune.
    I agree that it worked better than expected, just from its sheer popularity. There may be some cultural shifts that arise from 700000 more families getting out of their SUVs. But I have yet to see any solid data that suggest that this is more than a drop in the bucket, fuel-economy wise.

  4. Jason - September 16, 2009

    I got this email from a friend:
    “A vehicle at 15 mpg and 12,000 miles per year uses 800 gallons a year of gasoline. A vehicle at 25 mpg and 12,000 miles per year uses 480 gallons a year. So, the average clunker transaction will reduce US gasoline consumption by 320 gallons per year. They claim 700,000 vehicles

  5. Emma - September 16, 2009

    Interesting article – my personal issue with the C4C program was that they demolished the cars when they could have been given to people who have a genuine need. I understand this wouldn’t have reduced the CO2 emissions, but it could help some people who are in genuine need for transportation get mobilized.

  6. michelle - September 16, 2009

    As previous posters have pointed out, the environmental benefits of C for C will probably be negligible, and I won’t repeat those valid comments here. Of course Mr. Stein doesn’t want to debate this subject, because he realizes it is a senseless argument he has no chance of winning. To prove this point, I present the following:
    1. The government’s definition of “successful program” is the instantaneous evaporation of taxpayer money. Using that criteria, yes, this was a SMASHING success.
    2. As of today, (9-16-09) most dealerships are STILL waiting for their government checks. This industry is a cash-intensive one, and having to wait months for payment on items already delivered is not feasible.
    3. Notice how this ‘program’ was instituted just after the forced closing of hundreds, if not thousands, of other dealerships? If this program were to stimulate the economy at all, (which it didn’t,) I’m quite sure the effects could have been more widely distributed.
    4. Just as in subsidizing mortgages for people who could not qualify or could not afford them, assistance was most likely given to folks who will, at some point in the future, either have their vehicle repossed because they can’t afford the payments, or will drive without insurance, because they won’t be able to afford that either. (So if you don’t have uninsured motorist coverage on your auto policy, I highly recommend adding it *today*.)
    5. Yes, Mr. Stein is correct when he states that the point of the ‘stimulus’ was to spend as much taxpayer money as possible, as quickly as possible. Unfortunately, only the government would believe that incurring future debt to temporarily improve today’s situation is a good idea. It is IMPOSSIBLE to borrow one’s way to wealth.
    6. Taxpayer money was also wasted by paying inflated or above-market-value prices for used cars. This in turn has caused: A. Used vehicle prices to increase, making these cars more expensive for the people who cannot afford new ones; B. Caused a serious drop in donations to charities that rely on this income; C. Made the price of used parts (recycling, dummies!) that could have been used in the future more expensive, as now these parts no longer exist. (yes, I’ve shopped at salvage yards to fix my car)
    7. The naturally-occuring cycle of new vehicle sales has been altered; the purchase of all these cars now would probably have spread out over the course of the next year or so, but those future sales have been cannibalized.
    8. Auto manufacturers, in their infinite wisdom, are now ramping up production to meet a phantom demand. In forecasting sales for the next 6 – 12 months, using skewed data from the previous 2 months, I predict an increase in unsold inventory a year from now. Then of course, we’ll probably see a resurrection of this ill-conceived program, to clear that inventory. And the cycle continues.
    9. In my vicinity, there as been a substantial increase in insurance fraud, by people who didn’t qualify for C for C, or didn’t want a new car, but couldn’t sell their used one. So they are reporting their vehicles stolen, and torching them. Now we get to expend more resources to investigate, apprehend, prosecute, and jail people who probably wouldn’t have thought about this, had it not been for the government handout.
    10. And don’t forget the increased insurance premiums we all get to pay for the points made in nos. 4 and 9.
    Capitalism works if government stays OUT of it.

  7. Rob - September 16, 2009

    I have to agree with the other comments. I enjoy your posts Adam, and usually I agree with you, but this program doesn’t add up. I’m not completely opposed to the idea that government spending in times of recession can help revive the economy, I am however strongly opposed to the idea that the government should spend money on *anything*, no matter how little it gets for it’s (our) money – all it does is waste money that could have been used on more effective programs. “This money could have been spent better elsewhere” arguments do a lot for me.

  8. Den Mark Wichar - September 16, 2009

    Tiny tiny tiny mileage upgrade stipulation made no sense, when congress could have & should have made the difference significant. I am NOT one of those “better than nothing” types. I’m sick of tiny tiny tiny gestures. My 21 year old car (’88 Plymouth Reliant stick) did not qualify (& i wouldn’t have traded it anyway), because its efficiency is too high (about 30mpg). Meanwhile, well-off people whose original cars with mpg’s far less than mine traded for cars that STILL get less mileage than mine. CfC was stunningly stupid, for many reasons.

  9. Adam Stein - September 16, 2009

    Well, I still don’t really want to get in a big back-and-forth on this, but it’s sort of interesting how much most of these comments fail to engage with the central points in the post. A laundry list of quibbles and hypothetical secondary effects don’t really undo the positive stimulus effects of this inexpensive program (0.3 – 0.4 GDP growth in the third quarter) and the modest environmental benefits (a few hundred million gallons of gasoline per year).
    Broad statements like “Capitalism works if government stays OUT of it” are sort of breathtaking in their lack of consideration for recent events, but Keynesianism is actually alive and well.

  10. Sara - September 16, 2009

    Since our entire economy is based on rampant consumerism I can see why this would be considered an economic stimulus. I am curious though why from an environmental perspective no one has discussed the benefits of keeping the old car. There is a carbon footprint and a use of resources associated with building a new car, especially one that no one needs. I seriously doubt that a .6 or .7 mileage improvement is enough to offset this use of energy and raw materials. There are ways to improve the efficiency of old cars but from an environmental perspective if we look at the whole picture it may be better to use what you have until it is no longer useful rather than buying the latest shiny toy.

  11. Den Mark Wichar - September 16, 2009

    And what would be the projected change in gdp for the YEAR, or for the DECADE. Third quarter? Obviously! I’m surprised you didn’t detail the “powerful” boost to the gdp per HOUR, maybe based on eight-hour factory shifts! Sorry. This program was yet another in a huge & grotesque parade of missed opportunities. There is no way to make a compelling case for a program that fell so far short of what could have been.

  12. Adam Stein - September 16, 2009

    Recessions are measured in quarters. The positive GDP effect is projected to extend into Q4, as automakers replenish inventory. Just yesterday the New York Times reported that the recession is likely over, although the economy still has a long way to go toward recovery.

  13. Jake Brown - September 16, 2009

    Keep in mind, that $375 million will keep giving back over several years, whereas the program cost a 1-time $3 billion.
    Not to say that it was a profitable program, but to compare $3 billion to $375 million, is misleading.
    It’s entirely conceivable that the oil savings will last for at least 5 years, if not the 10 that it will take for the program to reach parity.

  14. Jake Brown - September 16, 2009

    I see a common thread in the kinds of arguments you put forward here. The kind of economic strategy you’re advocating is great 95% of the time.
    But government stimulus is necessary when the CPI becomes negative because demand is no longer keeping up with supply. Using a monetary policy (the fed changing interest rates) broke down because they dropped rates to 0% (lower rates spur growth and inflation), but the economy kept shrinking and inflation kept going down. In 1929, the country faced a similar situation, and faced it as business as usual. They lowered taxes and decreased government spending. What the economy needed was temporary artificial stimulation to keep the price of goods from falling.
    In 2009, the government recognized the situation and granted a handful of stimulus measures. It helped keep us out of another long, deep depression.
    What we all want to see is for the government to take their hands off now – because the CPI is rising again (barely), and signs point to a growth in GDP.
    Let’s not beat up on the government from stopping runaway deflation.
    Let’s just make sure they stop taking on debt now that the crisis has been averted.

  15. Daniel - September 17, 2009

    Everyone one here has great comments and ideas and it’s very healthy to keep them coming. A few things that have occurred to me are that we should all try to think outside of the Americanisms that we have grow up with. While they are not all wrong it makes it difficult to proceed in any other direction. I couldn’t agree more with Sara about how “our entire economy is based on rampant consumerism”, this is just grotesque and there is something seriously wrong with that and this will ultimately lead to our undoing as a relevant nation, we have just pushed that day in to the future for our kids to deal with. Secondly, what’s wrong with deflation? It rewards the people who save their money while inflation rewards those who love crazy credit and save nothing since they can pay back loans with devalued dollars or just not pay them back at all and get a taxpayer funded bailout. Thirdly, no one considers, except Sara perhaps: what are we recovering to? Happy motoring, mass consumption on boat loads of beautiful Chinese made goods, McMansions in wondrous suburbia and unlimited credit, credit, credit? Ah what a perfect world. And no one thinks that creating three trillion or more pixilated dollars will have any negative consequences? Wake up America because soon the rest of the world will, and on that day in the near future I predict the currency will collapse making today’s news seem like the good old times.

  16. Jonathan Chen - September 17, 2009

    Completely agree. The stimulus package was monetary policy instituted to prevent 1 in 10 of you becoming unemployed, not for savings on oil and reductions in emissions (although these were a positive offshoot). The rest of the world relies on the US having a stable economy. For once (as an outsider), US government policy (rememebering that C4C was a drop in the ocean compared to the overall stimulus package) had a positive effect on the outside world, for which I’m sure, many politicians are grateful.

  17. Jake Brown - September 17, 2009

    I agree with you that our country relies too much on short-term consumerism to drive the economy.
    To the point about deflation:
    The problem arises when the costs of goods goes down for too long. This can lead to over-saving, where producers must reduce workforce to stay in business. This results in unemployment, which reduces spending, which fosters more deflation, and results in a negative feedback loop. (America in 1929 is not the only example of this. Several countries went through this throughout the 20th century, and the results are generally similar. Argentina in the 90′s for instance.)
    To summarize:
    Deflation yields high unemployment.
    High inflation encourages reckless consumer spending.
    Low inflation allows for a healthy mix of saving and employment.
    We had a strange situation where the CPI was relatively low for a long time, but because of the housing bubble, people effectively behaved similar to a high-inflation scenario (too much consumerism).
    The ideal is to have full employment with a healthy mix of savings and consumption. The best way to do that is to have a very low inflation rate, which encourages full employment, but discourages over-buying of goods.

  18. Jake Brown - September 17, 2009

    Minor point – we do have an 1 in 10 unemployed already.
    The unemployment rate may have reached 1 in 7 without the stimulus.
    Normally in the US only 1 in 20 or so are unemployed.

  19. Tom Harrison - September 17, 2009

    Adam — you might want to close the comments on this thread, as your desire to not get in a big back and forth on this seems to be hard :-)
    I am cheered to see your initial skepticism gave way to a positive view. Seen as an environmental program, of course it was “expensive”. But seen as a stimulus program (where the idea is to spend money in order to stimulate the economy), this one may have been one of the better ones — it was certainly a fast way. That there is a remarkably significant environmental side-effect is a nice bonus.
    Thanks for writing one the controversial topics. You and Joe Romm have a lot of patience for people whose view of the world is somewhat different.

  20. Don - September 18, 2009

    A lot of these comments are negative towards the program; I’m not sure if that’s due to self-selection (negative reactions are more likely to provoke a post) or if reception of the program is that negative.
    I would like to chime in with a positive one. You have to put the plan in perspective with respect to the actions the government has failed to take in the past.
    Problem: US cars were too inefficient and dirty – we’ve known this at least since the Carter administration, when the CAFE standards were put in place.
    Original “solution”: Fail to raise the CAFE standards for more than 2 decades.
    Outcome: US cars inefficient, dirty, and noncompetitive relative to their competitors who had governments who _did_ raise their mileage standards. US loses money importing more gasoline, US loses air quality, US loses MOST OF OUR ENTIRE CAR INDUSTRY.
    Given a background like this, the national government actually moving in the right direction is a GREAT thing. Did they pay too much? Possibly – but we wanted stimulus. Did they get dirty cars off the road for good? Yes. Destroying the engine of the old cars, getting dirty-emission-inefficient-mileage engines off the road, was a bold step that greatly needed taking.
    I am THRILLED that in its own lumbering way, our national government has stopped going the wrong way on at least 1 environmental issue, and started moving in the right direction.

  21. Brian - September 21, 2009

    Well put. I am one of the ten people you reference. Why spend tax dollars when you can receive them to achieve the same purpose?

  22. Brian - September 21, 2009

    I agree, ‘could have been better’ is not a very useful statement without stating exactly how I would have done it. I will leave that alone for the time being. However, I do not agree that my four arguments miss the point of what a stimulus is. Most importantly, #3 and #4 address the success of ‘stimulating’ the economy fairly directly.
    To elaborate on #3, a ‘stimulus’ works best when transferring wealth from the government sector to the private sector. However, in this instance, the transfer was significantly government-to-government given the ownership structure of GM. That is why I feel this is more like a secondary bailout masquerading as a stimulus.
    To clarify #4, better-performing stimulus programs tend to have long-lasting effects. For instance, infrastructure repairs create better business environments (e.g. new roads) and quality-of-life (e.g. electric lines) long after the tax dollars make their way to workers’ bank accounts. The c4c program cannot, by definition, do this. Again, this is another reason why I would debate the success of this program.
    With this being said, I think the remainder of the comments on your post are quite civil (minus a few exceptions). The posts are thought-provoking, even if I don’t agree with them all.

  23. Laura - September 22, 2009

    Actually, there is a state stimulus for light rail and other public transit options. My state, Ohio, is hoping to get some of this money to connect Cleveland, Columbus, and Cincinnati with a much needed train. Unfortunately, there is not nearly enough money for all states to get their projects done, so there is fierce competition for it.

  24. Phoenix Woman - September 23, 2009

    Government programs tend to have far less in overhead costs than their private-sector counterparts. (Social Security has less than 1% overhead, while private pension and old-age insurance plans here and overseas run between ten and twenty times that much — the UK’s was 14% last I checked.)
    I’ll trust an Eeeeevil Gummint Bureaucrat who’s making $150,000 a year over a hedge fund CEO pulling down over a billion a year — that’s right, $1,000,000,000 a year — as some of them did up until recently.

  25. Ian - September 30, 2009

    The program made sense on so many levels. One important one that everyone forgets is a pure financial one: We (through the US Government)had already made a $45b (I believe) investment in 2 car companies (GM and Chrysler). This $3b C4C program, in addition to its environmental and economic stimulus benefits, also helped safeguard that investment. Without C4C there is a decent chance that one or both of these investments would have gone under and we would have lost $45b. So we spent $3b to save a $45b investment. That makes a lot of financial sense.