Brookings analysts recommend against repeating cash for clunkers program in future recession
03 November 2013
According to a new paper and policy brief by Brookings, the Car Allowance Rebate System (CARS) or “cash for clunkers” program, launched during the height of the recession with the intention of stimulating the economy and reducing emissions, actually resulted in only a small and short-lived impact on GDP; a higher implied cost per job created than alternative fiscal stimulus programs; and a higher cost per ton of CO2 reduced than what would be achieved through a policy such as a carbon tax or cap-and-trade.
However, the cost of CO2 reduced was comparable or lower than that achieved through less cost-effective policies such as the tax subsidy for electric vehicles, the analysis concluded. In terms of distributional effects, compared to households that purchased a new or used vehicle in 2009 without a voucher, CARS program participants had a higher before-tax income, were older, more likely to be white, more likely to own a home, and more likely to have a high-school and a college degree.
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| Cost per job created. Click to enlarge. | Cost per ton of carbon reduced. Click to enlarge. |
The CARS program, administered by the National Highway Traffic Safety Administration (NHTSA), allowed consumers to trade in an older, less fuel-efficient vehicle for a voucher for either $3,500 or $4,500 (depending on the delta in fuel economy between the trade-in and the new vehicle) to be applied toward the purchase of the newer, more fuel-efficient vehicle. After the “clunker” was traded in, its engine was destroyed. 677,842 clunkers were traded in between 1 July 2009 and 24 August 2009 as part of the program, which issued $2.85 billion in vouchers; NHTSA concluded that the new vehicles purchased under the program averaged 24.9 miles per gallon (9.4 l/100 km), compared to the 15.8 mpg (14.9 l/100 km) averaged by the trade-in vehicles.
Based on an evaluation of the various aspects of the program, from numbers of vehicles traded-in to impact on GDP, cost per job, environmental impact and the types of consumers who took advantage of the program, Ted Gayer, Co-director of Economic Studies at Brookings and Research Assistant Emily Parker found that:
The $2.85-billion program provided a short-term boost in vehicle sales; however, some of these sales were pulled forward (or borrowed) from sales that would have occurred in the future in the absence of the program. The net result was a negligible increase in GDP, shifting roughly $2 billion into the third quarter of 2009 from the subsequent two quarters.
The small increase in employment came at a far higher implied cost per job created ($1.4 million, or 0.7 jobs for each million dollars of program costs) than other fiscal stimulus programs, such as increasing unemployment aid, reducing employers’ and employees' payroll taxes, or allowing the expensing of investment costs.
The program resulted in a reduction of carbon dioxide emissions of only 8.58 to 28.28 million tons.
The program resulted in a small gasoline consumption reduction of 884 to 2,916 million gallons—equivalent to about only 2 to 8 days’ worth of current usage.
In the event of a future economic recession, we would not recommend repeating the CARS program. While the program did accomplish both of its goals of stimulating the automobile market and decreasing carbon emissions, there are more cost effective policy proposals to achieve these objectives.
—Gayer and Parker brief
Resources
Paper: Cash for Clunkers: An Evaluation of the Car Allowance Rebate System
Policy brief: The Car Allowance Rebate System: Evaluation and Lessons for the Future
Are they ignoring the fact that Cash for Clunkers was primarily about helping car dealerships survive the recession? It was a jobs and business saving program which had CO2 reduction as a side benefit.
Now, would a program purposed toward cutting CO2 possibly be more successful in cutting CO2? One would expect it would.
Posted by: Bob Wallace | 03 November 2013 at 09:48 AM
What a silly remark. I wonder if they always ask the sharpest minds to do these reports.
The tax break for electric vehicles has never been about the direct CO2 savings. Of course the goal was and is to speed up the deployment and development of that technology that almost certainly brings long term benefits of more than just reduction in CO2 emissions.
If you want a true cost/benefit analysis, wait for the end of the century and look back on what it has achieved.
Posted by: Arne | 03 November 2013 at 01:10 PM
"..$1.4 million, or 0.7 jobs for each million dollars of program costs..."
Interesting accounting, one million dollars per job did not go to the workers, it went to the contractors.
When Bush spent $60 billion on Katrina, MOST of it went to contractors like Bechtel, mush LESS of it went to the actual people doing the WORK.
Posted by: SJC | 03 November 2013 at 01:53 PM
The results are rather inexact ... 8.5 - 28.2 million tonnes ?
That is a factor of 3.
2 - 8 days current usage ... a factor of 4.
The problem is that Co2 reduction programs get captured by interest groups (like the farmers), and end up transferring a lot of money to one group with very little CO2 saved per dollar.
The cheapest way to reduce CO2 would be to increase the price of gas to (say $5/gallon) with taxation, and maybe give the tax back in some way that benefited ordinary workers (lowering the lower income tax rates or increasing the lower tax bands for instance).
[ or just use it to reduce the debt ].
It is about $8 / US gallon in Europe and Japan and noone is dying as a result of it.
(People are driving smaller cars, for sure, but they still get around.)
Posted by: mahonj | 03 November 2013 at 02:04 PM
I said from the start, years ago that this program was fraud.
Posted by: Gorr | 03 November 2013 at 07:36 PM
@mahonj: reducing the deficit/debt would be counter-productive as that is the only means the Federal Reserve has to convey monetary policy. Deflationary forces still loom large in the U.S. Just look at a chart of M2 velocity: still in free-fall.
Japan, South Korea, and the EU have protectionist trade policies to help their automakers. Can't the U.S. respond in kind or are we just supposed to take it on the chin?
Yes, cash for clunkers was not efficient. That doesn't mean future implementations couldn't be efficient. Target old, inefficient vehicles and raise the fuel economy requirement of newly purchased vehicles. Simple.
Mandate free air pumps at all gas stations and subsidize it through a tax credit or something. Employ people to drive "pace cars" during rush hour on our most congested highways and implement variable speed limits.... there a tons of ideas out there.
Posted by: GreenPlease | 03 November 2013 at 07:42 PM
When people say "X" would have worked better than "Y" I ask could you have got "X" passed the "oh no you don't" crowd?
Posted by: ai_vin | 03 November 2013 at 08:16 PM
The program was worse than a fraud. It put a lot of the wrong inventory into uses where it burned a lot more fuel than necessary, sticking people with loans that locked them into that same sub-optimal vehicle for years. A lot of that inventory should have been just warehoused and dribbled out for essential uses over the next couple of years, while production lines built much more efficient vehicles.
It should have gone along with a fuel-economy feebate.
Posted by: Engineer-Poet | 03 November 2013 at 08:19 PM
Had Cash for Clunkers been a CO2 reduction program then some of the criticism would be valid.
But this program was part of the economic stimulus package. It was a targeted program aimed at keeping auto dealers from bankruptcy during a period in which new vehicle sales were extremely low.
By tweaking the program to favor getting some of the most polluting cars off the road a second goal was met, lowering CO2 emissions.
Had this been a program funded by CO2 reduction money from Congress then it would probably have been a more successful CO2 reduction program.
Posted by: Bob Wallace | 04 November 2013 at 09:31 AM
Reducing the amount of money sent overseas for imported oil would have a major stimulating effect on the economy.
Posted by: Engineer-Poet | 04 November 2013 at 02:15 PM
Cash for Clunkers was all about drying up the market for used auto parts. The so called "clunkers" were disallowed from the scrap heap. It is well known that the value of car components separately can add up to as much as ten times the value of the assembled car. A mess of virtually free clunker parts would have made a lot of sunday drivers very happy as they toted their poor grandmothers to a medical exam. Either finally fix up the old car with a bazaar of parts provided virtually for free, or trade in an old clunker for a slightly newer and more functional one, for a small fee. This is how to end the recession.
Posted by: kalendjay | 04 November 2013 at 03:40 PM
Fiscal economic stimuli are usually not cost-effective, period! Cash-for-clunker is nothing but politically-motivated economic stimulus. Then, the gov.'s debt and deficit got larger and larger and will again sink the economy to greater depth! Then, sequestration and gov. shut down will take place and will sink the economy to new lows!
It is a far better gov.'s policy to ride out of the recession by making budget-neutral laws that encourage more investments into worthwhile technologies and economic activities, such as green technologies, zero-CO2 energy sources, energy conservation, and perhaps even declare war on global warming and climate change.
For example, the gov. can promise to adjust fossil-fuel taxes such that to maintain a gradual rise in the cost of fossil fuels about 7% yearly. If fossil fuel prices will rise on its own, then the tax can be reduced or cut in order to ease the strain on the economy.
This predictable rise in fossil fuel prices will encourage steady invesments in renewable energy, synthetic fuel, H2, as well as nuclear energy and will allow us to wean off fossil fuel while growing the economy and adding tens of millions of jobs without spending a dime of gov. budget on economic stimuli that have been failing!
The program should be named "Fossil-fuel energy cost stabilization" and to emphasize that it is NOT a TAX, but a way to prevent economic disruption due abrupt hike in fuel prices that brought about many previous recessions.
Posted by: Roger Pham | 04 November 2013 at 04:20 PM
I should further elaborate on the Declaration of War on Global Warming tactic, in order to get the huge defense budget ($500B to 700B yearly) that make expensive high-tech weapons that only employ a few, into the making of lower-tech Green Energy Technology that will employ the masses. The Defense and Energy industries that are having strong influences on the gov. will use this money to build zero-CO2 energy infrastructures and to develop related technologies. This wave of infrastructure construction will employ tens of million of new workers, and will be like the New Deal in FDR's time that dug the US economy out of the Great Depression back then.
Posted by: Roger Pham | 04 November 2013 at 04:29 PM
WWII helped a lot also.
Posted by: Lucas | 04 November 2013 at 05:43 PM
By that reasoning we should declare WW III.
Just get the Republicans to stop obstructing and destroying, they did the same thing in the 30s, we will end up with a 10 year economic depression just like then.
Posted by: SJC | 04 November 2013 at 07:46 PM
It's kind of amazing how some people think that when we're faced with a stalled economy in which everyone is afraid to spend any money it's a bad idea for the government to step up and borrow/spend to get things going once more.
Posted by: Bob Wallace | 05 November 2013 at 10:47 AM
Roger,
In a nutshell, you are pro-stimuli "in FDR's time," but dead-set against it in our time.
That makes perfect sense and illustrates our current political logjams. We fear that any progress will help "the other side" as much as it helps us, and we would rather have everyone suffer than have everyone benefit.
Posted by: Bernard | 05 November 2013 at 11:23 AM
In the 30s a lot of consumer items were made in American, not so now. To get the economy back to growth, increase revenue and reduce the deficits, we need to fund new companies. New companies create new jobs.
Posted by: SJC | 05 November 2013 at 01:57 PM
@Bob Wallace
Governments do not have good track record of business success. It would be much better for wealthy people to invest their own monies into the economy and open up private companies to employ people. When the rich get richer, a lot of money is tied up and not circulating. The gov. would only need to make incentives to guide private investments for the rich to spend money, and to create a stable political environment for the economy to prosper. The ACA must be revised to avoid excessive burdens on our business and industries and excessive costs to our gov. budget.
@Benard,
I do not suggest nor favor any kind economic stimulus using public money in any time perio when the gov. is in deep deficit. In FDR's time, there wasn't much of gov. deficit as it is now! It is only OK for using the gov.'s budget for economic stimulus WHEN there is a budget SURPLUS!
However, the defense budget will remain large because so many beneficiaries of the defense budget have vested power in our government. So many Congressional districts and so many jobs depend on the defense budget, and powerful defense contractors have invested heavily into our political system! So, only by declaring WAR on Global Warming and Climate Change, can this huge defense budget be made available to truly save humanity from the impending GW catastrophy, while creating tens of millions new jobs and saving our struggling economy. With a stable energy supply and energy independence, we will be able to prevent future recessions.
@SJC,
That's exactly the point. When so many stuffs are imported, economic stimuli by the gov. will mainly enrich other exporters. It is only through making our industries competitive and encourage others to invest in our country can we create new jobs and increase revenue and reduce the deficit. THe gov. must level the playing field for our manufacturers by imposing gradual tarifs on countries with unfair cost advantage while opening a free-trade zone among trade partners with similar trade advantage, standards, and regulations to ours.
Posted by: Roger Pham | 06 November 2013 at 01:58 AM
@Roger
"Governments do not have good track record of business success."
In my opinion that is quite incorrect. I'm not sure on what you're basing your claim. Perhaps you could back it up?
I'll open by stating that, in general, the government does not run businesses. The exceptions would be things like the Post Office and TVA, both of which have worked very well.
And I'll add, 50% of all private US businesses fail within the first four years.
Now, your data?
--
"It would be much better for wealthy people to invest their own monies into the economy and open up private companies to employ people."
The problem during the recession was that wealthy people and large corporations were holding very large amounts of cash and were not willing to use their money to restart the economy. It was necessary for the government to fund a stimulus to get some activity started so that private money would feel a little more secure about investing.
--
"The ACA must be revised to avoid excessive burdens on our business and industries and excessive costs to our gov. budget."
The ACA will have almost zero impact on businesses and industries. All but about 2% of employers with more than 50 full time employees already furnish insurance.
Businesses with fewer than 50 employees are only required to inform their employees about the existence of the insurance exchanges. That requires a single email or piece of paper on the employee bulletin board.
The net cost of the ACA will reduce what we spend in tax dollars for health care.
Some of the savings will occur by forcing the "free riders" to purchase insurance.
Some will be saved by more preventative care and earlier intervention.
Some will be saved by digitizing medical records.
Some will be saved by reducing Medicare/Medicaid fraud.
Some will be saved by using more generic drugs.
Some will be saved by training more PAs and NAs to deal with basic illness rather than using MDs.
Posted by: Bob Wallace | 06 November 2013 at 12:44 PM
@Roger
"I do not suggest nor favor any kind economic stimulus using public money in any time perio when the gov. is in deep deficit."
When we are in a recession there is little economic activity. That means reduced tax revenue. It also means more unemployment and welfare payouts.
The government bleeds money in a recession. The deficit only gets worse.
History shows us that private individuals and companies will not step up and restart the economy. They hoard their money during recessions. Private money sometimes flees to gold, not to opening a new plant.
Someone has to provide the startup juice. If you don't think the government should and you realize private money won't, then how do you suggest we recover from recessions?
IMHO, if the government doesn't step in then we slip into a depression. What's your solution for avoiding a depression when the economy is sour?
Posted by: Bob Wallace | 06 November 2013 at 12:50 PM
Tax capital gains the same as income, use the revenue to reduce the deficit and fund new companies.
Posted by: SJC | 06 November 2013 at 01:49 PM
@Bob,
Rich people would hoard their money or invest overseas when there is no opportunity of investing money at home. The excessive redtapes and complex compliance requirement for example, in 2700 pages of ACA, are what will turn off investments into our economy. Gov.'s job #1 is to create reasons and incentive for PRIVATE investments here at home! That will kick start the economy.
By simply managing a 7% yearly increase in the prices of fossil fuels alone will spur investments in RE, NE, in H2 and battery and EV infrastructures. This will create jobs without spending a dime of stimulus money, when the gov. is heavily in debt.
By simply managing a gradually increase in tarifs from imported products from all countries having unfair cost advantage, more investments in manufacturing will be made here at home, and that will create jobs and revenues without having to spend a dime in economic stimulus. By opening a free-trade zone among trade partners with similar trade advantage, standards, and regulations to ours, we will still maintain a healthy level of competition without outsourcing all our economy overseas. None of these will require any economic stimulus money, yet will restoring our economic back on track.
Bob, you should open your eyes to realize that our gov. economic policies have been mostly wrong in the last several decades. Corruption and self-interest took precedence over national interest. Meanwhile, nationalism has boosted the economies of China and Russia tremendously.
Economic stimulus is mainly about corruption, about rewarding your supporters and your sponsors, it is about short-term and short-sighted gain in voters' support at the expense of digging a bigger hole into the economic trouble. It is about rewarding the 47% who do not pay taxes who voted for you, while making all tax payers pay dearly, or will pay dearly. ACA is all about those who contribute very little or none getting the fruit of labor from those who contributed the most. It is all about communism, which will invariably fail!!!
Posted by: Roger Pham | 06 November 2013 at 03:37 PM
Connected capitalism happened with Bush/Bechtel, Cheney and Halliburton with $300 billion of the Recovery money going to rich Republican business owners not creating ONE job, but allowing them to buy larger mansions and bigger yachts.
Posted by: SJC | 06 November 2013 at 09:49 PM
Roger, here are the compliance requirements for the ACA.
Insure yourself.
If you have some trouble paying the premium we'll help you. If you're really broke we will give you insurance for free.
That's about as complex as it gets. Well over 80% of us are already insured either through their workplace, individual purchases or public programs. The other <20% can do the same thing.
You do realize that you are paying for healthcare for the uninsured people right now, do you not? When they get really sick they go to the emergency room where they receive really expensive treatment and then since they have no insurance and can't pay your insurance premiums are jacked up to cover them. That's a law that Saint Ronnie signed.
Doesn't it make sense for little Johnny to go to the local health clinic and get his cut finger treated for $35 rather than in the emergency room for $750 or whatever it costs?
The economic stimulus is all about restarting our economy after greedy bankers were allowed to crash it.
Period.
Suck it up Roger. You did not build the hospital in which you were born, build the school in which you were educated nor pay for the education of your teachers. Someone else did that and you gained from their contributions to our society.
It's your turn now. Pay back what you owe.
You want this country to return to economic strength?
If so, pressure the government to spend more on infrastructure, to improve our schools, to spend more on research, to not burden our students with massive debt.
We've sort of quit investing in our future. We've got our panties all in a knot about paying taxes and all worried that not everything the government attempts will turn out perfect.
We're like a farmer who is so concerned about seeing his stock of seed corn depleted that he won't plant a crop. We've become too damned selfish and are hurting ourselves because we won't help others.
Posted by: Bob Wallace | 06 November 2013 at 11:49 PM