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'Cash for clunkers' was kind of a lemon, analysis says

WASHINGTON — 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.

The program had something for everyone: It would lend a hand to the ailing U.S. auto industry. It would tamp down 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 onto 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 found 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 some consumers just bought cars slightly earlier than they otherwise would have. Cumulative purchases over the year were basically unchanged.

Other studies have reported similar numbers. A 2011 analysis by 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 economic growth by about $2 billion and created about 2,050 jobs. That means the program cost about $1.4 million per job created, making it far less effective than other conventional fiscal stimulus measures, such as cutting payroll taxes or boosting unemployment benefits.

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 such as aid to states and payroll tax cuts).

What about the environmental benefits?

There were some bright spots on that front. 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 8.58 million to 28.3 million tons, the Brookings study found.

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

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. Similarly, that study found that there were far cheaper ways to achieve similar savings.

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

'Cash for clunkers' was kind of a lemon, analysis says 11/01/13 [Last modified: Friday, November 1, 2013 7:26pm]
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