Was the “cash for clunker” government program cost effective and should it be repeated?

In June of 2009 the United States Congress passed the Car Allowance Rebate System (CARS), commonly known as the “cash for clunkers” program, to help consumers exchange their gas-guzzlers for new, fuel-efficient vehicles. The government believed this program would increase revenue for the automobile industry, save consumers money, reduce green-house gas emissions, and decrease the U.S. dependence on foreign resources. More specifically, vehicles either qualified for a $3,500 or $4,500 credit in addition to the salvage value of the vehicle from the dealership. Only cars newer than 1984 and with miles per gallon of less than 18 qualified as an exchange for the program.

The effectiveness of the CARS program could be interpreted a variety of ways. However, information provided by Edmunds.com suggests that only 125,000 out of the 690,000 sales under the program would not have happened anyways. Although the fixed costs would remain fixed, this estimation suggests the variable cost of the rebate would have been $0.5 billion ($4,000 x 125,000) instead of $2.76 billion ($4,000 x 690,000). This calculation suggests ineffectiveness, so a closer examination of the goals is necessary.

To determine if the program accomplished the goal of increasing automobile company sales, the quarterly financials of Ford Motor Company, Inc. were examined. Financials from 2008 and 2009 indicate the revenue increased significantly from this program. In 2008, Ford’s sales decreased 5% from the first quarter to the second quarter and another 2% from the second quarter to the third quarter; however, in 2009 Ford’s sales increased 12% from the first quarter to the second quarter and 13% from the second quarter to the third quarter.  The change suggests that the U.S. government accomplished at least one of their four goals, but it will be interesting to see if there are long-term effects.

The program gives consumers credits, but does it really save them money? The CARS program required a new car to be purchased, not a used car. The average repair expense for new and used cars is $220 and $540, respectively. If the consumer purchased a car with 7 miles per gallon more than their last car and still drives the same mileage annually, they could save an additional $250 each year. With this cost savings and the rebate, the consumer appears to be saving an average of $4,570 in the first year. But since the average used car costs $14,000 less than the average new car, consumers are still spending almost $10,000 more than they would if they purchased a recycled vehicle.

This soon after the program it is hard to determine if the green-house gas emissions and the U.S. dependence on foreign resources has decreased at all.  Measures can be made based on the decrease on consumer’s gas consumption, but that is a large assumption to make. If usage has decreased by 23%, then maybe emissions and dependence on foreign resources has decreased in the same proportion.  This is a possible answer, but evaluation cannot ignore the independence of consumers. Alternatively, the assumption can be made that American’s will spend the same and drive more. They have the opportunity to save money, but they may adjust their usage instead.

It will take time to tell if all four goals of the entire program have sincerely been accomplished.  The automobile industry experienced a temporary increase, but we cannot tell if sales will continue to rise in the long-term. Consumers do not necessarily save money, but some may feel as if they have. It will take a very long time to officially determine if overall green-house gas emissions have been reduced and if the U.S. dependence on foreign resources has decreased because of the CARS program. Overall, the cash for clunkers program appears like it accomplished few of the goals in the mission. Although some progress seems to be made with this program, most of the projected success depends on consumer behavior.  Since people tend to drive less when gas is more expensive and they also tend to drive more when gas is inexpensive, increasing the miles per gallon of their vehicle could potentially lead to consumers spending the same. If this is the case, greenhouse gas emissions, consumers spending, and our dependence on foreign resources will remain the same and the CARS program will have made no impact.