Cash for Clunkers: Help or Hurt?

In our trying economy, an economist by the name of Alan Blinder helped make popular the idea of a scrappage program.  In his July 27th New York Times article, Blinder argued that a “Cash for Clunkers” program would promote a cleaner environment, distribute purchasing power more equally, and provide an effective economic stimulus.  This, Blinder called, a public policy “trifecta”.  The basic idea of this program is that the government will provide up to a $4,500 rebate as incentive for trading in “clunkers” for new and more environmentally friendly vehicles.  Of course, the cars traded in had to meet several criteria, such as being less than 25 years old and having a miles per gallon (mpg) rating of 18 or fewer.  The Consumer Assistance to Recycle and Save program (CARS) officially began on July 1st, 2009 with an initial appropriation of $1 billion worth of funds.  The initial funds were exhausted by the end of July and an additional $2 billion was given to the program by the federal government.  By August 24th, 2009, the programs funds were completely exhausted.  All of the clunkers that were traded in were required to go through an engine disablement process so that they were rendered useless and guaranteed not to be resold to the public. 

So, what are the main benefits of the program? First off, the car buyers who were already in the market to buy a new car, and who owned a clunker (vehicle averaging less than 18mpg), saved an average of $4,200 on the down payment of their new vehicle.  Obviously, this is a great benefit to those consumers.  Secondly, the program positively impacted the automotive industry.  According to consumerreports.org, 690,114 clunkers were traded in toward new cars at over 23,000 participating dealerships.  42,000 jobs in the automotive industries were saved as well, for the time being.  Another plus of CARS is that it helps cut down air pollution, particularly CO2 emissions.  According to the U.S. Department of Transportation, the average mpg of the trade-ins was 15.8, and the average mpg of the newly purchased vehicles was 25, a net increase of 9.2mpg.  This is about a 60% improvement.  According to the EPA, saving one gallon of gasoline per 100 miles saves 20 pounds of CO2 emission.  Also, the National Highway Traffic Safety Administration released a statement claiming that the clunkers were traded in for much safer vehicles and will save many lives.

Some, however, make the argument that CARS is the clunker.  Sure, the program was great for those who actually qualified for it.  But, how many people can say that they qualified for the strict qualifications of CARS?  Also, where exactly did the funds come from?  Well, they came from the pockets of all of the taxpayers.  So those who did not qualify for the rebate essentially paid for the rebate of those who did.  Professor Burton Adams of the University of Delaware wrote out some figures and came to the conclusion that each vehicle sold had a net cost of $2,000 to the government.  Next, think about how many people who could not afford a new car thought that this program would enable them to.  Sure, they got a great deal on the down payment and the dealers probably offered 0% financing for the first year! But, what happens after that first year, when a lot of these people realize that they really cannot afford their new car?  This program may have stimulated the economy for now, but I am quite certain that many of the participants of cash for clunkers will in fact default on their car loans and become an economic drain.  The same type of thing has been happening in real estate over the past decade or so.  People who could not afford to own a home were given discounts and low financing deals (for a period of time) but when it came time to make the interest payments, foreclosure.   The funny thing about the results is that 8 out of the top 10 replacement vehicles were Japanese or Korean, thus increasing their market share and sending even more auto making jobs overseas.  So much for helping U.S. autoworkers... As for the environment argument, critics believe that more CO2 emissions were created in making the new vehicles than will be saved in the near future of the vehicles. 

All in all, when the pros are weighed against the cons, I believe the program was not as much of a success as everyone claimed it to be.  Time will only tell and I hope to be proved wrong.