Just like countless government programs, yet another federal economic program has been proven to be a total wreck. This time, it’s the 2009 Obama program known as “Cash for Clunkers.”
In 2009, the American automobile industry was suffering from the effects of the Great Recession. Americans were not buying new cars like they used to before the housing bubble burst. Naturally, the Statist solution to this problem was… BINGO! More government spending, of course!
The economic theory that this program was based upon is called Keynesian economics. Basically, the idea is that we have to make people spend more money in order to boost the economy. If you’ve ever heard of the “broken window” fallacy, this is the school of thought to which the term is referring.
A Keynesian economist believes that breaking a glass window will stimulate the economy because the owner of the property will have to replace the window, and will pay someone for that replacement. Another term for this is “demand side economics.”
But as one of my undergraduate professors once observed, if destroying things helps the economy, we should destroy the world because it would help the economy.
So back to the Cash for Clunkers program… The Department of Transportation claims that the program was very successful in getting consumers to buy newer and more fuel-efficient cars. But a new economic study, reported by the Foundation for Economic Education, proves that to be patently false.
This economic study proves that even by Leftist economic standards, the Cash for Clunkers program was a colossal failure. The abstract alone succinctly sums up just how awful the program actually was.
The 2009 Cash for Clunkers program aimed to stimulate consumer spending in the new automobile industry, which was experiencing disproportionate reductions in demand and employment during the Great Recession. Exploiting program eligibility criteria in a regression discontinuity design, we show nearly 60 percent of the subsidies went to households who would have purchased during the two-month program anyway; the rest accelerated sales by no more than eight months. Moreover, the program’s fuel efficiency restrictions shifted purchases toward vehicles that cost on average $5,000 less. On net, Cash for Clunkers significantly reduced total new vehicle spending over the ten month period.
What this means is that there really was not much of an improvement at all, and because of the strings attached with the program, there was actually a negative result from those who participated.
How about that! When the State subsidizes an industry trying to save it, and attaches a whole bunch of “dos” and “do nots,” the whole thing ends up being a flop. Color me unsurprised!
But not only was the program ineffective in stimulating the auto industry, it also had a high price to pay environmentally (though part of the goal was for greater eco-friendliness).
One could also argue that this decline in industry revenue over less than a year could be justified to the extent the program offered a cost-effective environmental benefit. Unfortunately, the existing evidence overwhelmingly indicates that this program was a costly way of reducing environmental damage. For example, Knittel  estimates that the most optimistic implied cost of carbon reduced by the program is $237 per ton, while Li et al.  estimate the cost per ton as between $92 and $288. These implied cost of carbon figures are much larger than the social costs of carbon of $33 per ton (in 2007 dollars) estimated by the IWG on the Social Cost of Carbon [Interagency Working Group, 2013].
And finally, let us consider what taxpayers ended up being on the hook for because of the program. According to Edmunds, taxpayers lost an average of $24,000 per vehicle sold under the program; they also confirm that the sales of the vast majority of those vehicles would have happened anyway, with or without the program!
Folks, this is why we leave the economy alone… Don’t fall for Leftist myths about economics. Less Keynes, more Hayek, please.