Car Industry to Cope With the Economic

Car Industry

To cope with the economic downturn, both businesses and the government in the United States implemented various relief programs. One of these was the Consumer Assistance to Recycle and Save (CARS) program, also known as the "Cash for Clunkers" program. This program was implemented during July and August in 2009, and offered consumers $3,500 or $4,500 in return for older vehicles that were traded in for newer, more fuel-efficient ones. The program was administered by the National Highway Traffic Safety Administration (NHTSA). While some believe that the program was very successful in reaching its objectives, others believe that the program did not fully reach its objectives or benefit all stakeholders.

The two main objectives of the Cash for Clunkers program were to help stimulate the economy during the time of the downturn, and secondly to put more fuel-efficient vehicles on the road. According to the Government Accountability Office (GAO, 2010), these objectives were met, although the extent to which it did so remained uncertain. According to the GAO report, 680,000 consumers used credit from the program to purchase or lease vehicles. However, the report also points out that not all these sales are necessarily the result of the program and would have occurred either way. According to a calculation by NHTSA, an estimated 88% of the 677,842 CARS sales were directly attributable to the program, while the average fuel economy of the new vehicles purchased or leased was 24.9 miles per gallon. The average fuel consumption of the vehicles traded in was 15.7 miles per gallon.

In terms of specific benefits, the GAO reported that eligible consumers benefited by receiving credit for purchasing a new vehicle.

The scrap and salvage industry reported mixed results in terms of benefits from the program. Vehicle manufacturers and dealerships mostly benefited by means of increased sales, although there were some administrative challenges. It therefore appears that most stakeholders benefited from the program.

Fox (2009) confirms that the program was "spectacularly successful" during the time of its existence. At the time of writing, the author noted that economists were uncertain about the true economic success of the program, which combined environmental objectives with Keynesian economic ones.

As a stimulus, the program has provided a sound incentive for purchasing new cars. According to Fox (2009), July auto sales were at their highest level in 11 months. There are, however, certain economic concerns that may not be immediately apparent when taking the program at face value. One such concern is that it may distort existing incentives, which may lead to "side effects" such as the mechanics industry repairing cars that do not work sufficiently to trade them in for a new vehicle. Another concern is that any visible economic boost could be misleading, since the lost value of trade-in vehicles is not reflected in the statistics. Nevertheless, the program has provided a sufficient stimulus for consumers to buy vehicles to such an extent that the vehicle market received a significant boost, or at least appeared to do so.

In terms of the environment, the benefits of the program are no less difficult to estimate. While some argue that the Cash for Clunkers program has created an incentive for removing vehicles with high pollution levels from the roads, others argue that an increase in the manufacturing process would in fact contribute to an increase in overall pollution levels. As an alternative, these critics have suggested that cash be offered for old vehicles without the requirement of buying a new vehicle.

In terms of income distribution, another claim is that the poor would receive assistance via the program, since this sector of society tends to be obliged to drive older vehicles. However, one requirement of the trade-in via the program is that a new vehicle should be purchased, as opposed to a second-hand one. This is certainly not accessible to most poor people, which means any supposed benefits for these citizens are illusory (Fox, 2009).

One might therefore conclude that it is difficult to estimate the true benefits of the Cash for Clunkers program, since many economic and social variables affect it. Lee, Linn and Spiller (2010) paint a somewhat gloomier picture. The study used Canada as control group to determine the true effects of the Cash for Clunkers program on the economy and the environment. New vehicle sales, for example, increased by 0.36 million during the months during which the program ran. The implication is that 45% of these sales were made by consumers who would have purchased a new vehicle in any event. Furthermore, the results show no significant gain in sales beyond 2009, which means the program did little to stimulate the economy beyond the months of its existence. In terms of the environment, CO2 emissions were reduced by 9 to 28.4 million tons, which is negligible in terms of the investment required.

What made the authors' evaluation somewhat unique is the scope of the assessment. While many evaluations focused on certain aspects of the program or only on the time of its existence, Lee, Linn and Spiller (2010) created an evaluation that focused both on the program and the months before and after it. Furthermore, the control group used in the evaluation provided a more realistic sense of the program's effect than other single-focused assessments could.

In other words, the estimations provided in the study focused on comparing the composition of the fleet of vehicles that would have been sold during the time without the program with those that were sold as a result of the program. This provided a comprehensive overview of the actual stimulation levels of the economy as well as the true impact on the environment.

The program's cost-effectiveness in terms of reducing gasoline consumption and CO2 was also evaluated by means of comparing total consumption levels both with and without the program. Furthermore, different programs to reduce gasoline consumption and CO2 emissions were compared with the Cash for Clunkers program to determine its effectiveness in terms of reductions and cost.