Cash for Clunkers: Economic and Environmental Impact

Introduction to the Cash for Clunkers Program

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 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 it did not fully reach its objectives or benefit all stakeholders.

Program Objectives and Stakeholder Benefits

The two main objectives of the Cash for Clunkers program were to help stimulate the economy during the downturn and 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 they were achieved 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 of these sales were necessarily the result of the program, and some would have occurred regardless.

According to a calculation by the 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 toward the purchase of a new vehicle. The scrap and salvage industry reported mixed results. Vehicle manufacturers and dealerships mostly benefited through 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.

Economic Stimulus: Incentives and Concerns

As a stimulus, the program provided a sound incentive for purchasing new cars. According to Fox (2009), July auto sales were at their highest level in eleven 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 could lead to "side effects" such as mechanics repairing cars that do not work sufficiently well simply to make them eligible for trade-in. 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 provided a sufficient incentive for consumers to buy vehicles to such an extent that the vehicle market received a significant boost — or at least appeared to do so.

Environmental Impact and Criticism

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 created an incentive for removing high-pollution vehicles from the roads, others argue that an increase in manufacturing activity would in fact contribute to an overall increase in pollution levels. As an alternative, these critics have suggested that cash be offered for old vehicles without the requirement of purchasing a new one.

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

Conclusion: Assessing True Effectiveness

The findings indicate that there was very little significant effect in terms of either market stimulus or environmental impact. While many authors and analysts are confident that the program provided much-needed stimulus to the vehicle market, Fox (2009) points out that the quoted figures may well be an inflated indication of the true numbers. As indicated by Lee, Linn, and Spiller (2010), the investment into the program was far higher than warranted by its results.

In conclusion, it appears that the Cash for Clunkers program was far less effective than some may suppose. Much of the confusion stems from a lack of thorough analysis. Most assessments of the program focus only on the program itself; where comparisons to other countries are conducted, these typically compare similar programs rather than using a true counterfactual. In this regard, Lee, Linn, and Spiller (2010) appear to offer the most realistic and methodologically rigorous evaluation of the program's actual impact.