Clunker program a failure? Where's your proof?

 I was asked by a reader recently about my claim that the Cash for Clunkers program was a failure.  He said, and I quote, "And your proof is...?"  Here is my response:

Hello Ramon, Thanks for the comment. My conclusion that the Cash for Clunkers program was a failure was based on three factors. One, it did not have the intended consequences on the environment; for those folks who purchased a marginally more fuel efficient car now, rather than later, the added fuel efficiency was likely more than offset by the pollution generated by destroying the old car, and by the loss in additional fuel efficiency they would have enjoyed had they waited a year or two to replace their current vehicle with an even later, even more fuel efficient model year. Two, the costs of the program, which are much greater than the $4500 rebate, far exceed any benefits generated (Abrams and Parsons in the Economists' Voice (http://www.bepress.com/ev/vol6/iss8/art4/) estimate that the costs of the program exceeded the benefits by about $2000 per car, which I think is an underestimate.) The list of costs include but are not limited to the additional paperwork and private and public workers needed to administer the program, the interest costs to dealerships of financing the rebate program while awaiting the government checks (some less capitalized dealerships actually went out of business because of the program), the costs of destroying the old vehicles, and the cost of lives lost and injuries sustained in accidents in smaller, less safe but more fuel efficient cars, just to mention a few. Last, this "injection" into the economy -- which, in reality, is the blatant substitution of private consumption choices with public policy, and an affront to our economic freedom -- costs the economy untold sums by putting off the inevitable failure of automobile companies that fail to produce cars the population values sufficiently to keep the auto companies in business without being propped up by the government. Case in point: GM's plunge of 45% and Chrysler's fall of 43% in the months following the rebate program; Honda and Toyota also reported double-digit slides, while Kia and Hyundai had double-digit increases. New car sales fell in September as the predicted post-"cash for clunkers" slump dragged the U.S. market down to its lowest levels in seven months (http://www.allvoices.com/news/4286397-clunkers-letdown-slump-auto). I wish it weren't so, but I'm afraid that good business is not the strong suit of our policymakers. Thanks again for your question. I hope you find my comments useful. Sherry Jarrell

Comments

[James Goody (Former Student)]

One major point to note. In an economic environment where individuals and companies are both de-leveraging, the Cash for Clunkers program incentivized individuals to "trade up", thereby taking on more un-neccesary debt at an inoppurtune time. Talk about hypocritical.

Let's not kid ourselves by saying that cash for clunkers was done for environmental reasons. Fact of the matter is, it was a government handout focussed on one industry. Ironically enough, the program helped the foreign car makers more than domestic manufacturers. Funny how the media didn't spin it that way.

[Sherry Jarrell]

Hi James,

Thanks for your comment! I agree, it certainly is a case of targeted demand paid for by taking income from one part of the private sector and giving it to another, wasting millions of dollars in the process. The economy would have been stronger without the program, but try explaining that to folks who see it differently! I've gotten many comments from Europeans who think it's a grand idea!

Sherry