Did Cash for Clunkers Help Auto Sales?

The busy folks at the Council of Economic Advisers (CEA) released a quartet of studies today, covering the economic impacts of:

»The stimulus act.
»The state assistance in the stimulus act.
»Stimulus efforts in other countries.
»The Cash-for-Clunkers program.

I suspect that other bloggers (not to mention the regular media) will have lots to say on the stimulus analyses, so I started my reading with the clunkers piece, which I found quite interesting.

News accounts often describe the program as a success because almost 700,000 people participated in it in just a few weeks. But, as CEA emphasizes in their new study, the fact that someone participated in the program does not necessarily mean that they bought a car because of it. Indeed, CEA estimates that the 690,000 auto sales under the program boosted 2009 auto sales by only 330,000:

What about the other 360,000?

  • Some would have happened anyway. People trade in clunkers and buy new cars all the time. CEA estimates that about 200,000 such new car sales would have happened in July and August without the program.
  • Some people held off on purchases in order to participate in the program. If you were going to trade in a clunker in June, the creation of the Cash-for-Clunkers program gave you a big incentive to delay your purchase until July or August. CEA estimates that 50,000 sales were delayed for that reason.
  • Some people accelerated purchases they were going to make later in the year. If you were planning to buy a new car in the fall, for example, you might have decided to go to the showroom a few months early in order to get in on this deal. CEA estimates that 90,000 sales were shifted forward from September, and another 20,000 were shifted from October through December (so the total forward shift in 2009 was 110,000).

Putting those factors together, CEA estimates the net effect of the program was to lift 2009 auto sales by 330,000, less than half of total participation in the program.

The Cash-for-Clunkers program cost about $2.88 billion, so one way to slice the numbers is to say that each additional auto sale cost taxpayers about $8,700 (=$2.88 billion divided by 330,000).

Was that money well spent? That’s a hard question I leave for another day. A careful answer would require analyzing a host of factors including the short-term boost to GDP from the program (which CEA analyzes), the longer-term reduction in GDP from the program (due to lower auto sales over the next few years), the cost of paying off the $2.88 billion borrowed to finance the program, the environmental benefits of getting newer cars on the road, and the wealth loss from euthanizing the clunkers rather than moving them into the used car market.

Note: CEA is careful to note that there are lots of uncertainties around each of its baseline estimates. It also reports a more pessimistic estimate (only 210,000 net new sales in 2009) and a more optimistic one (560,000).

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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