“Cash for Clunkers” was a clunker, according to economists at Texas A&M University who found the 2009 fiscal stimulus program designed to increase spending on new vehicles had the exact opposite effect, costing the automobile industry billions in lost revenue.
Cash for Clunkers, which was formally called the Car Allowance Rebate System, was one of several fiscal stimulus programs implemented by the federal government during the last two recessions. In their study, “Cash for Corollas: When Stimulus Reduces Spending,” Texas A&M economists Mark Hoekstra, Steven Puller and Jeremy West found the program backfired because it had more than one goal.
“The first goal was to increase revenues to the auto industry by accelerating the purchase of new vehicles,” Puller explains. “The second goal was to reduce harm to the environment by encouraging households to purchase more fuel-efficient vehicles.”
Puller says the program could have worked if the subsidy to purchase fuel-efficient cars encouraged people to buy more expensive hybrid cars, such as the Toyota Prius. “This would have improved fuel efficiency and increased revenues to the auto industry,” he says.
But what happened instead, say the researchers, is that since most fuel-efficient cars on the market are small and relatively inexpensive, such as the Toyota Corolla (the most popular new vehicle purchased under the program), and the subsidy was only available for high fuel-economy cars, people purchased less expensive cars than they otherwise would have.
The researchers determined this by comparing the purchases made by households barely eligible for the program – those with “clunkers” rated at 18 MPG or less – to those whose clunkers were rated 19 MPG or higher and were unaffected by the policy. They found that while the program did shift sales forward, that increase in the number of vehicles sold was completely offset by declines over the following eight months. And over the entire ten-month period, each barely-eligible household who purchased under the program spent $5,000 less than their barely-ineligible counterparts.
“The environmental goal undermined the stimulus goal of the policy,” Hoekstra asserts. “We find that total revenue to the auto industry was significantly reduced due to the environmental goal of the policy. If the policy had not been put in place in summer 2009, then total revenues to the auto industry from summer 2009 to spring 2010 would have been several billion dollars higher.”
So what’s the takeaway?
“Don’t try to kill two birds with one stone,” says Hoekstra. “Even though the two objectives may both be worthy as individual goals, trying to simultaneously achieve both can cause a policy to fail. In this particular case, the environmental goal turned a stimulus policy into anti-stimulus in less than a year. Revenues to the auto industry fell significantly.”
The researchers say that a more effective stimulus policy would have subsidized the purchase of any new vehicle, rather than just fuel-efficient and thus cheaper vehicles. That would have still accelerated the purchase of new vehicles without inducing households to purchase less expensive vehicles.
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