American Elephants

The Clunker Stimulus Didn’t Stimulate. Are You Surprised? by The Elephant's Child
September 20, 2010, 7:20 pm
Filed under: Capitalism, Domestic Policy, Economy, Liberalism | Tags: , ,

It is becoming clear that the Obama stimulus programs were a flop.  But would the economy have been worse without them?

Economists Atif Midan of the University of California, Berkeley and Amir Sufi of the University of Chicago have studied the $2.85 billion program that gave consumers a subsidy to turn in their old cars to be destroyed and buy new ones.

We called it “Cash for Clunkers.”  They concluded that the program “had no long run effect on auto purchases.”  It boosted sales during its two-month run last summer by about 360,000 cars and then quickly hurt sales by about the same amount.  In effect, it stole sales from the future, and was a complete wash in only seven months.

The goal of White House economists was to stimulate “aggregate demand” in the regular economy.  It wasn’t sold as a discount for cars that people were already planning to buy. Christina Romer, the former chairman of the Council of Economic Advisers wrote that ‘cash for clunkers was “very nearly the best possible countercyclical  fiscal policy in an economy suffering from temporarily low aggregate demand.”  It was meant to encourage economic activity like more consumer spending and job creation.

Economists Mian and Sufi caution that their findings that there was no noticeable difference in economic outcomes in the 957 metropolitan areas they studied, does not mean that all forms of fiscal stimulus fail to boost long-run economic output.  There was a blip in the cities where the auto industry concentrated, but that can’t be disentangled from the bailout money.

The article doesn’t indicate whether the study included the long-term effects of removing so many cars from the used car market and the parts department.  Supposedly it raised the cost of used cars across the board, but I have not seen that confirmed.

6 Comments so far
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The issue is not whether the “Cash for Clunkers” stimulated the economy — as the study concludes, it did for a short while, and probably giving more of a boost to some cities and regions (especially in the swing states of Ohio, Michigan and Pennsylvania) than others. But if a recession is bound to be longer than the length of the stimulus, all it does is defer pain.

There has been enough experience with past “cash for clunkers” programs around the world (called “car-scrapping schemes” in most other places) that the effects of the latest U.S. one would have been easy to predict.

As pointed out in a Policy Brief (Car-scrapping schemes: An effective economic rescue policy?) written for the Global Subsidies Initiative last year:

While the car-scrapping schemes may have softened the impact of the economic crisis on the automotive sector, subsidies have distorted the market by favouring specific sectors at the expense of others. The German retail industry suffered a considerable loss at the beginning of 2009 and blamed the scrapping incentive for absorbing consumers’ purchasing power.

Analysts have demonstrated that the savings rate in the United States fell due to the consumption incentives, siphoning off money that could have otherwise been invested (for example, in small and medium-sized enterprises suffering from the credit crunch).

In addition, the trade-in incentive offered by car-scrapping programs risks creating a flash in the pan in buying activity, since car buyers have simply advanced their purchase decision in time. Recent economic forecasts for the year 2010 already predict a substantial decline in motor-vehicle sales, leading car manufacturers to adjust their price policies1. Over the long term, consumption-oriented stimulus packages may cause severe economic impacts, which can be difficult to reverse.

There is little doubt that one of the objectives of the U.S. plan was to take some of the older cars off the highway and, so the Administration hoped, replace them with models with better fuel economy. One consequence of that, as you point out, is that the supply of used parts will have been diminished. But so would have future demand for such parts.


Comment by Subsidy Eye

I think you misinterpreted the study — they said it was a wash and there was no gain from it at all. If you remember at the time, the cars being turned in as clunkers weren’t. The standards they had to meet to be a clunker were too low to get old, gas guzzlers which was probably the intent. Instead they were perfectly good used cars. The people who were dealing with the turned-in-to-be-destroyed cars were outraged that such good cars were being crushed without even taking parts. It was a flop from every aspect. Probably good intentions, completely flawed in execution.


Comment by The Elephant's Child

Child, I was picking up on your comment that “They concluded that the program ‘had no long run effect on auto purchases.’ It boosted sales during its two-month run last summer by about 360,000 cars and then quickly hurt sales by about the same amount.”

That says to me that it did boost sales, very temporarily. That’s all I meant. I agree that over even a slightly longer period it “was a wash”. But, of course, what that means is that the government contributed even more to volatility in the market than would have been the case without its intervention!

Thanks for the additional information on the composition of the “clunkers” turned in.


Comment by Subsidy Eye

I thought I wrote about it at the time: See here and hereand here and here Shall we say I didn’t think much of the program and was angry at the stupid waste. I’ve also reminded people that the folks who managed this so well are the same ones devising your health care, which is developing in the same well-managed fashion.


Comment by The Elephant's Child

My other point was that crushing “good cars … without even taking” their parts does mean a reduction in parts available in future years. But with good cars of those models off the road, it means that there will also be fewer owners of such cars looking for used parts in the future. What the net long-run effect on the availability and price of those used parts will be is difficult to predict a priori.

None of this is to defend the policy, by the way.


Comment by Subsidy Eye

Good for you! But you really don’t expect me to go back into your archives, do you? In any case, I haven’t been following your blog that long.


Comment by Subsidy Eye

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