Evaluating “Cash for Clunkers”

Federal government programs are very popular. We all enjoy Social Security benefits, student loans, food stamps, Medicare, and various housing assistance programs. What never seems to be discussed is the cost of these programs.

We all realize there is some cost to these services, but we don’t think about whether or not they are worth the cost. To begin with, as I mentioned in my column on health insurance, money is lost because of the expense of administering any program.

A good rule of thumb is that for each $1 we pay in taxes, we receive about 85 cents in benefits. After all, there are over 60,000 SSA employees that need offices, buildings, computers, salaries, etc.

I’m a thrifty person who wants all financial expenditures to be made as efficiently as possible. It breaks my heart, for example, to learn that we spent $23,899 per person enrolled just to create the website for Hawaii’s Health Care Exchange.

I wish that money could have been put toward the dire needs here in Robeson County.

As I’ve also mentioned in previous columns, I prefer to analyze situations once the “dust has settled” rather than in the heat of the moment when political ideologies weigh heavily on people’s minds.

Here we will analyze the Car Allowance Rebate System, affectionately known as “Cash for Clunkers.” President Obama signed this legislation on June 24, 2009. What’s nice about this example is that it is more straightforward to analyze than almost any other government program which has far more interdependencies to estimate.

The program began on July 1, 2009, and ended on Aug. 24, 2009, when the initial money authorized and a second installment both were exhausted. Last fall, the Brookings Institution completed a thorough evaluation of Cash for Clunkers.

The program offered Americans a voucher of up to $4,500 if they traded in a used car for one that was more fuel efficient. The objectives of the program were to stimulate the economy and to decrease the number of polluting vehicles; any car traded in had to be destroyed, not resold.

A challenge with any government program is accurately making predictions about the future and this program struggled in that area, with actual demand in the first several days of 22,400 vouchers when only 3,000 were predicted.

Demand dropped somewhat from those lofty levels, but stayed much higher than predicted until the money was used up. Money spent on vehicles increase d11 percent during the third quarter that year, but declined by 10 percent in the fourth quarter.

Essentially, what happened was that people anticipating purchasing a car a little later moved up their plans to take advantage of the voucher. Brookings estimated that some jobs were created at the cost of $1.4 million per job. About 678,000 vouchers were processed and the difference in fuel efficiency saved two to eight days of gasoline.

Who received these vouchers? Brookings found that “CARS program participants had a higher before-tax income, were older, more likely to be white, more likely to own a home, and more likely to have a high-school and a college degree.”

In addition to the $2.85 billion paid in vouchers, we don’t have any idea what the administrative cost was. About eight weeks into the program fewer than 30,000 vouchers had been processed. So, more than 7,000 employees were redeployed from other agencies to help process the remaining 649,522 vouchers.

Was Cash for Clunkers a policy we should have enacted? I can’t think of a single outcome that was worth the cost. The environmental effect was negligible. The economic effect was negligible, and possibly negative because it distorted the timing of sales because car manufacturers and dealers were artificially busy for a period of time, probably incurring additional costs such as overtime pay, and then artificially slack for months.

Businesses do best when demand is reasonably consistent. Finally, we transferred money to people who are more affluent than average. They also pay more than the average amount of tax, so it isn’t as if the money came from the poor.

The government picked winners and losers. If you happened to be in the market for a new car at just that time, you were a winner, subsidized by all of the rest of us who didn’t buy a new car then.


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