This summer’s “Cash for Clunkers” program has been vastly more successful at generating new car sales than expected. Under the so-called Car Allowance Rebate System (CARS) passed by Congress at the end of July, qualifying car buyers could trade in old cars and trucks for more fuel efficient new vehicles and receive a rebate of $3,500 to $4,500, depending on the fuel efficiency gain. The initial $1 billion in funding for the rebates, planned to last for three months ending in October, ran out in a matter of days. In early August, Congress approved an additional $2 billion for the program and, as of this week, it too has been exhausted.
The intent of the program was two-fold. It was designed to increase new car sales and stimulate the struggling car industry in the U.S., while improving the fuel economy of the overall fleet. Whether the program has done a good job of meeting these goals is difficult to determine, both because the full effects will play out over time and because we don’t know the “counterfactual,” or what would have happened if the program had not been adopted. But, we have some information about the program now and more will be revealed in the future.
Stimulating Additional Sales or Shifting the Timing of New Car Purchases?
In terms of the first goal, the program has clearly had a significant impact on sales over the last month. When the dust settles the total $3 billion dollars spent under the program will account for about 700,000 new vehicle sales and the same number of scrapped clunkers. This would results in an 8 percent increase in overall new vehicle sales over what had been predicted for 2009 before the program began. There is some evidence that it also had the additional effect of generating even more sales from people who were drawn into dealer showrooms, but did not qualify for the program. The program clearly drew down the high vehicle inventories and boosted the confidence of both dealers and consumers.
But the truth is we don’t yet know how successful the program has been at increasing the sales rate of new vehicles. To the extent that any vehicles traded in under the program would have been traded anyway, this just represents a transfer from taxpayers to the new car buyers. Or, it is possible sales which would have been spread out over the next few months are occurring now as consumers want to cash in on the benefits of the program. It is really an issue of how the timing and amount of new car sales will change over the next few months to a year. The short-term effects have been dramatic, but how lasting will they be?
Initial assessments by the auto companies suggest that there will be a net increase in total sales as a direct result of the program through 2009. And, although in July there were no plans by auto companies to increase production, in recent weeks several manufacturers have restarted some assembly lines and have hired back workers at some plants. Although it is impossible to know exactly what would have happened without the program, there are ways to analyze the data over the next few months that will provide good information on important outcomes such as total new sales, increased production, and additional jobs.
Improving Efficiency in the Fleet but Increasing Miles Driven?
The other goal of the program was to increase the fuel economy of the fleet by inducing consumer to trade in low fuel economy vehicles for those with better fuel economy. Edmunds has tracked the vehicles traded in and the vehicles purchased under the program. They find that all buyers, regardless of the trade-in, are opting for smaller more fuel-efficient vehicles at a higher rate than before the program began.
Newly-purchased vehicles tended to get about 25 mpg while the clunkers traded in averaged 16 mpg. This will result in a modest improvement in the average fuel economy of new vehicles sold, regardless of any changes in timing of new sales the program has generated. In addition the clunkers are destroyed so unlike other trade-ins, they will not be sold in other markets or to other countries and therefore will no longer contribute to the emission of greenhouse gases. However, this slightly newer car fleet created by the program may be driven more miles since newer vehicles tend to be driven more.
Other benefits
The program has been criticized because it allows the replacement vehicle for trucks trade-ins to have fuel economy improvements that are relatively small compared that for cars. But it is gallons saved that matters for reducing energy consumption. So, a driver who shifts from a large vehicle that gets 15 mpg to a more efficient one that gets 19 mpg will save as much fuel as a driver who goes from a 26 mpg car to a 41 mpg car (saving about 1.4 gallons of gas if going on a 100 mile trip), assuming the same number of miles driven in both cases. Improving the fuel economy of the biggest gas guzzlers is important, even it those improvements seem relatively small.
There are other benefits that may not have been part of the original intent of the legislation but which may be important if the program really does result in a newer fleet. One such benefit is the improvement in safety features of the newer vehicles compared to those they replace. New vehicles, even SUVs and light trucks, will tend to have features such as side airbags, quicker stopping distances, and electronic stability controls. Another benefit is in reduced air pollutants such as hydrocarbon and NOx which contribute to local air pollution.
On the cost side, there is substantial lost value of the vehicles that were traded-in and then destroyed. Their used car values have been estimated to average about $1,500 a vehicle. Although the deal offered must have been enough to make participants better off, there was value to society in these vehicles as reflected in their used car prices.
Could we have done better?
A full assessment of the program must wait for market forces to play out over the next few months. There is much to be learned from this program, about the behavior of consumers to the subsidy, the extent of the benefits, and the full examination of whether benefits exceed costs. We can then evaluate the important question - could we have done better with the $3 billion to reduce GHG emissions and provide jobs?
