This article was updated on August 31, 2009.On the sidewalks of the far west side of Manhattan, two well-dressed car salesmen are taking a break. Have they noticed a difference in their business since the government's "cash for clunkers" program began in July? "Oh, yes," says one, waving his cigarette. "Totally," echoes his colleague, between drags. "There was nothing going on before, and now we're being run off our feet."
Their bosses, who do not allow sales people to speak to reporters, would doubtless agree. Both Ford and GM gave the Car Allowance Rebate System (CARS), which gives vouchers worth up to $4,500 to consumers who trade in gas-guzzling cars for more fuel-efficient models, credit for a nice little boost. And certainly it’s been great for the guys on the front lines. “We needed a shot in the arm and this is it,” says Cody Lusk, president of the American International Automobile Dealers Association. “The problem was everyone had been sitting in the sidelines. It was like a flower wilting; cash for clunkers was like sprinkling a little water and the flower begins to revive.”
Certainly the program, which ended on August 24, was popular. The first $1 billion, which was supposed to last for months, was accounted for in less than a week. Congress, with a little grumbling from those worried about the cost, quickly poured in another $2 billion on Aug. 6. At a fundamental level, though, what did the cash for clunkers program really achieve?
Net Effect: 13 Percent Jump in Sales
Cash for clunkers had two stated goals: to get greener cars on the road, and to boost the auto industry, and by extension, the U.S. economy. And lo and behold, there are signs that it is working on both counts. The cars purchased under the program get, on average, almost 10 miles more per gallon than the ones being scrapped, and the industry has seen a nice little bounce.
Car sales in July were the highest since August 2008 and up 13 percent over June. Ford actually saw a small year-on-year increase, the first in almost two years, while GM’s four core brands — Buick, Cadillac, Chevrolet and GMC — all did well. Indeed, GM announced recently that it was adding workers and shifts to help meet the increased demand created by CARS. At current trends, more than 11 million new cars and pickups will be sold this year — not much compared to the 16 million sold in 2005, but a lot better than the 9.5 million that was projected just a few months ago.
“A billion dollars for cash for clunkers looks dramatically more efficient, dollar for dollar, than anything else the Congress has passed yet,” concluded Credit Suisse chief economist Neal Soss in an August assessment.
By comparing the program only to other government initiatives, however, Soss is setting a low bar. For one thing, at least some of the purchases are by people who would have been replacing their cars anyway. In that case, demand has not been created, it just has been moved up a few weeks or months. “We have crammed three to four months of normal activity into just a few days,” Edmunds.com CEO Jeremy Anwyl wrote in an op-ed in early August.
Then there is the iron rule of subsidy: What helps one industry hurts another — in this case, those businesses that are not seeing sales because families have spent their available money on a new car. Retailers of, say, cashmere, have also been hard hit by the recession, but don’t expect a voucher to buy expensive sweaters.
“We did not magically create more demand for these cars,” says Jeffery Miron, a Harvard economics professor of libertarian sensibilities who is decidedly not a fan of CARS. “We are taking it from other consumers and reducing demand for all the other goods in the economy and transferring it to those who take advantage of the program.”
Environmental Impact: Slight Drop in Emissions
Beyond the economic impact, there’s also an environmental component to the program. The Department of Transportation says about 690,000 cars have been swapped for more fuel-efficient models as a result of the CARS program. According to a study by Christopher Knittel of the Center for the Study of Energy Markets, that would reduce annual gas consumption in the United States by roughly 186 million gallons per year, lowering emissions of carbon dioxide, the most important element in the greenhouse gases that are implicated in global warming, by about 1.9 million tons a year.
While that may sound like a lot, consider that the United States consumes about 378 million gallons of gas a day, and released about 6.4 billion tons of greenhouse gases into the air last year. Of course, cleaner-running cars also spew fewer air pollutants such as carbon monoxide, nitrogen oxide, volatile organic compounds, benzene, formaldehyde, particulate matter, and other toxic materials that contribute to smog and respiratory disease.
Another criticism of the plan is that cash for clunkers is an expensive way to reduce carbon emissions. One estimate, by Henry Jacoby, co-director of the Joint Program on the Science and Policy of Global Change at MIT, is that CARS will reduce carbon emissions at a cost of about $160 a ton; Knittel puts the figure at $237 and possibly much more. By comparison, a ton of carbon on the European trading system goes for about $20 right now.
But while the direct environmental effect might be expensive and not necessarily huge, is it at least a meaningful step in the right direction? To answer that, one has to look at a more complicated picture. First of all, there is the environmental cost of manufacturing all those new cars; the process of making and transporting the average new car creates 6.7 tons of carbon dioxide. So that’s about 4.6 million tons of carbon dioxide created right there from the trading in of 690,000 cars.
What’s more, there is the “Mexico effect.” As Matthew Kahn, an environmental economist at UCLA, notes, the North Atlantic Free Trade Agreement has, in effect, been a hemispheric cash-for-clunker program, as the United States and Canada ship used but sellable cars south of the border. If these are sent to the scrap heap instead, that means that many older and dirtier Mexican clunkers will stay on the road longer, reducing the gains of the slightly greener U.S. fleet.
Moreover, most of the the funds for cash for clunkers came by shifting money from the loan guarantee program for renewable energy, which is designed to make it easier to invest in and expand green energy projects. Unfortunately, there is no alternate universe in which to test whether there would have been more green for the buck had the money stayed where it was. But the point is that to determine the calculus of environmental impact, one has to go beyond the simple arithmetic of new cars and mileage standards. The most that can be said of cash for clunkers is that it probably has some modest environmental benefits, and that these will accrue over time — but at above-market cost.
The Bottom Line
We’ve certainly done dumber things with our money in the name of greenery than the CARS program — see, for example, ethanol. And because cars are big-ticket items, a $4,500 subsidy generates many times that in actual expenditure and produces useful ripple effects in related industries such as steel and auto parts; that is the very definition of stimulus.
Both the anecdotal and macro evidence suggests that CARS has gotten people to venture into the showroom. And even if all cash for clunkers has done is accelerate buying rather than creating new demand, that’s a useful step away from the dreaded “liquidity trap” — essentially, the fear of spending, which in itself creates the conditions for prolonged economic doldrums. Luring pent-up demand into the dealerships sooner rather than later is a sensible way to nudge the Great Recession closer to an end.
But there is no free lunch here. Those Americans who do not own a car or whose car does not qualify for CARS — and that means about 99 percent of you — are paying for those who do. Strip away the green fig leaf, and this is free money to a small number of households, and a taxpayer gift to a politically powerful industry. But in an era of vastly more expensive bailouts to vastly less popular industries, not to mention lots of stimulus money that has been allocated but not spent, CARS, on balance, looks like a modest success.
But enough already. A $3 billion gift to a small portion of the population that gooses the economy a bit and brings trivial environmental benefits may be justifiable. Any more is not.
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