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Cash for Clunkers' Muted Effect on Economy

The Obama administration's program to encourage new car sales may have encouraged people who would have bought new cars anyway to do so sooner rather than bringing new buyers into the market, according to a UC Berkeley economist.

When the incentive was offered, automakers sold an additional 360,000 vehicles in cities with lots of used cars, only to see sales plummet once the program expired, said Atif Milan, who teaches economics and finance at Cal.

"Cities that had more clunkers and therefore they bought more new cars, they had a much stronger decline in auto sales relative to cities that did not have that much exposure to the Cash for Clunkers program," he said.

U.S. auto sales fell 5 percent from July to August and 21 percent from the previous year, making last month the worst August for American car sales since 1983.

Milan tracked sales in the 7 months after the $4,000 incentive ended and found a drop of about 360,000 units, suggesting no long-term change in consumers' habits.

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