On July 1st, 2009, the Car Allowance Rebate System (CARS) or Cash for Clunkers officially began. The purpose of the program was twofold: to help stimulate the economy, while also reducing the number of vehicles on the road with low fuel efficiency ratings. The program ended on August 24th, 2009 when the $3 billion appropriated to it was completely exhausted.
Consumers were given a voucher for $3,500 or $4,500 for trading in an old vehicle to put towards the purchase of a new car or truck. If the new vehicle had a combined fuel economy that was at least 4, but less than 10 miles per gallon (mpg) higher than the traded-in vehicle, the credit was $3,500. If the new vehicle had a combined fuel economy value that was 10+ mpg greater than the traded-in vehicle. the credit was $4,500.
By examining the top-line results, Cash for Clunkers has to be ruled a success. The program resulted in almost 700,000 dealer transactions, and fuel efficiency of traded in vehicles was 15.9 mpg while the fuel efficiency of the purchased vehicles was 24.9 mpg. But Cash for Clunkers is a great example of the law of unintended consequences as there were secondary impacts that need to be considered before the program can be ruled a success:
*Cash for Clunkers pushed sales that were going to occur in the near future forward by a couple of months. According to a study by Edmunds.com, only 125,000 of the 690,000 purchases would not have been made without the incentives, or in other words, over 80% of the purchases would have occurred even if Cash for Clunkers had not provided the $3,500 and $4,500 vouchers. Two University of Delaware economists determined that the program had a net cost of $2,000 per vehicle transaction and total costs outweighed benefits by $1.4 billion.
*The program reduced the supply of inexpensive vehicles. By forcing all traded-in vehicles to be destroyed the supply of inexpensive vehicles available to lower and middle class households was greatly reduced. This reduced supply in turn caused an increase in price for similar vehicles available for sale, thus forcing households to spend more for used cars.
*Japanese and Korean automakers gained market share from the Big Three (General Motors, Ford, and Chrysler). Toyotas accounted for almost 20% of the total sales, while Hondas represented 13% of the total sales. Seven of the top 10 models sold were foreign cars or trucks with the Ford Focus, Chevrolet Silverado, and Ford Used car buyer F-150 being the only models manufactured by US auto companies to crack the top 10. The top 3 purchased vehicles were the Toyota Corolla, Honda Civic, and Toyota Camry.
*The fuel efficiency gains were not as great as expected.. A University of Michigan study found that the program improved the average fuel economy of all vehicles purchased by 0.7 mpg in August 2009, or a little over 3%. What also needs to be considered is that if something becomes cheaper (in this case, gas in the form of improved mileage) a consumer will invariably consume more of it, thus offsetting the fuel economy gains.
*Destroying the clunkers’ engines reduced the availability of replacement parts, making them more expensive. Typically, the car’s engine is the most valuable component of a scrapped car, but the salvage or scrap facilities were prohibited from selling any powertrain components from the scrapped vehicles.
The Cash for Clunkers program proved the axiom that if you give someone money for something they were going to buy anyway, they will buy that object sooner. The program also provided a real world example of the broken window fallacy as consumers were paid to have their perfectly functional vehicles destroyed. Money that these consumers spent on new vehicles could not be spent on other potentially more beneficial purchases.