The Wilder View

9 Months after the Most Economically Atrocious Piece of Legislation in 2009 (Cash for Clunkers)

Okay, I’ve seen a lot of whoppers in my time, but the Cash for Clunkers legislation (CFF, colloquial for Car Allowance Rebate System) takes the cake. And today’s CPI report reiterates the net welfare-reducing impacts of CFF on the economy. I present my case in three parts, but skip on down to point three if you want to see the gist of it.

First, the cars that should have been scrapped were unlikely scrapped; better put: the bottom of the distribution of environmentally sound vehicles are still on the road. Why? The trade-in value for any given vehicle that qualifies for the program would be its scrap value, not the re-sale market value. And those that own used cars with market value close to the scrap value benefit the most from the program. However, those same people were very unlikely to participate in the program when the labor market was contracting…precipitously.

So what do you get? The cars that were scrapped were likely the ones that only marginally needed scrapping (compared to the cars that should have been scrapped but were not).

I would venture to say that the net-benefit on the environment was much lower than Congress had intended; but we’ll never know because the environmental impact is essentially unobservable. estimates that each Cash for Clunker cost tax payers $20,000.

Second, the net impact on auto and parts sales was, according to the Census retail sales figures, negative. To date, retail sales by motor vehicles and parts dealers (part of the Census advanced retail sales report) is -0.6% spanning the period July 2009 to February 2010.


So, according to this measure, there has been NO additional auto sales created since CFF; no new jobs, no new spending, no aggregate benefit. There was some confusion about the CFF start date, so including July 2009 retail auto sales were up 1.1%. This is positive growth, but still nothing to call home about.

To be sure, consumer autos and trucks production has grown 23% since the program’s initiation, but the growth was more than accounted for in the two months after the July CFF start. Basically, since September 2009, the industrial production numbers show essentially flat growth in new auto production.

Third – and this is the most deleterious side effect of the program – used car prices are up 13.7% since July 2009.


Used car prices are higher than they were when the recession started. One cannot blame the CFF in full for the growth in used car prices, but the ex post correlation is pretty striking. The government reports that 677,081 vehicles were traded in under the Cash for Clunkers program, which is code for dropping the supply of used cars by 677 thousand vehicles. What did Congress think was going to happen?

Now, try and tell those aged 16-19 years, the age category that is currently experiencing a 25% unemployment rate, that Cash for Clunkers was a successful piece of legislation.

Originally published at News N Economics and reproduced here with the author’s permission.

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