Mises Wire

Cash for Clunkers: Yet Another Way Government Increased the Cost of Living

President Obama’s Car Allowance Rebate System (CARS), more popularly known as “Cash for Clunkers,” is now a decade old.

For those with short memories or those utilizing the healthy defense mechanism of repression, CARS, enacted by Congress in the summer of 2009, was a Keynesian-inspired stimulus package consisting of a $3,500 or $4,500 subsidy to those willing to part with their inefficient used vehicles and “trade” them for newly manufactured cars and trucks with better mileage ratings. Congress initially appropriated $1 billion for what was to be a five month program, both to stimulate new car sales and supposedly improve air quality. Because the initial $1 billion was exhausted in a matter of days, Congress appropriated another $2 billion, the balance of which ran out well short of the five month stimulus period. Per the legislation, all vehicles traded in were immediately made inoperable and junked, their engines frozen with sodium silica.

Not surprisingly, this interventionist program was a massive policy failure for several very predictable reasons.

First, no economy is made better off by destroying existing resources. Contrary to conventional myth, production of soon-to-be-destroyed-war-goods during World War II did not propel the United States out of the throes of the Great Depression — and neither did euthanizing 690,114 operational vehicles “jump start” the U.S. auto industry in 2009. Both endeavors merely redirected resources to manufacturing sectors out of touch with genuine consumer demand.

Bastiat’s “broken window fallacy” demonstrates how society is never made better off by destroying goods. In the case of the automobile market, instead of having hundreds of thousands of operational used cars with some market worth, we have government-engendered malinvestment in the production of new vehicles not genuinely demanded by consumers. The average age of a used light vehicle on the road today is 11.6 years, versus 10.5 in 2009. Does it make economic sense to call for cars more than a decade old to be destroyed today? My own household would lose two perfectly good vehicles and incur much higher new car and insurance payments.

Second, we have distortions in the market because we can’t know what Cash for Clunkers participants might have purchased (or not purchased) instead of new cars What about less affluent consumers who now face a significantly diminished supply curve (and thus higher prices) for a used vehicle because Cash for Clunkers reduced the supply of older, cheaper used cars(and total vehicles for sale, for that matter) by nearly 700,000 units? Did significant fuel savings and cleaner air result from the removal and destruction of these vehicles? Experts say no; people tend to drive older vehicles sparingly or very short distances. A reliable but inefficient old vehicle which gets someone back and forth to a job that is, say, three miles away, may very well make it possible for the owner to keep a job. Anecdotally, my father purchased a new full-sized pickup in 1982 which he drove sparingly for 5 years. I inherited it with only 26,000 miles from my mother in 2002, then sold it 15 years later with 52,000 miles.. On a good day with a heavy tailwind, the truck might have gotten about 13 miles per gallon on the highway. But when was it driven by either my father or me ... when only a full sized pickup truck would suffice, such a vehicle often seemed invaluable.

Third, only the price mechanism can rationally allocate resources. Producers and consumers meet at a price; prices in turn signal the need for more or less investment in a particular good or service.

Nobody in Washington DC knows the right number of vehicles to have on American roads, the optimal ratio of new versus used vehicles, or the correct number of each type of vehicle. These choices are best made by consumers who know intimately their own personal needs and constraints. Stimulating new car sales with subsidies, as the Obama administration did 10 years ago, could only generate malinvestment. Not only were new car sales per capita trending down at the time the CARS program, they had been trending down since 1975. Markets reflected genuine consumer preferences; DC reflected a political preference for auto makers and lenders.

The one recent exception to that forty-year downtrend of fewer new car sales per capita was the post-recession sales increase that occurred between 2009 and 2015. While some of this increase is attributable to drivers who weathered the recession but could no longer make do with older cars, the temporary increase in auto sales following the Cash for Clunkers “stimulus” did little more than the mimic the rise in the general overall consumer spending during that same, post-2009 time period.

Also contributing to the post-recession increase in auto sales was an increase in the number of households over that same period of time. While the number of autos per U.S. household actually trended down slightly from 2.05 autos per household in 2008 to roughly 1.95 in 2018, the number of total households increased over that same period — and at a significantly greater rate than the number of vehicles per household went down, accounting for more total cars in use. Demographics and consumer preferences, not Cash for Clunkers, created the post-recession spike in new car sales.

Since 2016, however, sales have dropped off. This is what we would expect given higher interest rates, higher auto prices, increased telecommuting, and riedesharing programs like Uber. Millennials, already strapped with college debt, appear less interested in new car ownership than their Baby Boomer parents.

And perhaps most of all, newer cars tend to be more reliable and longer-lasting. None of this bodes well for auto manufacturers.

The Cash for Clunkers program destroyed valuable resources, misallocated other resources, and made life difficult for cash-strapped drivers needing a low-priced car—not to mention mechanics and salvage yard operators who rely on clunkers for their livelihood. It, did nothing to rejuvenate the new car manufacturing industry. Before the next round of intervention we would be wise to reflect on Bastiat and learn the harsh lesson of Cash for Clunkers.

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