Cash for Clunkers destroyed working cars in 2009 to stimulate the economy

Picture the scene at a car dealership in the summer of 2009. A customer pulls in with a perfectly drivable truck, one with a good transmission, tires that still hold air and a heater that works. A salesman tells the customer the government will pay several thousand dollars for it. Then the truck is driven around back, and a mechanic pours a liquid into the engine and runs it until the engine seizes into a single lump of useless metal. The federal government, in its wisdom, called this stimulus.

I am not making it up, and the program's own rules are the evidence. It was officially the Car Allowance Rebate System, CARS, and everyone called it Cash for Clunkers. It deserves a place in the museum of economic ideas, right beside the Whip Inflation Now buttons. Let me walk through it, because it teaches one of the oldest lessons in economics, and it teaches it with a dealer's lot full of ruined engines.

How the program worked

In the summer of 2009, with the economy in the worst recession since the 1930s and the auto industry in crisis, Congress created a temporary program to encourage people to buy new, more fuel-efficient vehicles. It ran from late July to late August 2009. The government initially set aside $1 billion, the money ran out within days, and Congress added another $2 billion, bringing the funding to $3 billion.

The mechanics were as follows. A buyer who traded in an old vehicle for a new one could receive a voucher, paid through the dealer, of $3,500 or $4,500, depending on the fuel economy of the new vehicle and the improvement over the old one. To qualify, the trade-in had to be a drivable vehicle, insured and registered for the previous year, with a low fuel-economy rating, set at 18 miles per gallon or less for most cars. And here is the crucial rule: the dealer had to send the trade-in to be destroyed. The engine was to be disabled by replacing its oil with a solution of sodium silicate, then running the engine until it seized. The vehicle was then crushed or shredded. The point of the engine-ruining rule was to ensure the old car could not be resold to another driver, which would have defeated the purpose of reducing the number of low-mileage-per-gallon vehicles on the road.

By the program's end, hundreds of thousands of vehicles had been traded in under it, the great majority at new-car dealers who suddenly found their showrooms full.

The argument for it

A fair summary of the case for the program has three points. First, stimulus: the economy needed demand, and a subsidy for new cars would get people to spend and keep the auto industry alive. Second, the environment: replacing the least efficient vehicles with more efficient ones would cut fuel use and emissions. Third, a one-time boost: the program was cheap compared to the stimulus bill and was easy to administer, as the vouchers went through dealers.

All of these goals are respectable, and some of them were met in a narrow sense. Sales in the program's month rose dramatically, and the headlines said the program had been a success. That is the first thing to understand about it: success was measured in the month in which the money was spent.

The argument against it, in numbered form

One: the broken window

In 1850 the French economist Frédéric Bastiat published an essay with a title that has become a motto: "That Which Is Seen and That Which Is Not Seen." His example was a shopkeeper's son who breaks a window. The glazier is paid six francs, the glazier spends them, and the onlookers conclude that the broken window has created business. Bastiat's answer is that you have seen the glazier but not the other thing the shopkeeper would have bought with the same six francs, a pair of shoes, perhaps, if the window had not been broken. The community is not richer. It has lost a window.

Cash for Clunkers is the broken window with a federal budget. The engines were deliberately broken. A working car is wealth: it provides transportation, and it can be sold to someone who values it. Destroying it does not create wealth. It destroys it and calls the replacement purchase an economic gain. The seen thing is the new car sale. The unseen things are the used cars that disappeared from the market, the other goods the buyer would have purchased, and the taxes that financed the voucher.

Two: pulling sales forward

Economists who studied the program afterward came to a notable result. A well-known study by Atif Mian and Amir Sufi, published in the Quarterly Journal of Economics in 2012, examined sales and found that the extra purchases during the program were largely offset by lower sales in the months after. In other words, people who would have bought a car in the fall or winter bought one in August, to collect the voucher. The program changed the timing of purchases and did not create many new ones. By their estimates the effect had largely reversed within several months, and they found no lasting increase in car purchases and no clear spillover to local employment or spending in the places that got the most vouchers. If you want to confirm the findings or find other estimates, read the paper and the follow-up work yourself, as the numbers differ in details but the broad conclusion has held up among economists across the spectrum.

That is exactly what a conservative economist would have predicted. A temporary subsidy on a durable good is an invitation to buy early. It is like a sale at a store: the day of the sale is crowded and the week after is empty. The government paid, at a cost of $3 billion, for a calendar shift.

Three: the used-car market and lower-income buyers

The program removed from the market a stock of used vehicles that, by design, were older and cheaper. Used cars are the transportation of lower-income households, who cannot buy a new car with or without a voucher. A reduction in the supply of used vehicles pushes up prices at the cheap end of the market. The mechanism points to higher prices at the cheap end of the market, and trade-in values did rise, though I would send you to the studies for how large the effect was on low-income buyers. The beneficiaries were largely people who were already in the market for new cars. The costs fell, in part, on those who were not.

There was also a hit to charities and to the recycling and parts businesses that relied on donated and salvaged vehicles, as the supply of working cars and parts shrank. I am not going to give you a figure for it, because I do not have one I am certain of, but the mechanism is straightforward: you cannot donate or sell a car that the government has required be turned into scrap.

Four: the environmental case is weaker than it looks

Defenders pointed to fuel savings. But the program's critics, and some analysts at the time, argued that the cost per ton of carbon dioxide avoided was extremely high compared to alternatives, and that the benefit depended on how much the old vehicles would have been driven and how many of the new purchases were additional. Because many of the purchases would have occurred anyway, the fuel savings credited to the program were overstated. Moreover, manufacturing a new car, and scrapping a working one, has its own environmental cost. I will leave the precise estimate to the analysts, because the point is simple: when you pay a premium for a small benefit, you have probably found a more expensive way to get the same result.

The conservative lesson

I want to say what this episode is really about, because the car is only the symbol.

The deepest argument for markets is that prices tell the truth about what people value and what things cost. When a government decides it knows which cars should be on the road, which purchases are worth subsidizing, and when people should buy, it replaces that information with an official's estimate. It is the old problem that Friedrich Hayek described in his essays on knowledge in society: the information needed to allocate resources is scattered among millions of people, and no planner can collect it. A voucher program is a planner's guess about what households need.

And there is a moral point, one that goes with the Judeo-Christian principle of stewardship. A working car is the product of someone's labor, and to destroy it, on purpose, because the accounting said it would help, is waste of a kind that ought to make anyone uneasy. If a private company had paid to smash working vehicles and called it a business strategy, shareholders would ask for the CEO's resignation. In Washington, they threw a press conference.

I also think this is a fair place for a joke at the program's expense. The government's idea of an efficient car-recycling system was to pay people to ruin an engine with a chemical that sounds like it belongs in a chemistry set. If you ask a mechanic what he thinks of a program that pays you to ruin a good engine, you will hear words that cannot be printed here. And the program was not even honest about its name, because the "clunkers" in many cases were not clunkers at all, but working trucks and sport utility vehicles whose only fault was thirsty engines.

A fair word for the other side

Not everything about the program was a mistake, and a fair reader should hear this. Car sales had collapsed in the winter of 2008 to 2009, and some people argued that dealers and manufacturers were in danger of failing, with a ripple effect across the supply chain. In a depressed economy, shifting purchases earlier has a value, because it brings demand to a moment when it is scarce. Some economists have argued that a temporary stimulus of this kind can be justified exactly because it is timed to a recession, even if it pulls demand forward. And the program was easy to understand and fast to deploy, which are qualities that most stimulus measures lack.

My answer is that the cost of that timing benefit was $3 billion of borrowed money, and that the same logic could justify almost any subsidy: pay people to buy refrigerators, pay people to replace windows, pay people to replace anything. It is always better for the economy to spend, in the short run, in the spending month. It was precisely the 2009 faith in that kind of spending that I examine in the 2009 stimulus promised unemployment under 8 percent, then came 10, and the broader record of government choosing industries to favor is in Solyndra to Amtrak, why government picks losers when it picks winners. The economic process that the clunkers program interrupted, in which the old is replaced by the new at the pace that buyers and sellers choose, is described in Creative destruction, why the buggy whip makers lost and America won, and the information that profit and loss provide is the subject of profit is a signal, not a sin, and what a loss tells a company.

What the Constitution has to say

A constitutionalist question, in one sentence: where in Article I, Section 8, is the power to pay households to destroy their automobiles? The enumerated powers include taxing and spending for the "general Welfare," and the debate over how far that phrase reaches is as old as Madison and Hamilton. Madison read it as a limit on the taxing power, Hamilton as a broad grant, and the Supreme Court has leaned toward Hamilton. I do not rest this post on that debate. But I think any citizen should be able to ask the question, and if the answer is "the general welfare clause covers everything," then the Founders' list of enumerated powers was an elaborate way of saying nothing.

The case in brief

1. The Car Allowance Rebate System of 2009 spent $3 billion, after Congress added $2 billion to the first $1 billion, to give $3,500 or $4,500 vouchers for trading in working, low-mileage-per-gallon cars.
2. The trade-ins had their engines deliberately ruined with sodium silicate, which is Bastiat's broken window with a federal budget: the destroyed cars were real wealth.
3. A well-known study by Mian and Sufi found the extra sales were largely offset by lower sales in the following months, so the program shifted the timing of purchases and did not create many lasting ones.
4. Removing cheap used cars from the market raised prices at the low end and fell hardest on buyers who could never afford a new car.
5. The lesson is about knowledge: officials guessing which purchases are worth subsidizing do worse than prices, and a government that smashes working goods to show growth has mistaken motion for progress.

What you can do: when the next "temporary" stimulus is proposed, find its cost on Congress.gov and its estimated effect in the Congressional Budget Office's report, and ask your representative whether the benefit is new activity or only moved from next month.