Remember a little over a year ago when Congress passed a bill that let you exchange your old, dilapidated car for a few thousand dollars if you bought a new one? The program affectionately nick-named "Cash-for-Clunkers" was often criticized for its big price tag and dubious impact. Critics said that it would merely pull forward demand without actually spurring many purchases that wouldn't have occurred anyway. It turns out they were right. A new National Bureau of Economic Research working paper analyzed the impact of the program and found very little.
The new paper is by economists Atif Mian of University of California, Berkeley and Amir Sufi of University of Chicago's Booth School of Business. They found that the program didn't live up to the expectations that Washington had sought. In fact, it had very little lasting impact on the U.S. economy. They conclude that the program's gains were "far smaller" than the $2.85 billion cost.
If cash-for-clunkers could have hoped to impact anything, it was auto sales. And, yet, it barely even did much to stimulate those in the medium-term. The economists write:
Under the identifying assumption that cities with very low numbers of clunkers were unaffected by the program, our estimate implies that approximately 360,000 cars were purchased under the program during July and August 2009 that would otherwise not have been purchased.
However, we also find that most vehicle purchases induced by the program were borrowed from purchases that would have otherwise occurred in the very near future. In the subsequent ten months after the program (September 2009 through June 2010), high clunker cities purchased significantly fewer automobiles than low clunker cities. By the end of March 2010, seven months after the program, the cumulative purchases of high and low clunker cities from July 2009 to March 2010 were almost the same. In other words, the relative impact of the program on high clunker cities was almost completely reversed in just seven months.
© 2010 by Atif Mian and Amir Sufi.
But what about that short period of several months when people bought more cars then they would have otherwise? Surely the economy benefitted at least in the short-term, right? Not really. Mian and Sufi analyzed employment, household defaults, and house prices. They found "no noticeable effect" on employment growth. Moreover, they found a relative increase in household default rates and decline in home price growth in high-clunker-exposure cities.
In general, these sorts of temporary programs that encourage people to spend money won't have lasting effects. Indeed, if cash-for-clunkers is any indication of their results, then they barely even have any short-term benefits. I'll look forward to seeing similar economic research on how the home buyer credit affected the housing market. It was in place for much longer than clunkers. That means either it was in place long enough to have more significant results or it simply distorted the market even more severely. My money's on the latter.