True costs of Cash for Clunkers revealed

Image 1 of / 3 Caption Close True costs of Cash for Clunkers revealed 1 / 3 Back to Gallery

The 2009 federal Cash for Clunkers program is often hailed as a success because it jump-started new-vehicle sales, but a new study says it actually cost car dealers $3 billion in lost revenue because its fuel-efficiency requirement caused people to buy cheaper cars than they would have otherwise.

Instead of buying expensive hybrids such as the Toyota Prius, most people fulfilled the fuel requirement by purchasing economy cars. The Toyota Corolla was the top-selling vehicle under the program.

The goal of the program was to stimulate the auto sector by accelerating car sales from the future, when the economy presumably would be stronger, into mid-2009, when auto sales had veered off a cliff. A secondary goal was to increase fuel economy.

MBA BY THE BAY: See how an MBA could change your life with SFGATE's interactive directory of Bay Area programs.

Pursuing both goals caused the program to fail, said Mark Hoekstra, one of three Texas A&M University economists who authored the study, entitled Cash for Corollas.

The program, officially called the Car Allowance Rebate System, ran for eight weeks in July and August 2009. It gave a rebate to people who traded in a car that got 18 or fewer miles per gallon and purchased one that got at least 22 mpg. The subsidy was $3,500 if their fuel economy improved by four to nine mpg or $4,500 if it improved by 10 or more mpg.

The study compared vehicle purchases in Texas by people who were barely eligible for the program (because their old car got 18 mpg) to vehicle purchases by people who were barely ineligible for the program (because their old car got 19 mpg).

It looked at data from the Texas Department of Motor Vehicles for the period from July 2009 through April 2010, to compare the before and after effects.

The researchers found that barely eligible households spent $1,400 to $2,200 less per vehicle than barely ineligible households during this 10-month period. When you adjust for the percentage of eligible households that actually got the rebate, they estimate that on average, each buyer in the program spent between $3,800 and $5,900 less on a new vehicle than they otherwise would have.

Multiply that by the 677,238 clunker trade-ins, and it suggests that the program reduced new-vehicle spending by $2.6 billion to $4.0 billion over the 10 months.

That roughly $3 billion is about 1 percent of total new-car industry sales in 2009, according to estimates from Edumunds.com.

"Given that I'm sure the industry was happy for every dollar it got during those 10 months, that 1 percent isn't negligible, but it also isn't huge given the size of the industry," Hoekstra said in an e-mail.

Stealing from future?

Everyone knew the program would borrow from sales that would have occurred in the future. The question is, by how much?

In 2009, President Obama's Council of Economic Advisors assumed that it would lead people to buy cars five years sooner than they would otherwise.

But three academic studies found that the program borrowed sales from six to 10 months in the future.

The Texas A&M study came to roughly the same conclusion. Although the incentive significantly increased new-car purchases during July and August 2009, "all of this increase represented a shift forward from the subsequent seven to nine months," it said.

What's different about the Texas A&M study, the authors say, is that it used "quasi-experimental methods" to measure the impact of the program on the dollar volume of sales.

"Our study indicates that absent the environmental component, sales would have still been shifted forward to the first 2 months without reducing total spending over the 10 months," Hoekstra says.

Environmental impact

One could argue that a $3 billion decline in spending was worth it if the program offered an environmental benefit. But two studies cited in the paper indicated that "this program was a costly way of reducing environmental damage."

A separate report, published in 2011 by the American Council for An Energy-Efficient Economy, said that "vehicles purchased under the program were in fact more efficient than the typical vehicle in the market, due to both superior fuel economy within vehicle class and shifts between classes." These differences, however, "translated to only modest fuel economy gains."

People who got a clunker rebate purchased a car that got, on average, 2.4 mpg higher than the market as a whole and 2.9 mpg higher than they would have otherwise purchased. "On average, the program paid $4,200 for its fuel economy gains, higher than other estimates of per-vehicle cost for additional fuel economy," that report said.

The lesson for next time, Hoekstra says: "Don't try to do too many things at once. Even though both might be worthwhile, trying to achieve both at the same time can cause the policy to fail."

The counterpoint

Asked to comment on the study, a spokesman for the National Automobile Dealers Association pointed me to a study released in 2010 by Maritz Research. It said that only 4 percent of participants in the CARS program would have purchased or leased a vehicle without the extra incentive.

And it "debunked" concerns that the program "was mortgaging the future by stealing sales that would have occurred anyway at a later date."

Although there was a "slight dip in sales in September 2009," it said the seasonally adjusted annual rate of sales from October through December 2009 was higher than before the program was implemented.

It added that the program did not attract the "normal" new car buyer, "but an unorthodox pool of consumers, including many used car owners, first-time car buyers, consumers who were trading in cars with more than 100,000 miles and buyers adding an additional vehicle to their family fleet."