The initial view of the Cash for Clunkers program was very positive. Lots of cars were being sold and there was the additional secondary benefit that people were getting more fuel efficient cars–i.e. it was also good for the environment. Now a new analysis by Resources for the Future suggests that perhaps that initial view of the program is faulty.
In the United States, the Cash-for-Clunkers program provided eligible consumers a $3,500 or $4,500 rebate when trading in an old vehicle and purchasing or leasing a new vehicle. Many other countries, such as France, the United Kingdom, and Germany, have similar programs, which generally share the same two goals: to provide stimulus to the economy by increasing auto sales, and to improve the environment. The U.S. program received enormous media attention and many considered the program to be a great success; during the program‟s nearly one-month run, it generated 678,359 eligible transactions and had a cost of $2.85 billion.1 But as a matter of economic theory, it is typically quite difficult to achieve multiple goals with a single policy.
Indeed, one of the problems with the environmental aspect of the policy is Jevon’s Paradox.
Jevons paradox (sometimes Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource.
This is a relatively straight forward application of micro-economic theory. With an increase in fuel efficiency the price of the fuel will fall and demand for the fuel will increase. How much of an increase there is in demand depends on the price elasticity of demand. While price elasticity is often inelastic in the short run, over the longer run it is more elastic. Still, the Jevon’s/Rebound effect is often less than 100%. That is, even in the long run the price elasticity of demand is still inelastic. Then there is the Khazzoom-Brookes postulate that argues the rebound effect is but one way in which energy usage can increase. There are two additional factor that will increase demand for energy. First is that there is something like an income effect. If you save $100/month in fuel expenses you’ll likely spend most, if not all, of that $100 on something else which will increase economic growth which in turn will increase demand for energy/fuel. Also, improving the efficiency of one limited resource will have a beneficial effect on all complimentary resources. Thus, energy efficiency gains paradoxically tend to increase energy consumption vs. reducing it.
As for the increased car sales one of the main criticisms was that the program may end up time-shifting car purchases. That is a person might already be planning on purchasing a new vehicle, but is going to be doing it in November or December. Cash for Clunkers merely moves that purchase forward via a subsidy. Thus, the initial surge in sales in July and August would be at least partially offset by a decline in sales in the months that follow.
To test these effects the analysis uses Canada as a control group since Canada did not have a Cash for Clunkers style program. In addition the authors argue that qualitatively Canada car market is similar to the U.S. market. They use data from 2007 to 2009 on new car sales.
The results of the analysis indicate that of the 0.66 million cars sold during the Cash for Clunkers in July and August 2009 program 0.3 million would have been sold anyways and that only 0.36 million were car sales that other wise never would have happened. Outside of July and August the program had negligible impact and when looking at the total number of new cars sold from June to December of 2009 the effect was close to zero–i.e. there was almost no stimulus effect when factoring in time shifting over a longer horizon. And as for the benefit to U.S. automakers?
In addition, our simulation results show that Toyota, Honda and Nissan benefited from the program disproportionally more than other firms: with a combined market share of around 38 percent before the program, they accounted for more than 50 percent of the increased sales.
So in the end, the impact of Cash for Clunkers appears to be minimal and this program is considered to be one of the more successful programs. Hope and change you can believe in, or something like that.
