Cash for Clunkers: Why it was a flop

Cash for Clunkers may be the poster child for how it seems to be bad news anytime everyone in Washington, D.C., agrees on something. It was proposed in the midst of the flurry of stimulus programs during 2009, and sailed through both houses of Congress largely because it appealed to a variety of groups – it was supposed to boost U.S. car companies, create jobs, and reduce greenhouse gases. It was a politician’s dream bill, and it was a total flop.

The idea was to have the government give people up to $4,500 to trade in their old car for a new, more fuel-efficient one. Congress set aside $1 billion when the program began July 1, and within weeks upped the amount to $2.85 billion. When the program ended that August, the U.S. Transportation Secretary called it “wildly successful.”

Today, after a few years to study Cash for Clunkers’ impact, we know it was anything but a success. Multiple organizations across the political spectrum have found the environmental impact to be negligible, the paltry 3,000 jobs created cost more than $1 million each, and the cars sold would have been sold anyway. That’s $3 billion of deficit spending that accomplished basically nothing.

So what can we learn from this fiasco? First, government stimulus spending rarely stimulates. Second, note how many interest groups, think tanks, and economic advisors advocated for this program and promised its success. The White House’s Council of Economic Advisors predicted Cash for Clunkers would create 70,000 jobs, but when the final tally was counted it created less than 5 percent of that total. Cash for Clunkers perfectly demonstrates what economist F.A. Hayek meant when he said,

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The lesson to be learned is, when the next can’t-miss, no-brainer economic stimulus policy comes out of Washington D.C., let’s remember how many times we’ve been sold Cash for Clunker programs, and let’s not be fooled again.

Dig Deeper:

Report: Economic Analysis of the Car Allowance rebate System

Article: “Wildly successful”

Blog Post: Does government spending create jobs?

Report: Cash for Clunkers: An Evaluation

Article: Almost anything would have been better than ‘Cash for Clunkers’

Article: Brookings Institution says Cash For Clunkers was a bust