Wednesday, August 6, 2014

Cash For Clunkers Reduced Auto Industry Revenue By $3 Billion And Did Not Increase Auto Sales

From NBER Working Paper Series, "Cash For Corollas: When Stimulus Reduces Spending" by Mark Hoekstra, Steven L. Puller, Jeremy West, Working Paper 20349:
A major objective of the [The Car Allowance Rebate System (CARS), better known as "Cash for Clunkers"] program – and arguably the primary one – was to provide economic stimulus to U.S. vehicle and parts manufacturers (and therefore to the U.S. economy) by shifting expenditures “...from future periods when the economy is likely to be stronger, to the present...” [Romer and Carroll, 2010].
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However, another priority for the Obama Administration at that time was to improve the fuel efficiency of the U.S. vehicle fleet.... As a result, the policy was written to achieve multiple goals: to accelerate the purchase of new vehicles to increase revenues to the auto industry, and to increase the fuel efficiency of the fleet by requiring new vehicles purchased under the program to have sufficiently high fuel economy.

The fuel efficiency restrictions imposed by the program could have either enhanced or undermined the stimulus effect of the policy. On one hand, lowering the relative price of fuel efficient vehicles might induce buyers to increase spending by selecting vehicles with more expensive fuel-saving technologies, such as hybrids. On the other hand, the restrictions could induce households to purchase smaller, less expensive vehicles in order to meet the fuel efficiency criteria, which would decrease overall new vehicle spending. The net impact of these restrictions on the stimulus effect of the program is an empirical question.
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[W]e find that although Cash for Clunkers significantly increased new car purchases during the two months of the program, all of this increase represented a shift forward from the subsequent seven to nine months.
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On net, the program did not result in any more vehicle purchases than otherwise would have occurred over the nine to eleven month period that includes the two program months.
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[T]he program’s fuel efficiency restrictions could have shifted both the type and price of vehicles purchased, which would have important implications for the program’s effect on auto industry revenues.
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Strikingly, we find that Cash for Clunkers actually reduced overall spending on new vehicles during the period beginning with the first month of the program and ending eight months after the program. [H]ouseholds tended to purchase less expensive and smaller vehicles such as the Toyota Corolla, which was the most popular new vehicle purchased under the program. Estimates indicate that each household purchasing under the program spent an average of $4,600 less on a new vehicle than they otherwise would have.

Thus, we estimate that this stimulus program – which dispensed three billion dollars in subsidies toward the purchase of 677,000 new vehicles nationally – actually reduced revenues to the auto industry by around three billion dollars over the course of less than one year. This highlights how – even over a relatively short period of time – a conflicting policy objective can cause a stimulus program to instead have a contractionary net effect on the targeted industry. [Emphasis added. Footnotes omitted.]

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