The following editorial first appeared in the Chicago Tribune:
Transportation Secretary Ray LaHood called it "the stimulus program that really worked." President Barack Obama said it was "successful beyond anyone's imagination." They were referring to Cash for Clunkers, a program tried last year to pay consumers to trade in old gas-guzzlers for fuel-efficient new models.
On the surface, it did work, spurring motorists to rush to their local dealers to take advantage of the generous credits, which went from $3,500 to $4,500 per vehicle. New car sales, which had plunged during the recession, suddenly rebounded, to the delight of dealers and carmakers.
In fact, the demand was so great, the program ran out of money far ahead of schedule, prompting Congress to provide additional funds. Some 680,000 older cars and trucks were traded in and destroyed, to make sure they wouldn't be out on the road wasting petroleum.
But the flurry of action last year was not the whole story. When the exhaust settled, it became apparent that Cash for Clunkers didn't accomplish much - and much of what it accomplished wasn't beneficial.
To start with, it didn't raise auto sales so much as briefly accelerate them. A study by Amir Sufi of the University of Chicago's Booth School of Business and Atif Mian of the University of California, Berkeley, found that "almost all of the additional purchases under the program were pulled forward from the very near future." Instead of buying cars in November, consumers bought them in August. So dealers gained early while losing out later.
The $3 billion cost was also higher than it needed to be. George Mason University economist Russ Roberts says any member of Congress watching the showroom stampede should have concluded that "$4,500 per clunker was too big a subsidy and that you can achieve the same effects with a much smaller amount."
That doesn't even count the hidden cost of the program: higher used car prices, caused by the removal of 680,000 functional vehicles from the market. Between July 2009 and July 2010, a period of near-zero inflation, the average price for a used car rose by $1,800, or more than 10 percent, in part because of Cash for Clunkers. It's a perverse form of redistribution: People who can't afford new cars pay more so that people who can afford new cars pay less.
The administration can claim that the brief burst of demand was valuable because it gave auto makers and the economy a jolt of adrenaline at a crucial moment. But the value of helping automakers is debatable, and the economy showed no lasting benefit.
The lesson from this experiment is that the government can bribe people into doing things if it's willing to spend enough of their money. But as an attempt to show that such efforts can do more good than harm, this program is the real clunker.