September 14, 2010
In a new study, economists Atif Mian and Amir Sufi find that the government’s “cash for clunkers” program “had no long run effect on auto purchases.”
C4C was supposed to stimulate the struggling automobile industry – and thus the economy – by inducing people to purchase autos today that they might otherwise have purchased in the future. However, whereas the White House’s Council of Economic Advisors claimed that C4C “pulled forward” purchases that would have occurred five years into the future, Mian and Sufi found that it merely pulled forward purchases that would have been made in the next seven months.
From the study:
In the subsequent ten months after the program (September 2009 through June 2010), high clunker cities purchased significantly fewer automobiles than low clunker cities. By the end of March 2010, seven months after the program, the cumulative purchases of high and low clunker cities from July 2009 to March 2010 were almost the same. In other words, the relative impact of the program on high clunker cities was almost completely reversed in just seven months.
Mian and Sufi also looked at whether C4C had a positive effect on other aspects of the economy. The answer is pretty much “no”:
Cities with high CARS exposure show no noticeable difference in economic outcomes from before the program to after the program relative to cities with low CARS exposure. We also examine economic outcomes for cities that have a high number of employees working in the auto industry. There is some evidence that high auto employment share cities had a relative increase in employment after the CARS program, but there is no noticeable effect on either house prices or household defaults. We should caution however that the effect of CARS on employment in the automobile industry is difficult to separate from the federal bailouts of General Motors and Chrysler in early 2009.
As we recently noted, short-term measures implemented by policymakers to “fix” the economy have introduced unwelcome economic distortions. For example, because auto purchasers benefiting from C4C were required to turn in their used cars for destruction, the supply of used cars decreased. The result is that prices of used cars increased, which has hurt low-income families and others struggling through the recession.
Policymakers should stop trying to “fix” economic problems with short-term gimmicks, especially since it was ill-advised government policies that facilitated the present economic downturn. Given that these “fixes” are only driving up already dangerous levels of debt, policymakers should reverse course and pursue policies that would facilitate long-term economic growth such as eliminating burdensome programs and regulations.
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