Cash for clunkers revisisted: Putting cars into reverse

AMERICA’S “cash for clunkers” program, introduced during the depths of the downturn, was supposed to be a policy two-for-one. By paying people to trade in their old fuel-guzzling cars for new efficient ones, the scheme was supposed to jump start consumption of durable goods, boost the hard-hit car industry, and improve the fuel efficiency of America’s fleet. The eight-week programme generated an immediate spike in car sales, with almost $3 billion spent on the popular rebates. However, a new paper suggests that the programme may have actually decreased total spending on new motor vehicles creating a net drag on the economy.The study, by Mark Hoekstra, Steven Puller and Jeremy West from Texas A&M University, examined the difference between consumers who were on the border-line of being eligible for the scheme. To qualify as a ‘clunker’, a vehicle needed to achieve less than 18 miles per gallon. Thus by comparing households whose cars were just under this threshold, with those who were just over it, the authors were able to measure the impact of the scheme on consumption patterns. Unsurprisingly, they found that the scheme dramatically increased the car purchases for eligible households over the 8 weeks. But this was largely due to households changing the timing of their purchase. Instead of stimulating new car sales, the spike was mostly attributable to sales that …

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