Economic Analysis of the Car Allowance Rebate System ("Cash for Clunkers")

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I. INTRODUCTION

The Car Allowance Rebate System (CARS) ¹ is one of several stimulus programs whose purpose is to shift expenditures by households, businesses, and governments from the future to the present. (Other programs with the same motivation include support for bringing forward future infrastructure investments, and accelerated depreciation to bring forward business investment.) Such time-shifting is valuable in a recession, when the economy has an abundance of unemployed resources that can be put to work at low net economic cost; even conservative economists such as Martin Feldstein, Chairman of the Council of Economic Advisers (CEA) under President Reagan, have endorsed this logic for stimulus spending. The benefits of such expenditure-shifting programs are particularly clear when the induced spending is in an industry (like the automotive industry) with a disproportionately large amount of unemployed resources. An additional benefit specific to the CARS program is that bringing forward the replacement of dirty (high-polluting) "clunker" motor vehicles by cleaner, high-efficiency vehicles means there will be less pollution over some time period.

The CARS program was signed into law by President Obama on June 24; in principle, the program went into operation on the first day of July 2009, but in practice few sales were completed under CARS until final details of the program were specified by the Department of Transportation on July 24.

The program provided $3,500 or $4,500 bonuses to buyers who traded in light motor vehicles with mileage ratings of 18 miles per gallon or less, who purchased a new car or truck with an improved mileage rating, and whose trade-ins and new purchases met certain other criteria. In order to get the maximum amount of $4,500, the mileage had to improve by 10 mpg for new cars and 5 mpg for new light trucks. (There were separate criteria for medium trucks.)

This report provides our current estimates of the economic impact of the CARS program on motor vehicle sales, Gross Domestic Product (GDP), and employment. We should note that these estimates will likely change in coming weeks and months as we receive further data on the pace of motor vehicle sales, automaker production schedules, and other information important for our calculations.

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