CARS: A winner or a clunker?

Congress voted August 6 for a $2 billion extension of the “Cash for Clunkers” or CARS (Car Allowance Rebate System) program. John MacDonald (’95), a lecturer in the economics department, talks about where CARS might speed up the recovery and where it might lose control.

Is CARS good for the economy?

Relative to the size of our economy, CARS is a pretty small program, so I doubt it will have a substantial impact one way or another. But it will certainly impact specific players in the economy. The obvious “winners” are car dealers who’ve had trouble selling existing inventories, and consumers with true clunkers who are willing and able to purchase a new car. The “losers,” as with any subsidy, are the taxpayers who have to finance the program.

Is CARS good for the environment?

Probably, although the environmental impact is surely analogous to the economic impact: it will be relatively small. Nonetheless, if the benefits of pollution reduction outweigh the costs of clunker disposal, I’d say this program will produce a small but positive net benefit for the environment. Unless participants in the program drive substantially more miles than before, the higher fuel efficiency brought about by CARS will surely reduce all sorts of atmospheric pollutants. Yet, since the CARS act essentially requires that all clunkers be destroyed, this long-term benefit must be weighed against the short-run surge in landfill disposals. I would imagine that most Americans consider this to be a fair tradeoff.

What does the program really cost?

Two ways to address the issue of costs come to mind: short-run taxpayer costs and long-run industry costs. The taxpayer cost for CARS is likely to be more than $4,500 per car when you include administrative costs, transportation and disposal of clunker costs, advertising costs and any other costs brought about this program. That said, the total program cost seems to be capped at a concrete $3 billion. From the standpoint of the automotive industry, the sudden surge in demand for vehicles this year should be accompanied by an equal and opposite drop in demand for vehicles over the next few years. This could distort sales and production expectations, subsequently complicate labor negotiations and contracts, and perhaps even postpone competitive restructuring. Now that the act has passed, time will tell how the true costs will play out.

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