Cash for Clunkers Cars Program: Boon or Boondoggle?

The proposition had much appeal. Trade in your beat up vehicle for a credit of $3,500 or $4,500, depending on the type of new vehicle you purchased and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Not only would participating help the ailing economy, there was the chance to be green: fewer gas guzzlers and more fuel efficient vehicles would be a boost for the environment too.

Americans took the government up on the offer that for many was too good to pass up. They traded nearly 700,000 cars in the Cash Allowance Rebate System (CARS) or Cash for Clunkers program that ran last July and August.

So was the stimulus initiative stimulating, or a $3 billion waste of taxpayer money?

Video of Treasury Secretary Ray LaHood talking about cash for clunkers.

Simply put, says Paul Taylor, chief economist with the National Automobile Dealers Association, it was a success. "There was a boost to car sales in July and August, and because of the industrial production boost the four months following the program, it kept some jobs in production and retail."

Taylor credits Cash for Clunkers as an important bridge, sparking sales, giving the industry enough gas to keep going until it began recovering slowly on its own. "Cash for Clunkers was one part of the stimulus package that actually did what it was supposed to."

According to the National Highway Traffic Safety Administration estimates, Cash for Clunkers resulted in a $3.8 billion to $6.8 billion increase in GDP and over 60,000 jobs created or saved. The new vehicles obtained under the program were 58 percent more fuel efficient than the vehicles they replaced, with an average combined EPA rating of 24.9 miles per gallon, versus 15.8 MPG for the vehicles they replaced, reducing fuel consumption by 33 million gallons per year. And, there was a concomitant reduction in green house gases and other pollutants.

However, not everyone is hailing Cash for Clunkers a wild success., an online provider of automotive information determined that Cash for Clunkers cost taxpayers $24,000 per vehicle sold. Of the nearly 700,000 sold, analysts calculated that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway, regardless of the program.

To conduct the analysis, the team examined the sales trend for luxury vehicles and others not included in Cash for Clunkers and applied the historic relationship of those vehicles seasonally adjusted annual rate to make estimates. Estimates were independently verified through examination of sales patterns reflected by transaction data. Once the numbers were determined, analysts divided $3 billion by 125,000 vehicles to arrive at the average of $24,000.

Then too, there were glitches. "Some dealers had given credit to the customer for their trade-in but it took some up to a month to get reimbursed by the government, so they had the strain of carrying that amount until they did," says Taylor.

Some didn't get reimbursed at all. The U.S. Department of Transportation says that more than 99 percent of the program rebates were approved, meaning some dealers came up short.

Ken Bennett worked at a car dealership in San Antonio, Texas, during the Cash for Clunkers program. "We probably lost $3,000-$10,000," he recalls.

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