The Obama administration accidentally accelerated the Corolla conquest of American roads

Bye-bye, Bronco—hello, Elantra!
Bye-bye, Bronco—hello, Elantra!
Image: Reuters/Shannon Stapleton
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When was it, exactly, that petite Toyotas and stubby Hondas came to rule the American road? One milestone in the compact-car takeover dates back to the summer of 2009. Times were, as you’ll recall, pretty dark. The US economy was bleeding jobs. Trillions of dollars in wealth in stocks and home equity had been vaporized. People were clinging to what cash they had—and definitely not spending on cars. With sales nosediving, several flagship US auto companies were on the brink of ruin.

And then came the great Keynesian experiment known best as “cash for clunkers.”

Under the bipartisan program, the federal government offered incentives of between $2,500 and $4,500 to US residents trading in a gas-guzzling, older vehicle to buy a new, more fuel-efficient car. (That’s worth about $2,900 and $5,100 today.)

Even in the deepest recession doldrums, Americans proved plenty ready to splash cash on new gas-sippers—provided Uncle Sam pay for some of it.

As promised, car sales surged.

So popular was the scheme that car buyers blew right through funds the government had expected to last until November 2009. The government had to cough up an extra couple of billion dollars to meet demand.

What seemed like a great idea at the time, however, probably wasn’t. The latest evidence comes from a new paper (registration required) in the American Economic Journal that deals an extra harsh double-whammy of revisionism.

Cash for Clunkers was supposed to do a couple of things. By requiring traded-in clunkers to be junked, it aimed to replace sales of used cars with new ones, boosting sales for beleaguered automakers, and goosing those Keynesian “animal spirits” that would encourage even more consumer spending. In the process, the US fleet would be left cleaner and more fuel-efficient than if aging gas-guzzlers clunked around for another half-decade.

Obama officials expected the incentives to “pull forward” consumer spending to July 2009—when everyone was still too broke or freaked out to buy much—that would have happened many months later. It wouldn’t matter much that cars weren’t being bought for months or a year after Cash for Clunkers because the economy would likely have recovered enough to need them less.

The program did boost short-term spending—but not much. Under the plan, only gas-guzzling clunkers were eligible for the program; the cutoff was cars that got 18 miles per gallon (about 7.7 kilometers per liter). Using data from sales in Texas—where about 6% of the program’s purchases took place—the researchers compared the car-buying behavior of households just within the cutoff with that of households whose cars fell just beyond it (so that they acted as a kind of control). Around 60% of the subsidies were claimed by consumers who would have bought a new car during the Cash for Clunkers window anyway, they found. Within eight months of the end of the program, there remained no difference in new car ownership between those eligible for Cash for Clunkers and those not. 

But the program didn’t just sputter—it backfired. Cash for Clunkers didn’t juice consumer spending; it reduced it.

Had the law’s environmental focus merely limited the fuel-economy rating of the vehicles eligible for trade-in, Cash for Clunkers would probably have worked pretty much as planned, say the authors. And in fact, the sizable rebate would likely encourage buyers to buy more expensive cars than they otherwise would have—boosting auto industry revenue over the long term.

So why didn’t that happen? The fatal flaw lay in the program’s second environmental component—the part of the law that aimed to clean up the US vehicle fleet by encouraging households to buy more fuel-efficient cars than they normally would have. For instance, a passenger vehicle needed to get at least 22 miles per gallon to qualify for the subsidy.

This incentive made fuel-efficient vehicles cheaper than other cars. This put hybrids like the Toyota Prius—which retailed at between $21,000 and $35,000—within reach of some customers. Fancy hybrids aside, though, the vast majority of highly fuel-efficient vehicles tended to cost less than other vehicles.

This shifted demand toward cheaper cars. Cash for Clunkers wound up discouraging the sales of vehicles that ran between $30,000 and $50,000, according to the authors’ results—and boosted purchases of those priced from $15,000 to $25,000.

The authors estimate that households forked over an average of $7,600 less per subsidy for a new set of wheels than they would have otherwise. Add all that up, and even under conservative assumptions, argue the authors, the program cut new vehicle spending by about $2 billion (and it could be as much as $5 billion). The authors also find that the de-clunking helped cut environmental damages by $253 per vehicle. That’s surely not nothing, but it’s also not a lot of bang for fiscal buck.

Of course, many of these cheaper, smaller cars are foreign. But they weren’t necessarily imports; many were made in the US or Canada. This would explain the researchers’ finding that the slump in spending that the program triggered didn’t disproportionately hit US production.

Still, Cash for Clunkers didn’t exactly help the intended beneficiary, US automakers. The nearly 39% share of autos sold under the program was actually about six percentage-points less than their overall market share at that time.

This isn’t that surprising. At the time, American carmakers didn’t much specialize in zippy little fuel-efficient autos (except Ford, which happened to be the lone major US carmaker not in financial straits). For instance, GM’s hybrid, the Volt, was still years away from profitability. Detroit’s specialty was more high-margin steely behemoths—the dutiful exhaust-coughers that delivered their owners to dealerships that summer of 2009, so that Uncle Sam—and his merry band of unwitting taxpayers—could pack them in their new Prius, Versa, or most probably, Corolla, and send them on their way.