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Big Government versus Smart Government: Cash for Clunkers Revisited

Updated on January 14, 2012

Now a distant memory in light of the current Presidential contest, one 2009 government program highlights a dividing point in the two parties’ ideological debate: whether government can be a positive force in Americans lives. The Consumer Assistance to Recycle and Save Act of 2009, which created the Car Allowance Rebate System (CARS), also known as “Cash for Clunkers”. This program demonstrates how the anti “big government” debate is overly simplistic, and how a smarter government program can be far more effective than a larger, but less considered one.

Kicked off in July of 2009, the CARS program was designed with three goals: 1) increase the energy efficiency of the nation’s fleet; 2) stimulate the economy through the sale of new cars, and 3) retire polluting, inefficient vehicles from U.S. roads. The program was overseen by the National Highway Traffic Safety Administration (NHTSA) which offered consumers credits of $3,500 or $4,500 on purchases of new automobiles. Vehicle purchases with a net fuel efficiency improvement of 10 or more miles per gallon (mpg) were entitled to the $4,500 rebate; new cars with an improvement of four to nine mpg received the $3,500 rebate. All retired vehicles had to be disposed of.

A close look at the time CARS was implemented underscores its economic significance. Signed into law on June 24th, 2009, the stock market had hit its nadir just three months prior. Chrysler had declared bankruptcy in May and GM on June 1st – less than a month earlier. These bankruptcies happened after government bailouts failed. While CARS was too late to forestall those bankruptcies, it was effective in a number of ways the bailouts weren’t. Not only would government funds flow to dealerships saddled with excess inventory and unpaid warranty work from their parent company, but credit-strapped consumers could suddenly consider new vehicles affordable since the rebates came at time of purchase -- greatly reducing the sticker shock of a new car buy.

CARS was a spectacular success. Within two weeks of the first applications, Congress recognized the overwhelming demand and tripled the allotment of funds designated for consumer credits from $1 billion to $3 billion. In the 30 day run of the CARS program, 401,274 passenger cars, 274,602 light trucks and 1,966 heavy trucks were sold or leased. The average improvement difference over the replaced vehicles was 9.2 miles per gallon. The National Highway Traffic Safety Administration reported to Congress that over the next 25 years 824 million gallons of fuel will be saved, and 9 million fewer metric tons of carbon dioxide and greenhouse gases will be emitted.

Net gains in mpg for the 677,842 vehicles traded in during the CARS program.
Net gains in mpg for the 677,842 vehicles traded in during the CARS program.

Good Policy Meets Good Government

Superficially, the main beneficiaries of the rebates were new car buyers and the automotive industry, but CARS delivered an immediate improvement to the whole country. All Americans benefited from the energy efficiency, pollution reduction, and boost to the overall economy – all at a fraction of the $25 billion invested in failed bailouts. Once again, it is important to consider the time of this program to understand its benefit. Oil prices had reached their all-time peak in July of 2008, and though $4.00/gallon gas undoubtedly reduced consumption, the sustained drop in demand attributable to CARS was considerable. Half of oil consumed in the U.S. is imported, using the NHTSA estimate of 33 million gallons saved annually, this was a minor positive to the GDP, but the consumer dollars saved at the peak of the economic downturn tied to lower demand were much needed.

It’s hard to imagine how any state or group of states could have administrated the CARS program, the size and scope demanded a large federal agency’s oversight. When Republican Presidential candidates try to outdo one another with the number of government agencies to do away with; and brag about how deep and fierce their cuts to the federal government will be, we should consider how programs like the CARS could ever have gotten off the ground without the federal Department of Transportation.


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    • CHRIS57 profile image

      CHRIS57 6 years ago from Northern Germany

      Mr.G. is part of and Mr.B. certainly listens to Mr. O´s administration. But that doesn´t matter. The general attitude is still laissez faire, which means the economy is treated like a flock of sheep where a shepard dog jumps among them (the stimulus, QE) and all sheep spread out but the overall position of the flock doesn´t change, now new grass.

      Just show the sheep some sweet carrots near by(incentives) and they will run to new meadows.

    • Brupie profile image

      Brupie 6 years ago

      I agree completely with your point about demand incentive Chriss57, but the Quantitative Easing program is a Federal Reserve program, not one that the Obama administration can exert any direct control over. Whether you like Ben or not, he and the FOMC run that ship, not the President.

    • CHRIS57 profile image

      CHRIS57 6 years ago from Northern Germany

      Why is it so difficult to create motivation and incentives on the demand side?

      I think demand side incentives give more long time effects that supply side stimuli. The Obama administration did a fairly good job with the cash for clunkers program (demand incentive), but at the same time just wasted money (which had to be printed) on supply side programs like the Solar initiative.

      And by the way, quantitive easing is nothing else but a supply side program. So for now i think the current administration can be described as 90% big government and 10% smart government. Would be happy if there was a 50/50 situation.

    • Druid Dude profile image

      Druid Dude 6 years ago from West Coast

      So, fewer brains are better.