Bootleggers, Baptists and Cash for Clunkers

Ah, yes, a bit of nostalgia from the “summer of recovery”: the Car Allowance Rebate System (CARS), also known as Cash for Clunkers.

It seemed quite promising to many in the halcyon days of 2009.  Citizens could trade in their old gas guzzlers (which were subsequently destroyed) for a rebate that could be applied to purchase a more fuel-efficient car. It would simultaneously stimulate the economy (and the auto industry) and improve the environment. Undoubtedly, as part of the stimulus efforts, it would pay for itself.

Ted Gayer and Emily Parker have a new paper and policy brief at Brookings on the program. (For a brief overview, see Kevin Robillard’s piece in Politico). The discussion below draws from the policy brief.

How did Cash for Clunkers perform?

• By the end of the program, 677,842 vehicles were traded for vouchers, at an overall cost of $2.85 billion (some $4,200 per rebate).
• But according to Gayer and Parker, the program only added 380,000 additional sales to what would have occurred absent the program, and these were largely sales that were pulled forward from sales that would have normally occurred in the future. “Ten months after the end of the program, the cumulative purchases from July 2009 to June 2010 were nearly the same, showing little lasting effect.”
• And while there was a short-term addition of $2 billion to GDP, it was simply pulled forward from the next two quarters.
• Cars for Clunkers did create jobs, but at a cost of $1.4 million per job.

There are some additional information in the brief on the distributional impacts (surprise: the recipients tended to be more affluent than those who purchased a new or used car during the same period without a rebate) and the environmental impacts (surprise: Cash for Clunkers was not a cost-effective means of reducing carbon emissions).

Bootlegger-Baptist coalitions (a term coined by economist Bruce Yandle) are common in politics (particularly in regulation). In essence, a Bootlegger promotes a policy that will further its economic interests. It  legitimizes its efforts by forming a coalition (often implicit) with the Baptists, who appeal to higher values or the public good. A simple example: renewable fuel standards. Agribusiness secures a market for corn ethanol, and draws on environmental advocates for cover.  In Cash for Clunkers, the bootlegger is easy to identify: auto dealers. Robillard’s article notes that the program retains the support of the National Automobile Dealers Association, which strongly advocated the program at its inception and lobbied quite effectively for its expansion from $1 billion to almost $3 billion. Its spokesperson noted: “There’s no question Cash for Clunkers was the best Obama administration program to date.”  From the perspective of the industry, what’s not to like? It provided a de facto subsidy for the industry, and industry self-interest was veiled by tying it to the larger goals of promoting the needs of the unemployed and saving the earth. Even if the Baptists were hung out to dry (another parallel with ethanol), what’s the harm? The $2.85 billion price tag (not including interest) will fall to future generations (i.e., the children who had the brief privilege, in 2009, to ride in their parents’ new cars).