Does 'cash for clunkers' work?

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    Gary Gray places an ad for the "cash-for-clunkers" program on a new Ford Fusion at Rick Hunt Ford in Warrenton, Va., on Aug. 1. The popular program exhausted its $1 billion in funding in a week, but does it actually generate new sales?
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"Cash for clunkers" is the best stimulus this side of the New Deal. Or a huge boondoggle that cost American taxpayers $20,000 per car sale.

That's the debate now going on in Washington as the US Senate decides whether to extend the wildly popular program that ran out of cash after only a week. Who's right depends on whether you believe in the power of consumer psychology.

Even auto industry observers differ. But many say most of the trade-ins under the federal program — which effectively gives car owners up to $4,500 to trade their gas guzzlers for new, fuel-efficient cars — would have happened without the rebate incentive.

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“We’ve just concentrated a lot of the economic activity in one short period of time” and one sector, says Mark Vitner, a senior economist at Wells Fargo. He thinks the “vast majority” of July’s trade-ins would have occurred at some point.

Every month, Americans trade in 60,000 to 70,000 clunkers without any government incentive, says Jeremy Anwyl, CEO of auto-industry tracker Edmunds.com. He estimates that only about 50,000 of the trade-ins under the program wouldn’t have occurred otherwise, which means that with the $1 billion in funds spent on the program, each incremental sale came at $20,000 a pop.

“This will boost sales marginally,” says Michael Smitka, an economics professor who studies the auto industry at Washington and Lee University in Lexington, Va. The $1 billion already spent – and the additional $2 billion being considered by the Senate – won't even register a blip in the overall economy. But the value of the program is the “psychological component” that could get Americans to back off their cautious consumer-spending habits, he adds.

Even those ineligible for trade-ins are making their ways to showrooms in the atmosphere of increased confidence, according to Mr. Smitka. “Car dealers will always tell you that if they can get them into the showroom, they can sell,” says Mr. Vitner. As far as stimulus programs go, he says this one performs fairly well.

Beyond dollars and cents, there is, of course, the other green benefit of trading in clunkers. The average trade-in has resulted in a net gain of almost 10 miles per gallon — up to 25.4 m.p.g., according to the Department of Transportation. Environmental researchers at Duke University have estimated that in less than five years a 25 m.p.g. car would “pay back” in increased fuel efficiency the CO2 emissions incurred in producing the new vehicle in the first place.

– Guest blogger Taylor Barnes is a Monitor contributor.

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