Cash for clunkers

The Cash Allowance Rebate System (CARS), also known as "Cash-for-Clunkers", was a US government program passed in in the summer of 2009. It's stated purpose was to both stimulate new auto sales and reduce domestic fuel consumption by offering tax credits to individuals who traded in older, less efficient vehicles for new, more efficient models.

Background
In the summer of 2009, the US congress passed an appropriations bill for war funding in Iraq and Afghanistan, which initially included $1 billion for a program called the Cash Allowance Rebate System (CARS) which became known as “Cash-for-Clunkers.” The stated purpose of the legislation was to both stimulate new auto sales and reduce domestic fuel consumption by offering tax credits to individuals who traded in older, less efficient vehicles for new, more efficient models. The program was designed after similar initiatives in Europe, and had been long hoped for by the automotive industry, labor unions, and environmental groups, who had lobbied congress for months, hoping for a large infusion of cash. When it became apparent to the government that people will gladly accept “free” money, they expanded the program by increasing the appropriation to nearly three trillion dollars. CARS lasted only a few months, and was hailed as being wildly successful by the government.

Concept
Individuals who traded in older, less fuel-efficient vehicles could receive up to $4,500 towards the purchase of a new vehicle. The dealers would mark down their price, according to the qualifying rebate system, and file a claim with the federal government, who would pay the dealer directly. Once a “clunker” was traded in, the dealer would be required to send it to a junk yard where they would disable the engine and crush the car.

Effects
The result of the program was that approximately 250,000 older model cars were taken off the market and destroyed. The program required that vehicles be no older than 25 years, get 18 or less MPG, be registered and insured, and drivable, which meant the supply of otherwise perfectly working vehicles was significantly reduced. The effects of the program are to this day being felt in the used car market, where fewer vehicles are available, and those remaining have much higher price tags. Another consequence has been a shortage of used parts available for the remaining stock of vehicles not demolished at salvage yards.

The Broken Window
Austrians predicted that such problems would exist, and that no real wealth would be created through the transfer or destruction. While some can benefit from the programs, just as the glazier does in Bastiat’s tale (this is what is seen); others are harmed by them, such as young consumers or the poor (the unseen). For a detailed exposition of Frédéric Bastiat’s Broken Window Fallacy, see the Parable of the broken window.

Links

 * Official website of the program
 * Green Baptists Preach Salvation by Breaking Car Windows by Tyler A. Watts, July 2009
 * Shocking News: People Take Free Money! by Stephen W. Carson, July 2009
 * Used car prices up: who would have guessed? by Jim Fedako, May 2011
 * Car Allowance Rebate System on Wikipedia