- The question is: Did the program work? According to the careful empirical analysis carried out by the three Texas A&M economists, it did not.
- Perhaps then the president’s critics are on to something when they claim that his policies harmed the economy.
- The least one can expect from a bailout program is that it helps the firms it is supposed to bail out.
When car sales dropped precipitously after the financial crisis struck in 2008, the Obama administration came up with a broad variety of “stimulus” programs. These recovery plans would keep the unemployment rate from going over 8 percent and would bring it down to 5 percent by July 2013, more than a year ago.
That is not what happened. Why not? The administration has long held that the real state of the economy when President Barack Obama assumed office in early 2009 was worse than it thought at the time. Many of the president’s critics, on the other hand, argue that many of the administration’s policies were misguided, making a bad situation even worse.
It is, of course, often hard to disentangle precisely how aggregate government policy affects the functioning of the economy, as many variables interact, causality is frequently hard to establish and the construction of counterfactuals is difficult. For example, with less fiscal stimulus, one would have expected more monetary stimulus from the Federal Reserve.
It is somewhat easier to study the impact of specific programs and to decide whether they accomplished what they were designed to do. In a new research paper titled “Cash for Corollas: When Stimulus Reduces Spending,” three economists from Texas A&M University do precisely that. They trace out the effects of president Obama’s Cash for Clunkers program by cunningly exploiting the fact that some otherwise identical car owners were barely eligible for the program, while others were not. They use this approach to estimate how many additional new cars people bought during the eight weeks of the program, how many fewer cars they bought after the program ended, and what this all meant for overall spending on new vehicles.
Let’s remind ourselves of what Cash for Clunkers was meant to do and how it worked. In Obama’s words, the program was meant to “boost the economy” by allowing “folks to trade in their older less fuel-efficient cars for credits that go towards buying newer more fuel-efficient cars.” Even before the program ended, the president argued that “it has succeeded well beyond our expectations and all expectations” despite the fact that “there were skeptics who weren’t sure that this Cash for Clunkers program would work.”
The question is: Did the program work?
According to the careful empirical analysis carried out by the three Texas A&M economists, it did not. Car sales went up during the program, but they went down by enough during the subsequent seven to nine months that the total number of vehicles sold within a year of the start of the program was not affected. And it gets worse than that: because of the environmental agenda embodied in some of the rules of the program, “folks” used their credits to buy smaller, cheaper cars. As a result, total spending on new cars actually went down in 2009-2010, at the height of the recession. The federal government spent $3 billion on Cash for Clunkers, and by doing so it reduced spending on new cars by, you guessed it, $3 billion. The program, which was somehow found to be consistent with the Obama doctrine of “don’t do stupid stuff,” cost both taxpayers and carmakers $3 billion. Staggering.
The least one can expect from a bailout program is that it helps the firms it is supposed to bail out. Cash for Clunkers was so clumsily designed that it did not even accomplish that. Instead, it harmed the industry that it was meant help. It is hard to say whether one can extrapolate from this program to all of the administration’s stimulus spending, but this program was specifically touted as having, again, “succeeded well beyond our expectations.” Perhaps then the president’s critics are on to something when they claim that his policies harmed the economy just when the country could least afford it.