Cash For Clunkers Had Zero Impact On Car Sales And Minuscule Impact On GDP And Auto Production

From Federal Reserve Bank of New York, Staff Reports , "The Production Impact of “Cash-for-Clunkers”: Implications for Stabilization Policy" by Adam Copeland and James Kahn, Staff Report no. 503, July 2011:

In line with other recent studies, our analysis shows that the CARS program had only a transitory cumulative effect on sales. We estimate an initial impact of about 450,000 additional automobile sales, but these were essentially shifted from the periods before and (especially) after the program. We calculate that by January 2010, the cumulative effect of the CARS program on auto sales was essentially zero.

More important for our purposes, however, is the program’s effect on automobile production. While most studies of CARS have focused on sales, we argue that the program’s success as a stimulus to the economy hinges on its impact on production. Production increases are more likely to translate into higher GDP and employment, GDP being fundamentally a measure of production. Sales clearly rose at the outset, but given that the industry can simply let inventory stocks absorb the increase in sales, higher sales alone do not imply higher GDP or employment.

Overall, we find that the program had a very modest and short-lived effect on production. Production was about 200,000 units higher during the program (in comparison to the 450,000 increase in sales). Sales from September 2009 to January 2010 were correspondingly lower than they would have been in the absence of CARS, which allowed producers to have lower production while still replenishing their inventory stocks. Thus on a quarterly basis we estimate that the CARS program shifted production by around 100,000 units from 2009Q4 and 2010Q1 to 2009Q3.

These calculations suggest that the program had a negligible direct effect on GDP, shifting less than roughly $2 billion (or less than one-tenth of one percent of GDP) into 2009Q3 from the subsequent two quarters. This contrasts starkly with a study released by the Department of Transportation (DOT) in the immediate aftermath of the program, which concluded that CARS had given a substantial boost to both GDP and employment. In the final section of the article, we discuss why our conclusions differ from those of the DOT study.

The full paper is available here.

The paper's abstract is available here.