Study confirms 'cash for clunkers' responsible for spike in auto sales

Topic: Miller College of Business

November 10, 2009

 The merits of the Car Allowance Rebate System, commonly known as CARS or "cash for clunkers," may be debated for years, but the program did spark auto sales last summer, indicates a report by Ball State University.
 
An analysis of auto sales during CARS estimates that of the 690,000 autos sold under the program, all but 3,000 to 5,000 would not have been exchanged without rebates, said Michael Hicks, director of Ball State's Center for Business and Economic Research (CBER), the research division of the Miller College of Business.

The "clunkers" program, which cost nearly $3 billion in taxpayer funds, gave incentives of up to $4,500 to people who traded in old, inefficient vehicles for gas-thrifty new ones. CARS was designed to stimulate the nation's sluggish economy while also reducing carbon emissions.

"It is no secret that American automobile sales have languished miserably in this recession," Hicks said. "CARS created an immediate boost to the industry that is so important to Indiana as well as much of the manufacturing-centered Midwest."
 
Hicks believes his analysis should put to rest any thoughts that CARS was unsuccessful in spawning new vehicle sales. A recent report by Edmunds.com, an automobile consultancy, estimated that only 170,000 vehicles sold in July and August were attributable to CARS.
 
"The Edmunds.com study didn't properly account for the economic conditions and contribution of the 'cash for clunkers' program, so it seriously understated the impact," he said. "While some owners would have exchanged their cars for new vehicles — with or without the program, or simply made the purchase decision a couple months early — our model suggests very few buyers who participated in the program would have otherwise bought a new car last summer."
 
Hicks' model for the analysis includes variables such as unemployment rates, interest rates and gasoline prices.
 
 "All of these factors had an impact but, the 'clunkers' program was statistically very significant and explained most of the spike in new car sales in July and August," he said.  
 
Still, there are significant negative aspects of CARS, Hicks added. The program has allowed consumers to get rebates on cars that were not built by America's struggling Big Three automakers — Ford, GM and Chrysler.
 
"This might generate an unintended effect of lowering market share for the American firms the program was apparently designed to benefit," said Hicks. "I also have doubts about the benefits of destroying the nation's stock of less expensive, used cars that low-income buyers can afford while providing general fund support to individuals to buy new autos." 
 
The report may be found at http://cms.bsu.edu/en/Academics/CentersandInstitutes/BBR//-/media/WWW/DepartmentalContent/MillerCollegeofBusiness/BBR/Publications/policyBrief_CashforClunkers2.pdf.

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