A quadfecta of failure

Back at the beginning of the Great Recession, we had a great last fling at a Keynesian solution to recessions with a massive deficit spending program. As often happens with government programs of this sort, it became hostage to ideological passions and vested interests. Originally intended to build roads and repair bridges (of benefit to everyone), the deficit spending ended up to a great degree being a federalization of state deficits. The federal government provided the deficit funds to sustain state government spending on education and other programs.

Another showpiece in the deficit spending was the cash-for-clunkers program intended stimulate car purchases to provide new market demand for the newly nationalized car company's, GM and Chrysler. Keynesians provided intellectual cover for a program which standard economics said would merely bring purchases forward and would not change aggregate demand.

Ideological justification was advanced with the argument that cash-for-clunkers would primarily benefit the poorest by making it easier for them to purchase new cars. Environmental cover was provided with the claim that the poorest tended to drive the oldest and most polluting cars which would be replaced by new, highly efficient vehicles, dramatically reducing pollution.

All very plausible except to people with any knowledge about the automotive industry, economics, and human systems.

Immediate postmortems within a year or two did indeed confirm that the $3 billion in deficit spending had no affect on aggregate demand. We simply burned that money though there were corporate and government interests which benefited.

Also confirmed was that the poorest were hardest hit by cash-for-clunkers. By taking the oldest, cheapest cars off the market, the cost for used cars jumped markedly, making it harder still for the poor to purchase their own transportation.

Now there is a new study, Cash for Corollas: When Stimulus Reduces Spending by Mark Hoekstra, Steven L. Puller, and Jeremy West which indicates that this well-intentioned, if ill-thought through, intervention was even worse than that. From the abstract:

The 2009 Cash for Clunkers program aimed to stimulate consumer spending in the new automobile industry, which was experiencing disproportionate reductions in demand and employment during the Great Recession. Exploiting program eligibility criteria in a regression discontinuity design, we show nearly 60 percent of the subsidies went to households who would have purchased during the two-month program anyway; the rest accelerated sales by no more than eight months. Moreover, the program’s fuel efficiency restrictions shifted purchases toward vehicles that cost on average $5,000 less. On net, Cash for Clunkers significantly reduced total new vehicle spending over the ten month period.

Hoekstra et al also confirm the deleterious effect on the environment:

One could also argue that this decline in industry revenue over less than a year could be justified to the extent the program offered a cost-effective environmental benefit. Unfortunately, the existing evidence overwhelmingly indicates that this program was a costly way of reducing environmental damage. For example, Knittel [2009] estimates that the most optimistic implied cost of carbon reduced by the program is $237 per ton, while Li et al. [2013] estimate the cost per ton as between $92 and $288. These implied cost of carbon figures are much larger than the social costs of carbon of $33 per ton (in 2007 dollars) estimated by the IWG on the Social Cost of Carbon [Interagency Working Group, 2013].

As a result, while it may be possible to make a case for a generic subsidy program that pulls forward new vehicle purchases during a recession for a subset of subsidy recipients, it seems difficult to justify the inclusion of an environmental component in that program. At least in the case of Cash for Clunkers, that environmental component both failed to meet its environmental objectives in a cost-effective way and had a contractionary effect on the industry targeted for stimulus.

Cash for clunkers was a populist program, easy to explain, but deployed with no regard to standard knowledge and experience. It incorporated multiple goals (environmental, economic, social) in a complex program.

It was forecasted to fail by most those with knowledge of the issues and it failed comprehensively. Instead of increasing demand for cars, financially shoring up car companies, improving the environment, and improving the lives of the poor, it, in the long tradition of central planning, reduced demand for cars, damaged the environment by diverting resources from high impact to low impact strategies, weakened the economy by increasing the deficit, and made the lives of the poor more difficult by reducing the availability of cheap used cars.

Not a trifecta of failure, a quadfecta of failure?