Will 'Cash for Clunkers' Help the Economy?

Debate rages over whether the program is helping the economy and the environment.

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The Senate may have passed a bill to save "cash for clunkers" last week, but experts are still debating whether the program clicks or clunks. The administration argues that it has been a wild success. That's partly right. The program, which provides rebates to consumers swapping out old cars for more efficient vehicles, proved so popular that its budget of $1 billion ran out less than a week after launching. With dealers reporting crammed floors and late-night crowds for the first time in months and auto companies seeing surges in sales, it's little surprise that Congress added $2 billion to the program's coffers.

But not all economists and environmentalists are as enthusiastic. When it comes to the program's twin goals of stimulating the economy and reducing emissions, the results, many say, are mixed.

Few would argue that the program didn't get Americans buying cars. In July, 997,824 new cars were purchased, 16 percent more than were bought in June. Since the program was launched in the last week of July, sales are expected to be even stronger in August. So far, more than 315,000 vehicles have been traded in through the program. But many economists question the wastefulness of subsidizing the destruction of a functioning product, since "clunkers" traded in go to the scrap yard. And how many buyers would have come in on their own a few months later, at no cost to the government, is unknown.

Still, others point out that even if the program changes only the timing of purchases, that's not bad. "Part of what we're trying to do is get the economy going today," says John Irons, research and policy director of the progressive Economic Policy Institute. "If you can accelerate car purchases by a year or two years, you're moving economic activity from the future, when the economy may be recovered, to now, when you need jobs."

If the economic impact isn't clear-cut, neither is the environmental effect. On the plus side, experts point out that any increase in fuel efficiency (even the small change from 18 mpg to 22 mpg, which would yield a $3,500 rebate) is an improvement. Still, many see missed "green" opportunities, like the fact that a new vehicle that gets just 22 mpg—a fuel economy closer to a Hummer than a hybrid—can qualify for a rebate. Critics also point out that destroying a car and manufacturing a new one to replace it causes emissions.

That leads to a central conundrum of cash for clunkers, says Ted Gayer, incoming director of the Brookings Institution's economic studies program. If consumers would get rid of their clunkers anyway, then the program doesn't actually stimulate the economy; but by encouraging them to trade their vehicles for something more fuel efficient, it helps the environment. If they weren't going to trade their cars in but now do, the program helps the economy but undercuts the environmental benefits by stimulating destruction and manufacturing. "There are competing ends going on here," Gayer says.

While the reviews of cash for clunkers may be mixed, one thing is clear: It has gotten consumers excited about buying again. And for Detroit, that's a slam-dunk.