Cash-for-Clunkers and Stimulus What-Ifs

by Reihan Salam

Brad Plumer of Wonkblog writes that though the initial reaction to the Obama administration’s “cash-for-clunkers” initiative in 2009 was “generally favorable,” a new analysis from Ted Gayer and Emily Parker of Brookings finds that it was a bust as fiscal stimulus:

Gayer and Parker estimate that pulling these vehicle sales forward probably boosted GDP by about $2 billion and created around 2,050 jobs. That means the program cost about $1.4 million per job created — far less effective than other conventional fiscal stimulus measures, such as cutting payroll taxes or boosting unemployment benefits …

Why does this matter? It was just one tiny program, after all. Yet inefficient stimulus programs add up. One recent study by economists Gerald Carlino and Robert Inman found that the 2009 Recovery Act could have been fully 30 percent more effective in boosting the economy if it had been better designed (i.e., more focused on things like aid to states and payroll tax cuts).

The reaction to cash-for-clunkers was not generally favorable on the political right. There was, however, at least some support among conservative intellectuals and activists for the “alternative stimulus plan” championed by Stanford economist Michael Boskin:

My Stanford colleague Pete Klenow and Rochester economist Mark Bils estimated that cutting the payroll tax by six percentage points (of the 12.4% Social Security component) would, under standard assumptions, increase employment by three million to four million workers—an amount equal to all the job losses since the stimulus was passed.

The payroll tax cut would have reduced firms’ costs by roughly the same amount as from the entire decline in employment. It would have cost less than half as much as the stimulus bill, gotten far more income into paychecks quickly and, most importantly, greatly reduced incentives for firms to lay off workers. In fact, it would have created incentives to hire.

Other conservatives, however, resisted the idea of deep payroll tax cuts out of concern for rising deficits, and so there was no consensus around a coherent alternative stimulus.