The Corner

New Paper on ‘The Effects of Fiscal Stimulus’ Looks at Cash for Clunkers

Remember the rationale behind fiscal stimulus? It’s that when the government spends money — especially if the private sector isn’t — it will boost the economy. That was the idea behind the stimulus bill and also behind the “Cash for Clunkers” program. The program, which was officially known as the Car Allowance Rebate System, offered $3,500 to $4,500 to people who traded in an old car for a new one in order to increase vehicle sales and prop up the American auto industry (while it was being bailed out by taxpayers).

Did it work? This new paper by Atif Mian of Berkeley University and Amir Sufi of the University of Chicago Booth School of Business makes the case that it didn’t. Here is the summary:

A key rationale for fiscal stimulus is to boost consumption when aggregate demand is perceived to be inefficiently low. We examine the ability of the government to increase consumption by evaluating the impact of the 2009 “Cash for Clunkers” program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. The effect of the program on auto purchases was significantly more short-lived than previously suggested. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

The whole paper is here.

Thanks to Jason Fichtner for the pointer.


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