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Cash for Clunkers: Not Much of a Stimulus

1 min readBy: Kyle Pomerleau

While there were many attempts at stimulus during the “Great RecessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. ,” none were as memorable as the “Cash for Clunkers” program.

This program encouraged individuals who owned cars with poor gas mileage to trade in their car for a more fuel efficient vehicle through $2.85 billion in vouchers. Proponents argued that this would spur demand in the economy and help mitigate the effects of the recession.

While this program was very popular, causing the exhaustion of voucher money within days, opponents argued that the program would not do much to stimulate the economy.

According to a new report from the Brookings Institution, the opponents of the program were right. Rather than increasing overall economic activity (the goal of an economic stimulus), it simply shifted economic activity from one period to another. From the report: “Our evaluation of the evidence suggest that the $2.85 billion in vouchers proved by the program had a small and short-lived impact on gross domestic product, essentially shifting roughly a few billion dollars forward from the subsequent two quarters following the program.”

The following chart shows the spike in vehicle sales in mid-2009.

The report also indicated that the program also benefitted wealthier individuals, who would have purchased new cars anyway.

If the results of this study sound familiar, they should. This is exactly the issue with sales tax holidays, which operate on the same principle: give people a short-term incentive to consume and they will increase their consumption. However, like the cash for clunkers program, sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. holidays also fail to boost economic activity and merely shift it from one period to the next.