The Car Allowance Rebate System, commonly known as Cash For Clunkers, was a scrapping program that officially kicked off on the first of July 2009 and ended in August 2009. The Cash for Clunkers program was initiated by the US Federal Government and provided a three billion cash incentive for United States citizens get paid cash for cars to trade in their old and less fuel conserving vehicles for newer and more fuel conserving vehicles.
The deadline for submission of application for the Car Allowance Rebate System was the 25th of August. However, the program came to an end on the 24th of August. The funds that were set apart for Cash for Clunkers were exhausted. According to the Department of Transport, the one billion dollars set aside for this program was exhausted by the 30th of August 2009. By the 30th of July, the demand for the program was so high that the U.S Congress had to approve an additional 2 billion to bring the total sum of the program to 3 billion.
Understanding the Car Allowance Rebate System
The Car Allowance Rebate System was first initiated by the President Barrack Obama administration in June 2009. The law gained mostly bipartisan support in Congress and was under the administration of the National Highway Traffic Safety (NHTSA). To be eligible for the program, car dealers were to submit certain essential information to NHTSA on behalf of the qualified new car dealer.
Cash for Clunkers Conditions
The “Cash for Clunkers” program started in July 2009. To be eligible to sell your car, there were certain conditions you needed to meet. The conditions were as follows:
- The car you wish to trade needs to be less than 25 years old
- The car must be in drivable condition
- The fuel efficiency of the car must be below 18 miles per gallon according to EPA rating
- The car must still be in good and drivable condition.
Once the car met all the conditions for the program, the next step was to scrap the car. The engine would also be rendered unusable while the body would be shredded or smashed. Also, the new car you were intending to purchase was expected to have a fuel efficiency of 22 miles per gallon.
The Car Allowance Rebate System had different sets of rules for trucks, which were more complex than other cars. For light and standard-duty classic trucks, which includes vans, SUVs, and pickups, the following conditions must have been met:
- The fuel-efficiency mileage rating of the new truck must be at least 18 miles per gallon
- For the new truck to qualify for the $3,500 coupon, the mpg rating must be at least 2 higher than 18 mpg
- To qualify for the $4,500 credit, the new car is expected to have mpg higher fuel efficiency rating
The rules for heavy-duty trucks were:
- The rating for the new truck must be at least 15 mpg
- To earn a $3,500 coupon, the new truck must be at least 1 mpg higher
- To qualify for a $4,500 credit payment, it must be at least 2 mpg higher
The Benefits of the Car Allowance Rebate System
According to those who were in strong support of the program, they argue that the Car Allowance Rebate System was a success. One of the main bases for their argument is that the program helped to stimulate the economy by replacing many cars that are fuel-inefficient with more fuel-efficient cars. Conversely, Cash for Clunkers helped to cut down on pollution.
Going by records, the program successfully removed over 677,000 cars from the road, which were all fuel-inefficient. Still, there are people who were not in support of the program and referred to it as a “broken window” fallacy, which states that spending is a form of wealth creation. Others blamed the program partially for the shortage of used cars. A good example is a report by analysts at Edmunds.com.
The program aimed to serve as a stimulus for local car manufacturers. However, only about 49% of the new cars bought were products in the United States.
On the other hand, the National Bureau of Economic Research is of the view that the program had modest positive effects. It is also of the view that the positive effects were short-lived because most of the transactions it incited would have occurred naturally after some time, as people often sell their old car for cash anyways. According to studies by Edmunds, cash for clunkers incited 125,000 net vehicle procurements. Put together, this figure costs taxpayers about $24,000 an average for each transaction.
Legislative Background of the Car Allowance Rebate System
The idea of a scrappage program and the nickname “cash for clunkers” first became popular through the op-ed piece by economist, Alan Blinder in The New York Times of July 2008. According to Blinder, the effect of cash for clunkers includes:
- Stimulating the economy
- Helping the environment
- Reducing inequality in the economy
Notable figures like Jack Hidary and Bracken Hendricks of Smart Transportation and the Center for American Progress, respectively, are of the view that Cash for Clunkers has several benefits. In 2008, a paper written by both Hidary and Hendricks was sent to congressional offices.
Later in 2009, the Cars for Clunkers program was approved by the House under the Consumer Assistance to Recycle and Save Act (CARS). Betty Sutton, a D-Ohio Rep sponsored a bill that enabled people to exchange cars with fuel economy that is 18 or less for newer and more fuel-efficient cars. Again, Sam Brownback from R-Kansas and Debbie Stabenow both from the senate sponsored bills that were similar to that of Betty Sutton from the House.
Dianne Feinstein (D-California), Charles Schumer (D-New York), and Susan Collins (R-Maine) later proposed an alternative bill with a focus on increasing fuel efficiency. According to proponents of the bill, this alternative bill will lead to an improvement in fuel efficiency up to 32% more than the version of the former House bill proposed by Brownback and Stabenow. According to the alternative bill, a fuel economy of 17 miles per gallon or less was required.
Cash for Clunkers legislation became a part of a larger supplement funding bill in the senate. A point of order was raised by the dissenting senators under rule 28, which proscribed any additional provisions that were not originally part of the bill that was passed by the House onto conference report.
However, due to 60 votes, the rule was overridden and last-minute changes were made to the bill. According to the changes, the bill was no longer to be funded by the stimulus package, rather, it was to be funded by deficit spending. Some senators like Sam Brownback were not very comfortable with this last-minute change. In the Senate, the larger funding bill passed by a 91-5 vote.
In 2009, the Supplementary Appropriation Act was signed into law and it became functional. Consumer Assistance to Recycle and Save Program (C.A.R.S.) became title XIII, and the program received initial funding of one billion dollars from the US government. The estimated cost of the program was four billion dollars and was meant to last for one month.
By the 30th of July, 2009, the one billion appropriated for the program was almost used up as a result of high demand. Therefore, the government responded to the U.S Department of Transportation by allowing congress to further approve an additional sum of two billion dollars for the program. Also, the Senate further approved an extension of time to August 6 for the program, thereby defeating all six amendments that were originally presented before the senate. On August 7, the bill was signed into law by President Barrack Obama. By August 24, 2009, the appropriation for the bill was exhausted.
Cars that were Later Classified as Ineligible for the Program
Just before the start of the Car Allowance Rebate System program, the United States Environmental Protection (EPA) reviewed some of the estimates for its mileage and made some changes (The USA Today). The revision made some cars ineligible for the CARS program. A good example is the Dodge Grand Caravan, which has a four-cylinder engine with a mileage of 19 mpg. Nonetheless, other versions of this model like the V6 3.3 and 3.8-liter engines with an EPA mileage of 18 mpg are eligible for this program. Below is a list of other cars that were not eligible for the Cash for Clunkers program:
List of 10 Ineligible Cars For The C.A.R.S
1987 Alfa Romeo GTV
1987 Dodge Caravan/Grand Caravan/Ram Van 2WD
1987 Ford LTD Crown Victoria Wagon
1987 Mercury Grand Marquis
1987 Porsche 944
1988 Toyota 4Runner 4WD
1990 Saab 9000
1992 Acura NSX
1995 Kia Sportage 2WD
1997 Chrysler New Yorker/LHS
According to USA Today, the EPA was not specific on why some cars were rendered ineligible. According to the Editor-in-Chief of Edmunds.com, there were a good number of Americans waiting patiently to trade in their car who were affected by these last-minute changes.
However, considerations were made by the U.S Department of Transportation for cash for clunkers deals that were concluded before the 24th of July. Therefore, any vehicle that became ineligible due to new mileage ratings and concluded after the 24th of July became ineligible for the program.
The program awarded people with different credits in the form of vouchers, depending on the type of car and the EPA fuel economy rating. Eligible customers would either get a $3,500 or $4,500 credit in the form of a voucher. Presenting a voucher to a car dealer enabled him to cut down on the price of the new car by the voucher value.
Criteria for Scrappage and Disablement
To ensure that dealers did not resell the vehicles exchanged under the cash for clunkers program, the program provided a guideline on scrappage and disablement of the car engine. Also, the process ensured that none of the parts would be retrieved for reuse in other vehicles. The steps for scrappage included:
- The drainage of the motor oil, which is then replaced with a sodium silicate
- The next step is to turn the car on and leave the engine running until the sodium silicate heats up and becomes glass-like. The process destroys the internal bearings of the engine causing untimely seizure of the engine.
- The scrapyard that purchases the car will under no circumstances be able to sell the engine or the cylinder heads from the vehicle.
- However, the scrap yard may sell other parts of the car separately. They can also disassemble and keep the other parts in their warehouse.
- Within 180 days, the scrap yard must crush the car hull.
- The scrapyard can also sell unbolted or cut-off front ends of the car.
- The top and back of pickup caps can also be saved for sale at a later time.
According to the outlined procedure, when you run the engine at 2,000 RPM, the engine should disable in a few minutes. However, if this does not work, allowing the engine to cool down before repeating the process is advised.
The reason why the CARS program ensured that the engine was completely disabled was to get rid of recycling scandals like the one in Germany. Authorities in Germany found out that over 50,000 scrapped vehicles were shipped to Africa and Eastern Europe where the equivalent of such cars is expensive. The illegal exportation was easy because all that was required by the program was for owners to drop off their car at the junkyard.
Dismantlers and automobile recyclers have disparaged the program because of the strict instruction that the engine is destroyed to prevent recycling. Car recyclers attach a lot of interest to the car engine. Therefore, it makes the process less profitable and some recyclers refused to participate in the Car Allowance Rebate System at all. Also, the profit potential of junking a vehicle brought under the CARS program is limited.
Extra Measures to Prevent Illegal Car Schemes
When it comes to cars, there have been several scandals rocking the recycling of cars, which includes title washing. For example, after Hurricane Katrina, cars that were supposed to be recycled were moved to other states and sold as clean titles.
The U.S government employed a few strategies to ensure that the Cars for the Clunkers program does not suffer the same fate. The Federal Government partnered with National Motor Vehicle Title Information System (NMVTIS) to ensure that all cars eligible for the program are duly registered to avoid retitling and reselling to unsuspecting customers. Under the Cars for Clunkers program, the recycler must submit the Vehicle Identification Numbers (VINs) to NMVTIS as well as the clunker status.
Also, the U.S government went into partnership with VIN-based vehicle background suppliers like CARFAX. The National Highway Traffic Safety Administration (NHTSA) was responsible for providing the VINs of over 700,000 applicants of Cash for Clunkers to CARFAX and other designated VINs history providers. Putting the comprehensive information together, NHTSA and CARFAX were able to create a free clunker check website. The process made it easy for consumers to submit a VIN and check if the vehicle is re-claimed.
The Effect of Car Allowance Rebate System on Charity
Charitable organizations like Peter Palmers Vehicle Donation Center complained about the program as it led to a decline in car donations for charity. The center complained that the program led to a 7.5% waning in car donations in July as a result of the CARS program.
Effect of the Car Allowance Rebate System on the Environment
According to studies, the program reduced fuel economy by 0.6 mpg in July 2009, and there was a further improvement to 0.7 mpg in August 2009. According to a study distributed in the 2010 edition of Environmental research letters, CARS prohibited the emission of 4.4 million metric tons of Carbon Monoxide. The figure represented an estimate of 0.4% of the yearly carbon discharge from light-duty cars.
According to a report in 2011 published in the American Council for an Energy-Efficient Economy, the cars purchased under the Cash for Clunkers program led to a moderate improvement in fuel economy. On average, the participants purchased a vehicle with a fuel efficiency of 2.4 mpg greater than the market in general and 2.9 mpg greater than what they would have probably purchased.
In 2013, another study also published in the Journal of Environmental Economics and Management also came to the conclusion that the program helped to decrease the amount of carbon discharge by somewhere between 9 million tons and 28.2 million tons, which is an implication of costs ranging from $92 to $288 per ton, even after taking into consideration reduced standard pollutants.
Again, another research in 2013 by Brookings Institution also showed that the CARS program was responsible for a considerable enhancement in fuel efficiency and also in the slight reduction of carbon production.
Thus, it would have been better for Congress to push for improvement in fuel efficiency while stabilizing its stimulus effect on the economy.
Safety of Vehicles
According to a spokesman of the National Highway Traffic Safety Administration, newer vehicles that were bought under the CARS program were reasonably safer when compared to the ones they replaced. According to consumer reports, many car owners were able to replace their old cars without modern safety features to those that came with modern car safety amenities.
Did The CARS Program Achieve the Required Results?
According to critics of the Cash for Clunkers program, they argued that the program will have little or no impact because people will naturally dump their old cars for newer ones soon. However, the reverse is the case. According to reports in CEA’s economic investigation of the program in September, the Cars for Clunkers program attracted more sales that would have been left for some time in the far future. Therefore, the program is an important representation of vital increment to accumulation and trigger in the demand for new cars at a time when people rarely require new cars.
The chart below is the sales data of 7 months post-Clunker sales of cars with the dark blue line representing the effect of the CARS program on the sale of cars. According to the final data obtained, the sales of cars in November and December exceeds Edmunds’ prediction by far.
According to a survey carried out by the Department Of Transports on those who purchased their cars during the program, the average period car owners agreed that they will change their car was 2.87 years, which is a very long time when compared to the few months that critics predict that people will change their cars naturally.
A possible interpretation of the data shows that the majority of the people who bought cars during the period were people who could reasonably afford to purchase a new car. However, these people will purposely wait for the old car to wear out comprehensively before purchasing a new car. Therefore, the best possible option is to stimulate spending for such a set of people. It remains the best way to stimulate spending in an economy with serious issues of temporary low cumulative demand.
The End of the Car Allowance Rebate System Program
On the 20th of August 2009, the Transportation Secretary announced that the Car Allowance Rebate System program would come to an end by 8:00 p.m. Eastern time on August 24, 2009. The announcement made many dealers shy away from participating in Cash for Clunkers after the 22nd of August. The reason is due to the difficulties they faced in processing their reimbursement via the US government website that requires clear documentation of paperwork.
Austin Goolsbee, former economic advisor to former President Obama said that the administration was not right about their judgment on how fast America could pull through the economic crash of 2008. He was of the view that the short-term Cash for Clunkers program was not necessary to stimulate the economy. However, he threw his firm support behind the general stimulus program. He was of the view that the program in a way dealt with the problem of depression.
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