Cash For Clunkers

DEFINITION of 'Cash For Clunkers'

Cash For Clunker was a U.S. government program that provided financial incentives to car owners to trade in their old, less fuel-efficient vehicles and buy more fuel-efficient vehicles. The formal name for the program was the Car Allowance Rebate System (CARS). The CARS program gave people who qualified a credit of up to $4,500, depending on the vehicle purchased.

BREAKING DOWN 'Cash For Clunkers'

The Car Allowance Rebate System (CARS) was signed into law by President Obama in July 2009 with mostly bipartisan support in Congress. The law was administered by the National Highway Traffic Safety Administration (NHTSA). Car dealers submitted the required information to the NHTSA on behalf of qualified new car buyers.

Program Criteria

The program began in July of 2009. To qualify for the credit, a traded-in used car had to be less than 25 years old, have an EPA-rated fuel efficiency of less than 18 miles per gallon and be in drivable condition. In addition, the new car being purchased had to have an EPA-rated fuel efficiency of more than 22 miles per gallon. The new law required the traded-in vehicle to be scrapped, the engine rendered unusable and the vehicle's body crushed. The program ended in November, 2009 after the $3 billion allocated for it had been depleted.

Program Effects

Supporters of the program have argued that the program was a success because it provided a stimulus to the economy and replaced many fuel inefficient vehicles with more fuel-efficient vehicles that created less pollution. The program, supporters argue, removed about 700,000 fuel-inefficient cars from the road.

However, the program has been widely criticized by economists, as well as some federal government agencies and environmental groups. Many economists have called the program an example of the "broken windows," fallacy which holds that spending creates wealth. They argue that the program failed due to hidden effects and unseen consequences of the program and that the program created a shortage of used vehicles, causing used car prices to surge and harming low-income people; that the program cost taxpayers $3 billion; and that the program did little to stimulate the U.S. economy even in the short run because it helped foreign auto manufacturers at the expense of domestic manufacturers.

The National Bureau of Economic Research stated that the program's positive effects were modest, were short-lived and that most of the transactions it spurred would have happened anyway. A study by Edmunds claims that the program spurred a net 125,000 vehicle purchases, costing taxpayers an average of about $24,000 per transaction.

Some studies indicate that the net effects on the environment were negative. Scrapping the traded-in vehicles required large amounts of toxic chemicals and disallowed recycling of parts in favor of sending them to landfills or smelters. In addition, the program brought future production of vehicles forward using manufacturing processes that create pollution.

RELATED TERMS
  1. Clunker

    A popular reference to the old vehicle traded in under the U.S. ...
  2. Car Allowance Rebate System - CARS

    A U.S. government program under the Obama administration that ...
  3. Cash For Refrigerators

    A federal energy efficiency program introduced in the fall of ...
  4. Selling Out Of Trust

    A term commonly used in the automobile industry to refer to the ...
  5. Gap Insurance

    A type of auto insurance that car owners can buy to protect themselves ...
  6. Advanced Technology Vehicle Manufacturing ...

    A U.S. Government subsidy created under section 136 of the Energy ...
Related Articles
  1. Investing

    Car Shopping: New Or Used?

    Don't get taken for a ride. Learn the pros and cons before the salesperson makes a pitch.
  2. Personal Finance

    Used Car Shopping: How To Avoid A Lemon

    Being prepared before buying will save you thousands in the long run.
  3. Retirement

    Is It Worth Buying a New Car If You're Already Retired?

    You have to consider more than just the purchase price: Insurance, the warranty, resale value and how much you plan to drive are all important factors.
  4. Personal Finance

    7 Mistakes to Avoid When Buying a Used Car

    Understand the benefits of buying a used car. Learn about seven mistakes to avoid before making a used car purchase.
  5. Investing

    Your Car: Fixer-Upper Or Scrap Metal?

    Sometimes buying a new car can be cheaper than shelling out for repairs.
  6. Personal Finance

    How Car Insurance Companies Value Cars

    Learn the methodology used by car insurance companies to value cars, and understand why the amount they give you may not cover the cost of a similar vehicle.
  7. Investing

    Top Tips for Buying or Selling a Car

    If you're selling your car or buying one, here are several tips and tools to make sure your price is the right one.
  8. Managing Wealth

    Top 10 Ways To Get Top Dollar For Your Car

    Find out what steps you can take to reduce the depreciation of your vehicle.
  9. Personal Finance

    Wait on Buying a Pickup (F, GMC)

    Used car prices are dropping everywhere. But if you're in the market for a pickup truck, a good bargain is less of a guarantee – thanks to strong demand.
  10. Personal Finance

    How To Get A Good Deal On A Used Car

    Why are prices quoted by dealers and private sellers so disparate? Read on to find out how to use that info to your benefit when buying a used car.
RELATED FAQS
  1. Would it benefit us to take a 401k loan for a car instead of a car loan?

    My husband recently had a huge increase in his salary, we are paying a lot of taxes on it.  ... Read Answer >>
  2. When buying a car, is it better to have a trade in or a down payment?

    When buying a car, it may be better to have a down payment rather than a trade in. A trade in offers convenience to the car ... Read Answer >>
  3. How much impact does government regulation have on the automotive sector?

    Learn about how government regulation affects the automotive industry in terms of design, safety features, fuel-economy and ... Read Answer >>
  4. What types of companies are in the automotive sector besides auto manufacturers?

    Explore the relationships between automobile manufacturers and the numerous other types of companies that work in the automotive ... Read Answer >>
  5. How is residual value of an asset determined?

    Understand what the residual value of an asset is and how the residual value of an asset is calculated. Learn how residual ... Read Answer >>
  6. To what extent has global competition affected the profitability of U.S. car manufacturers?

    Learn more about the Big Three automakers and how global competition from foreign car manufacturers impacts profitability ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center