DEFINITION of Cash for Clunkers

Cash for Clunkers 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. They also argue 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.