What is 'Clunker '

A clunker is a popular reference to the old vehicle traded in under the U.S. government's "cash-for-clunkers" program, rolled out in 2009, for a newer more fuel efficient vehicle. For a "clunker" to be eligible for the program, it must have satisfied four conditions:

1) It has to be in drivable condition;
2) It has to have been continuously insured for one year prior to the trade-in;
3) It has to have been manufactured more than 25 years ago on the date of trade in;
4) It has a combined fuel efficiency of 18 miles per gallon or less.

BREAKING DOWN 'Clunker '

The cash-for-clunkers program in the U.S. offered drivers of old "clunkers" up to a $4,500 voucher for trading in their old car for a newer fuel-efficient vehicle. If an old vehicle was worth more than $4,500, then the program would not have been beneficial as the vehicle owner could have just sold their car to the dealer.

Supporters of the program argued that it 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 argued, removed about 700,000 fuel-inefficient cars from the road.

Criticism of the Cash-For-Clunkers Program

Many economists criticized the program along with some federal government agencies and environmental groups. Many economists 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.

In reality, the National Bureau of Economic Research stated that the program's positive effects were modest and 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. Other studies concurred on the negative net effects, stating that since 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.