Before they skipped town to enjoy the August recess, lawmakers anted up another $2 billion for the “Cash for Clunkers” program. Planned to run for a few months, the program proved so popular that the $1 billion the program initially received was gone in less than a month. The administration and many in Congress and the media grabbed onto this as an instant win-win – an environmental and stimulus success story. Not so fast. Giving away cash is always going to be popular, but it is far from clear that we are getting a legitimate economic bang for our buck. And anytime government picks winners, there are also going to be losers. Cash for Clunkers or CARS (Car Allowance Rebate System) is the program Congress approved earlier this year, where owners trading in eligible older, low gas mileage vehicles receive up to $4,500 in the form of a voucher to buy a new, more fuel-efficient vehicle. At first blush, it looks like this was a rip-roaring success; nearly a billion dollars spent on roughly 220,000 trade-ins, and vehicles traded in under Clunkers had better fuel economy by 8 miles per gallon – from 16 mpg to 24 mpg.

But as often is the case with economics, things aren't always what they seem. As automotive information website Edmunds.com pointed out in a recent analysis, “vehicles traded in under the Cash for Clunkers program are not at all different from the vehicles traded in before Cash for Clunkers. In other words, the vehicles traded in would have been traded in at some point anyway – government program or not.” According to Edmunds.com, as many as 100,000 purchases were pent up demand. Congress has been talking about this program since the spring, so many potential beneficiaries held up trading in their vehicle until the program kicked off July 1^st. In fact, Edmunds.com estimated that there are 60-70,000 clunker type deals done in any given month, government check or not. And in 2007, there were 254 million registered vehicles on the road, so we are talking about a drop in the bucket as far as the national auto fleet goes.

And what about the fuel economy improvements? The same Edmunds.com study found that before the program, clunker-eligible vehicles were traded in for new vehicles yielding a 5.1 mpg improvement. Under the clunkers program, that mpg improvement upon trade-in increased to 8.2 mpg- an improvement, but not a staggering one. Beyond that, car buyers across the board are opting for cheaper, more fuel efficient vehicles, whether or not they are receiving subsidies. Clearly, Cash for Clunkers has had an effect. Auto sales were better than they have been for a long time. Ford even posted a month to month improvement over sales in July 2008, and at least according to the other automakers sales were less bad than they otherwise would have been. But like a sugar rush or a caffeine high, the surge can only last so long. The $3 billion the federal government is willing to spend has given a boost at the moment, but much of that came from few sales leading up to the program and accelerated sales to take advantage of the program. Any time government picks a winner – in this case automakers, dealers and clunker-owning consumers – there are going to be some losers. First off, money spent on new cars and multi-year loans is money not being spent in other areas of the economy.  Second, government is running record deficits and we are adding to the pile of borrowed cash that we have to pay interest on every year. And finally, and most directly, the small business auto shops that repaired those clunkers are losing a key part of business that may put them in an economic bind. To be sure, Cash for Clunkers will subsidize hundreds of thousands of car sales by the time it is through. But as we pointed out in May, there is no guarantee that it will leave the country any less dependent on foreign oil, the environment and economy in better shape or return the auto industry to profitability. However, we can guarantee that it will have cost taxpayers billions.