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The Boston Globe

Opinion

JOHN E. SUNUNU

Cash for Clunkers: How bad public policy gets made

istockphoto/globe staff illustration

Politicians have difficulty learning from their mistakes; it’s tough enough to just acknowledge them. Admitting mistakes leaves elected officials feeling exposed and vulnerable. And why bother, when the partisan divide encourages both sides to endlessly litigate the rights and wrongs of past legislative choices?

Cash for Clunkers should be the exception. Enacted in 2009, the $3 billion program was intended to stimulate the economy by offering $4,500 credits for trading older vehicles for newer, more fuel-efficient cars. It was a spectacular failure, at least according to two comprehensive studies. The first was completed last year by the Brookings Institute, a left-leaning Washington think tank. Another, conducted by Texas A&M researchers, was released recently by the National Bureau of Economic Research.

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Even in failure, however, Clunkers provides the public and politicians with the chance to learn something important: It can help explain how such bad legislation gets passed in Washington in the first place.

If you are one of the lonely few still insisting that Cash for Clunkers was a great piece of legislation, this column isn’t for you. Instead, take a look at the Brookings and Texas A&M studies, or Globe columnist Jeff Jacoby’s excellent work on the subject four years ago.

Meanwhile, if you want to better understand how poor public policy happens, it goes something like this.

First, get caught up in the hoopla. Clunkers produced the type of headlines that politicians dream of: helping people buy cars, better fuel efficiency, the promise of job creation, and the word “cash” in the title. (Spelled with a $, if you please.) It was full of the kind of vague simplicity that has great political appeal, but begins to disintegrate as soon as it comes into contact with the real world.

Second, ignore the reality and complexity of human behavior. Proponents never seriously considered that subsidies would appeal most to consumers who were already considering replacing their vehicles. Both studies showed conclusively that the short-term spike in sales simply represented transactions that were pulled forward in time. Legislators’ belief that a temporary $4,500 rebate would result in sustainable sales growth was wrong from the start.

Lawmakers also failed to consider that the owners of “gas guzzlers” and those able to act quickly on a new car purchase tended to be higher income families. In fact, Brookings’ analysis showed that recipients of the credit were wealthier and better educated than the population at large.

Third, set aside basic economics, including the fundamentals of supply and demand. To justify the fuel savings promised under the program, the clunkers returned to dealers were destroyed, rather than resold as used vehicles. A year later, the resulting shortage of used cars pushed prices up an average of 10 percent.

The emphasis on smaller, fuel efficient vehicles also meant that the cars sold were less expensive than would otherwise have been the case. Consequently, automobile dealers — who actively promoted the bill and lobbied for its passage — saw lower revenues, and less profit, per car. Whether out of desperation or ignorance, they failed to consider the effects of this substitution.

Finally, use the wrong measurement for success. Ironically, early assessments asserted that the program was successful because it was popular. That’s a natural way for politicians to think, but completely meaningless where economics are concerned. (Throwing money in the street might make you popular, but it’s still a terrible idea.) Brookings and the Texas A&M researchers both concluded that across meaningful measures of success — economic growth, job creation, and emissions reductions — performance was abysmal. It was a costly error: by mistaking demand for success, legislators were convinced to throw away $2 billion more on top of the initial $1 billion program.

Time and again, legislators based their assumptions on hopes and aspirations — what they wanted to happen — rather than honest economic or empirical analysis. It’s a recipe for failure, but one used by Congress many times before. Recent news coverage of laws that encourage illegal immigration, create incentives for overutilization of the health care system, or reward colleges for promoting student debt are driven by similar faulty assumptions about economics and human behavior.

The overall lesson is simple enough: Leave predictions and manipulation of human behavior to the psychologists. Using taxes and rebates to control, coerce, and alter individual actions is inefficient, wasteful, and fraught with unintended consequences.

And if you think such folly can’t happen again, consider this statement from the National Automobile Dealers Association: “Cash for Clunkers,” spokesman Bailey Wood said in response to the Brookings study, “was the best Obama administration program to date.” Politicians aren’t the only ones who need to do a better job of learning from their mistakes.

John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Globe.
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