The $1 billion federal “Cash for Clunkers” program that will pay consumers up to $4,500 for trading in aging gas-guzzlers for new, more fuel efficient models could be a big bust. Macroeconomic Advisers just completed a study on the program and found that it will bring forward future sales that would have happened anyway (though that could be good for cash-strapped companies). This is very similar to what economists have found with natalist policies that try to incentivize women to have more kids:
We expect the program to be successful in that all of the roughly $1 billion of incentives will be exhausted in the purchase of some 250 thousand new vehicles. However, we expect CARS to affect the timing of sales, not total sales. In particular, we expect that roughly half of the 250 thousand in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway. Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program. It does, however, accelerate the return to more comfortable inventory levels and provides needed near-term cash flow to an industry that is struggling with the current low pace of sales.