Nudgenomics: Why 'cash for clunkers' works

The U.S. government is committing $23.7 trillion to various rescue programs and it has raised the national debt to $11.3 trillion. Are any of these programs doing a shred of good? For the most part, it's hard to tell. Admittedly, unlike last fall, I don't spend every Sunday night writing about the latest multi-billion Wall Street collapse or bailout.

But that doesn't mean any of these programs are anything but a finger in the dike -- that is except for one: the "cash for clunkers" or Car Allowance Rebate System (CARS) program, which gives consumers up to $4,500 if they trade-in a less fuel efficient car for a more fuel-efficient one.

Granted, with a $1 billion allocated to CARS so far, it is a mere 0.004 percent of the total taxpayer money put at risk to help save our economy. And yet, by many measures, this program is going so well -- so far 184,304 vehicles have been bought -- that the Senate is poised to allocate $2 billion more to keep CARS going.

Not only does this stimulate economic activity -- which is good for automobile manufacturers, dealers, and state and local tax authorities. It also gets low gas mileage vehicles out of circulation which should reduce energy demand and carbon emissions -- while creating more business for the companies that scrap those vehicles.

CARS has clearly improved fuel efficiency -- the average fuel economy of the vehicles purchased is 25.3 Miles per Gallon (MPG), 60 better than the 15.8 miles MPG of the trade-ins.

And the stimulus to the automobile industry has been compelling. GM sold 18.7 percent of the cars purchased under the plan; Toyota Motors Corp (TM) sold 17.9 percent and Ford Motor Co. (F) sold 16 percent of the CARS cars.

Why is CARS working when all the other programs don't have such compelling results? CARS embodies the best principles articulated in a book, Nudge, co-authored by Richard Thaler and Cass Sunstein, a Harvard Law School professor whose nomination to head the U.S. Office of Information and Regulatory Affairs was blocked by Saxby Chambliss (R-GA).

Nudge's basic notion is simple: give people the right incentives -- through choice architecture -- and they will choose the "right" course of action. In the case of CARS, the right incentive -- the $4,500 is big enough to make people trade in their old vehicles. And the high cost of gasoline means that if those consumers will spend less on gasoline which will leave them more money for other things.

And it happens to achieve a cherished goal of the government -- to cut air pollution. And that's the beauty of CARS -- it achieves this goal in a way that does not tap into the government's idea of what consumers should want -- a cleaner environment. Instead it taps into their economic self-interest. The cleaner environment is a side-effect of CARS.

If you're trying to figure out why the other programs are not working as well -- try comparing them to CARS on these three tests of Nudgenomics:

  • Is the incentive big enough to change the decision-maker's behavior?
  • Will all the system participants benefit?
  • Will it achieve a government goal as a side-effect?

It may be time to nudge the other government programs so they can pass these three tests. Despite opposition from those who dislike government intervention in the economy -- when it helps Americans in the bottom 99 percent -- but had no problem giving trillions to bail out Wall Street, the top one percent, I am confident that CARS will get another $2 billion from the Senate.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. Follow petercohan on Twitter. He has no financial interest in the securities mentioned.

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