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Thursday, August 6, 2009

Cash for Clunkers Debacle

The Car Allowance Rebate System (CARS) is the official title of the program. It has also been called “Cash for Clunkers,” which was the name originally chosen by some dealers to market the incentive-based program to consumers. Essentially, this is another big rescue program by our government intended to save struggling automakers, people who cannot afford a new car, and the environment. From the onset, one may think our government has a winning program on their hands. After all, who could deny a program that generously helps people and the Earth? In reality, this program has helped very little and, in some ways, could make things worse.

The plan is loosely based on a program initially implemented in Germany, only this version has a few more restrictions. It issues a credit based on the car you are trading in against the new car you are purchasing. In order to qualify for the program, you have to own a car today that gets combined miles of 18 mpg or less according to Depending on how inefficient your old car is compared to the efficiency of the new car you purchase, the more of a rebate you will receive. The rebates available are $3,500 or $4,500 for your car as long as it is not more than 25 years old.(1) Apparently very old clunkers do not qualify for this program. There is a specific list of vehicles that are approved for you to purchase under this plan that cost $45,000 or less. All cars have to be purchased between July and November of this year to qualify. (1) This program is in addition to any dealer incentives your dealer may be offering such as cash back, low-interest financing, etc. The old car is sent to the salvage yard with the engine destroyed by the dealership. (1) Basically this is a check written from the stimulus package that goes straight to the dealership upon purchase of a new vehicle and the savings is passed onto the consumer at the time of the purchase. The initial amount funded for the program was one billion dollars, and it is now estimated that an additional two billion will be required to fund the remaining portion.

First, the misnomer is that the CARS program would actually save struggling dealers. There is a website set up to give dealers the information they need to comply. Many dealers have complained the site is unstable and crashes often. A poorly written disclaimer meant to discourage hacking into the site has actually frightened many into thinking the government can take over their computer if they browse to that website! This prompted Glenn Beck to do a segment on his program dealing with the issue on his television program. The initial disclaimer has since been changed. Also cars that may be clunkers by our standards are not necessarily clunkers in the eyes of the government. (5) Many people will not qualify for this program whether they believe they have a clunker or not. The numbers from the White House paint a rosy picture showing results of thousands of cars that have been sold and inefficient cars that are no longer on the road. What the White House is not telling you is that summer is normally a busy time for car sales.

Critics of the program predict many of these people would have bought cars eventually and as a result waited to buy a car once the “buzz” leaked about this program. Our government very well could have caused dealerships to have slower months leading up to when this program was started. How many people were let go in the auto industry between the time this program was announced and when it was finally available? Many also predict once this program ends car manufacturers will experience more down months which will result in more lost jobs. How does that help anyone in the car business? Forcing dealers to have months of sales squeezed in a limited amount of time can be problematic for the car industry who have cut back and are running with less people. Who is going to change their spending habits in this economy if they know this demand bubble is temporary and will not continue? Many of the cars purchased in this program are going to foreign car manufacturers. Is that really what our government intended to happen after dumping billions into GM and Chrysler? Also, why does our government choose the auto industry? Millions of people have lost their jobs in a variety of industries, but you do not see a program like this for washing machine manufacturers do you? Worse yet, what are the automakers going to owe the government in the end? I fear this could lead to more regulation and more control by our government in the auto industry moving forward.

Next, the idea that CARS is helping people who cannot afford to buy a new car is also a myth. Our government cannot explain how someone who cannot afford a new car could afford to have a new monthly car payment in an environment where we could be coming up on 10 percent unemployment. Increased demand also leads to dealers selling cars at higher prices with fewer incentives than they would otherwise. This could also lead to fewer options for the consumer as dealers run low on some models. Does any of this sound familiar? It sounds a little like the housing bubble we are experiencing today, doesn’t it? Would it surprise anyone if we saw an increase in people defaulting on car loans in the next few years? If that does happen, then you can bet our government would be discussing a big ticket rescue package to save these people who are defaulting largely due to past programs administered by our government. In the long run, I feel this may hurt people more than it may help by forcing some into a more expensive car just to qualify for the program. Also, since dealers are required to destroy the engine, this will result in fewer functioning engine parts for some older cars. Fewer engine parts available will mean higher prices to get these cars repaired which will hurt many who cannot afford to buy a new car even with CARS incentives.

Finally, the claim that CARS is saving the planet is also debatable. Many of the new vehicles purchased through this program average about 25 mpg. (2) At a taxpayer cost of 3 billion dollars, many people could have bought a used car they could actually afford and got similar if not better fuel economy. Is the White House taking into consideration the energy that is spent to properly dispose of these cars according to government rules? The Associated Press has estimated carbon dioxide will be reduced just shy of 700,000 tons a year as a result of this plan. (4) While this sounds like a lot, last year the US emissions totaled nearly 6.4 billion tons, which was down from years prior. (4) One doesn’t have to be a math genius to conclude this hardly represents progress.

In the end, we can conclude this is just another government program that provides very little results and could lead to other problems in the future. In addition, this is costing tax payers more than anyone had expected. The government really needs to stop picking and choosing industries they want to help and allow the free will of the market to decide how they should or should not spend their money. Since the average car being purchased is getting just over 25 mpg, one can easily see there is still a market for bigger cars that use more gas than the economical tin cans our government says everyone wants. We can add “Cash for Clunkers” to the list of many other government programs that cost tax payers a fortune and have not produced the results we had hoped.


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