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July 31, 2009

What’s Really Wrong With “Cash For Clunkers”

by Doug Mataconis

This morning, we learned that the Car Allowance Rebate System, known more popularly as the “Cash for Clunkers” program was running out of money after only a few days in operation:

The government’s “cash for clunkers” program, aimed at boosting stagnant auto sales, is almost out of money, putting its future in question, according to sources familiar with the effort.

Passed by Congress in late June to help the flagging U.S. auto industry and launched just a week ago, the $1 billion program gives vouchers worth up to $4,500 to consumers who trade in gas-guzzling cars for more fuel-efficient models. The highly publicized effort was scheduled to run until Nov. 1, or until money ran out. It was not expected to run out of cash so quickly.

The effort, formally known as the Car Allowance Rebate System, or CARS, appeared headed for a temporary shutdown at midnight Thursday. Federal transportation officials became increasingly concerned that the program’s popularity with consumers could drain its budget by week’s end, according to sources familiar with the discussions who spoke on the condition of anonymity.

It’s pretty to figure out why this happened once you take a look at how the program worked:

Under the program, consumers get a voucher for up to $4,500 — depending on the model and average fuel economy of their car or truck — if they buy a new car or truck that gets better gas mileage than the one that was scrapped. The payoff grows depending on the difference in the fuel efficiencies of the old and new cars.

Basically, if you had an older car (and it’s typically older cars that get lower gas mileage) the Federal Government was subsidizing your trade-in if you purchased a new vehicle. For someone who’s been driving, say, a late 90s care into the ground, it was a pretty good deal — instead of waiting another year or two, you could have a new car now, and the government would pay for a good party of it. Frankly, only a government bureaucrat or a politician would be surprised that it would garner a lot interest.

The fact that the government apparently completely misjudged how popular the program is should be a warning to those who would continue to put more and more power into the hands of the state. If they can’t accurately estimate how many people would respond to a program like this, and can’t even tell us whether there’s any money left in the program as of today, then how are they going to be able to run one of the largest sectors of the economy ?

Now that’s it’s running out of money, of course, people are already calling for more:

One Michigan Republican, Congresswoman Candice Miller, has alreayd come out in favor of extending the program, saying in a statement that “There can be no doubt that the Cash for Clunkers program is a complete success given the fact that the entire $1 billion allocated to the program was expended in less than a week.”

She called the program “simply the most stimulative $1 billion the federal government has spent during the entire economic downturn.”

It’s worth asking, though, whether this program is really accomplishing anything, and whether it’s doing more harm than good.

Sure, the program has stimulated car sales, but it’s pretty clear that all that it’s really done is give drivers the incentive to purchase a new car now, rather than purchasing it in the future. That’s not economic stimulation, it’s a time-shifted purchase, and, to the extent that the program has given people the incentive to purchase cars that they otherwise could not afford, it’s helping to create an auto sales/credit bubble not all that different from the real estate bubble that got us into our current mess. However long the CARS program lasts, it will, in the end, be merely a brief up-tick in an otherwise dismal auto-market.

What’s wrong with “Cash for Clunkers” isn’t that they ran out of money — although that certainly should cause people to doubt the government’s ability to make economic forecasts of any kind — but that it’s more of the same nonsense we’ve been doing for years.

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9 Comments

  1. If I were in the market for a used car, this is a typically wonderful government program.

    My tax dollars are used to damage/destroy the supply of used cars, raising the market price of the lower mpg cars in particular that would be especially appropriate for my less than 4000 miles per year requirements.

    It rewards those who have been driving clunkers for years at the expense of those who have made unsubsidized purchases of modern, but not exotic, cars.

    Regards, Don

    Comment by Don Lloyd — July 31, 2009 @ 8:02 am
  2. Last year I sold my old dodge pick-up to my parents. They are sincerely hoping that the program will continue at least another month so they can use it to get a new car (you need to own a vehicle one year before it is eligible). I agree that it should be no surprise that this program is immensely popular, everybody who qualifies will jump at free money.

    But really, this is only condensing the new car purchases that would happen the next 6 month to a year into a tiny time frame. As soon as the program ends there will be a huge dropoff in sales.

    I do have one question, what is happening to all the old clunkers? Are they being destroyed, which would push used car prices up, or are they being resold, which would push used car prices down?

    Comment by Peter — July 31, 2009 @ 8:53 am
  3. It doesn’t matter if they more money. They problem is still the backlog. Read this article: The Real Reason for the “Cash for Clunkers” Suspension. The ex car salesman blog shares exactly why they stopped the program. Even reports that some sales managers are calling asking for the money back because they were denied the rebate when the final paperwork was submitted but their car was already ruined by dumping a solution in the engine. They now have no car. Scary. See: http://tinyurl.com/ml9sdo

    Comment by Jaors — July 31, 2009 @ 9:28 am
  4. Peter,

    It is a requirement that the “clunkers” be rendered undriveable before leaving the car lot (specifically, the engine – the rest of the car can be chopped up for parts). The oil is to be drained out and a solution poured in in its place and the engine ran until the motor is irreparably damaged.

    Since the engine is usually the valuable part of the car, salvage yards are generally not as thrilled with the program, since the cars they will be receiving as a result of this will not be as valuable. Also, some yards are already getting a glut of similar vehicles, so they may be looking at a surplus of used parts as they may have an excess of parts, and at the same time fewer of those models on the road needing them.

    Comment by SC — July 31, 2009 @ 10:30 am
  5. You’re saying that people are buying cars they otherwise cannot afford causing a bubble, yet you’re saying this isn’t doing much help because these people would have bought the cars within a few years anyway. Can you explain how they can coexist?

    Comment by Ben — July 31, 2009 @ 12:05 pm
  6. Ben,

    Because CARS is mostly likely attracting people from both groups.

    Comment by Doug Mataconis — July 31, 2009 @ 1:04 pm
  7. I would say that makes sense. Having said that, I don’t really view it as analogous to the real estate bubble unless people are borrowing to buy these cars, which they shouldn’t be doing (not to say it doesn’t happen, but this program seems to be about buying cars upfront). But the cost of maintaining the car, insurance, etc… is the same to them regardless of whether they used this program or saved up their money to buy it. Am I missing something?

    Comment by Ben — July 31, 2009 @ 1:36 pm
  8. I don’t think of myself as suffering from overly-limited means, but I’ve never purchased a new vehicle without a loan. I couldn’t find the statistics with a quick search, but I’ll go ahead and assert that most Americans have a similar history.

    This program takes future earnings from everyone in the nation to subsidize the destruction of functioning assets held most likely in low-debt or no-debt condition, and requires the recipients to most likely assume new debt purchasing a new vehicle.

    Aside from all the other inevitable unintended consequences which will doubtless arise from this latest market distortion, encouraging buyers into new debt they may have otherwise forgone – replacing with a used car, saving before buying, etc. – seems very much like the housing bubble to me.

    Social engineering fails so often for a large variety of reasons. One of the main reasons is that a handful of Federal policy makers cannot possibly understand, let alone manage, the market interactions of hundreds of millions of consumers.

    Comment by Akston — July 31, 2009 @ 11:23 pm
  9. As with most government programs, the success of the “cash for clunkers” program is not measured in how well the consequences of the program align with the stated goals of its advocates. Nor is it measured by any economic impacts the consequences might cause. Instead, just like the example of the public library in George Dance’s recent article about Booze and books, the success is measured by participation or usage, not by any measure of the value provides or harm it does to our economy. The trick is to define the program specifically so that it has a known demand so the usage is high. Media spin and politics will make sure the right people hear the program was successful and beneficial. I heard a bit on NPR just today about the downstream benefits that recycling all these old cars has. Ridiculous of course, but the perception amongst the voters is far more important than the actual results and consequences. Certainly there will be follow-on programs, cash for major appliances, cash for tools, etc.

    Comment by Matthew — August 6, 2009 @ 6:36 pm

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