August 3rd, 2009
Auto Stimulus ‘Cash for Clunkers’ A Bang or Bust?
The Cash for Clunkers Program is waiting for a fill up as a Bill that passed Friday in the House, which would refuel the Program with an additional $2 billion, awaits approval in the Senate. The government program, originally slated to run through November, ran out of gas after just five days, rolling through its $1 billion allowance that provided credits to consumers for trading in their old gas guzzlers and driving off the lot with new, more fuel-efficient vehicles.
Cash for Clunkers is meant to be a rare Trifecta: good for consumers, good for the environment, and most importantly, good for the auto industry. If the Bill passes the Senate, the additional funding will provide approximately 500,000 additional gas guzzling vehicles to be towed off the roads.
The program works like this: you must trade in a “drivable” car that has been continuously insured for the past year and registered to you for at least a year. The car must be 25 years old, from model year 1984 or older, and have a combined fuel economy of 18 miles per gallon or less. If the car you purchase has an EPA-rated fuel economy of 10 mpg better than your trade-in, you are eligible for a $4500 credit towards your new car purchase. If the EPA-rated fuel economy is between 4 and 9 mpg better than your clunker, you are eligible for a $3500 credit towards your new car purchase. The trade-in deal for heavy duty vehicles has slightly different qualifications, but still offers a $3500-$4500 credit for eligible vehicles.
It’s important to understand that the money is not a rebate, but substitute value for your trade-in. The dealer will submit a voucher for your trade-in credit of $4500 or $3500 to the Program for reimbursement. If the new fuel efficient car you purchase is over the trade-in credit, which it will be, you are still eligible for any incentive the dealers offer and have access to the same financing options available to all consumers.
In addition to job history, total loan amount, car type, and past experience repaying an auto loan, your credit report and credit score are a key component auto lenders consider when determining whether or not to extend you credit for a car loan, and if so, the auto loan rate they will charge for your vehicle loan. In general, the higher your credit score the better the loan terms.
After everything is said and done, your old clunker will be hauled off to the junkyard to be stripped of any parts for resale and then torn down to scrap metal. The environment, the auto industry, and especially you, will be driving away with a sweet deal. Hopefully, the proposed refueling of this Program will jumpstart many dealerships and jobs across the US.
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Actually, while obviously encouraging Americans to go further in debt, this program is more of subsidy for wealthier Americans and also very harmful to poorer Americans. Poorer Americans buy used cars. This program is subsidizing richer Americans to buy new cars, but only on the condition that their used cars are destroyed, thus reducing the supply of used cars going forward.
Cash for Clunkers is a popular program right now, but in the larger scheme of things it does very little towards accomplishing its stated goals. Requiring cars to be destroyed and new ones made to replace them might help the auto industry in the short run, but any improved fuel economy will not make up for the environmental impact of junking one car and making a new one. So this is not a program that should really make environmentalists happy.
In short, “cash for clunkers” not only encourages overconsumption by subsidizing unnecessary vehicle purchases and not only does the appropriation for the program represent more deficit spending at a time when our federal government is already bankrupt but it also decreases supply in the used car market thus driving up prices for lower-income Americans.
Basically, this program accomplished the exact opposite of everything it is intended to accomplish.