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August 7th, 2009

More Cash for Clunkers — Was it the Right Move?

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Despite our doubts, the Senate has approved and President Obama has signed into law an extra $2 billion for the Cash for Clunkers program before Congress’s summer recess. Granted, the program seems to be a hit with consumers, but was approving the extra money the right thing to do?

We want to take a slightly different approach with this post and examine the negative effects that the success of a program like C4C can lead to.

The Used Car Market: With a program that’s designed to generate new car sales by destroying used ones, it only makes sense that the natural victim would be used-car dealers.

Furthermore, the owners of used vehicles which do qualify for C4C, but don’t trade them in, may soon find it difficult to find new or used parts.

Charities: Charities which collect vehicles for Americans in need depend on the donations of used, older vehicles — the exact demographic C4C is attempting to reduce. Roger Penn, the director of The Car Ministry — a charity which collects and disseminates auto donations — told NBC that they get calls all the time from individuals and employers who say, I can get a job, or I can give someone a job, as long as they have reliable transportation. By destroying such a mass quantity of the vehicles he depends on, Penn says auto charities like his could soon find it very difficult to provide their service.

Borrowing Tomorrow’s Demand: It’s no secret that the auto industry has suffered greatly from the lack of consumer demand over the last two years or so. And, while C4C has generated about 250,000 auto sales so far, it’s worth considering that this program has caused a false sense of demand, a demand which will inevitably reduce future demand.

C4C’s original, predetermined amount of $1 billion provided a temporary jolt to the auto industry just as it was intended to do. However, tripling the program will intensify the counter-productive aspects that emerged from this idea.

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9 Responses to “More Cash for Clunkers — Was it the Right Move?”

  1. Lucia Says: August 7th, 2009 at 2:43 pm

    I can’t help thinking how this clunker program will speed up the turnover of the American fleet, something the clean energy folks have wanted for a long time. I think it won’t stop there, however, but that the next step will be public behavior modification towards electric cars. The state of Oregon has received federal funds to study the feasibility of introducing electric cars into the American fleet, including providing funds for 1000 Nissan electric cars and 2500 charging stations. So while many think the clunker program is a good deal, maybe they should take a look at the larger picture.

  2. Tim Manni Says: August 7th, 2009 at 3:11 pm

    Lucia,

    Your comment hit the nail on the head of the point I was trying to make: it’s all about taking a look at the bigger picture. It’s not that we think Clunkers is all bad, we just decided to take a different angle with our approach.

    Do you think the same amount of demand will be there like it was for the first billion?

    It will be interesting to monitor how the electric car makes its way (we’ll see how far) into the mainstream. Do you know how much Oregon was given?

  3. MonitorBankRates.com Says: August 8th, 2009 at 5:54 am

    Tim,
    I believe there will be more of a demand the second time around, don’t be surprised if the two billion goes as fast as the first billion. There was/is natural pent-up demand for new autos, C4C brought people back to the dealerships, will probably bring idle factories online and is good for the environment. It also looks like the economy will be growing again in the third quarter which will give an additional boost to the auto industry even when C4C funds dry up the second time around.

    Regards,

    Brian McKay

  4. Lucia Says: August 8th, 2009 at 12:44 pm

    There was an AP article in the Medford Mail Tribune 8/06/09 that covered Joe Biden speaking in Detroit outlining plans for a total of $2.4 billion in federal grants to 25 states to develop electric cars and batteries. Oregon gets $300 million, which is a feather in the governor’s hat. He’s wanted Oregon to lead the nation in electric vehicles for many years, and he’s trying to use behavior modification (from ignoring congestion problems to pushing for mileage taxes) to create demand for it.

  5. Lucia Says: August 8th, 2009 at 12:48 pm

    To answer your first question, there may be as much demand as there was for the first billion for clunkers, but dealers are running out of inventory and many are still waiting for the government to pay them for the first round of clunkers. I suspect there may be more dealers deciding that the program creates more problems than it solves.

  6. Tim Manni Says: August 10th, 2009 at 10:58 am

    Hey Lucia,

    A friend of mine has been in the dealership twice already attempting to trade in his clunker. So far for him it seems as though paperwork has been the major hold up.

    If dealers aren’t seeing that money right away, that could axe this whole thing. Yet, if the money comes and their lots are depleted, I’d bet they be happy.

    But are we borrowing from tomorrow’s demand?

  7. Lucia Says: August 10th, 2009 at 1:09 pm

    Some think so, but I think it’s fence sitters who are fulfilling a deferred demand. Future demand will come when consumers actually feel a need to exchange an existing older vehicle for a more reliable vehicle. Job insecurity will keep demand lower than during the boom and the gov’t assisted mini-boom, but the fact remains that things wear out and need to be replaced. However, demand could be constrained if the gov’t reduces consumer choice. The total destruction of older vehicles, engines and parts may be the gov’ts end run around the repair-it consumer.

  8. Tim Manni Says: August 10th, 2009 at 3:07 pm

    Lucia,

    That’s a good point i never thought of — the “repair-it” consumer may vanish…

    You’re also right, it has a lot to do with the people that were fence sitters — those who just needed the right motivation.

  9. Tim Manni Says: August 10th, 2009 at 3:17 pm

    Hey Brian,

    Thanks for commenting. I’m really curious to see how fast the additional $2 billion goes. Despite the negative aspects that has come with this program, it has been a nice jolt for the industry. I wonder what will happen once the money is done once and for all. That’s why I’m hoping the $2 billion doesn’t go so fast, so that as we transition into stronger recovery, the auto industry doesn’t experience a significant drop off. I’d hate to see another drop off in auto sales just as the economy comes to grips with a rebound.

    Thanks again for commenting, hope to hear from you again soon,
    Tim

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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