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The reality of cash for clunkers



June 19, 2009 – Comments (19)

Looking at things objectively, the government providing consumers with money to purchase a new vehicle is absolutely absurd.  Of course, as someone who works in the auto industry I am hardly objective so I say bring it on ;). 

The Senate passed the cash for trash auto stimulus bill yesterday.  All that has to happen for it to become reality is for Obama to sign it and I don't see him not doing to.  At one point I thought that such a program would be extremely stimulative for new vehicle sales in the U.S., but now that I know exactly how it works I doubt it.

Here's how the program works.  From July through November of this year consumers who trade in a used car that gets less than 18 MPG and purchase a new one that gets better than 22 MPG will get a voucher from Uncle Sam for $3,500.  If their new vehicle gets 10 MPG better than their old one, the voucher increases to $4,500. For light trucks, the $3,500 voucher is for consumers who get a new vehicle that gets 2 MPG better and the $4,500 voucher at 5 MPG better.

In reality this bill is a stupid waste of taxpayer money.  You're going to give people who improve the gas mileage of their SUVs by a lousy 2 MPG $3,500 bucks.  Are you kidding me?  What difference will that make in the environment or our dependence upon foreign oil.  Talk about a drop in the bucket.  This is a drop in the freaking ocean.  I'm sure that the fact that this program should help GM and Chrysler, two companies that the government now owns huge chunks of, recover has a lot to do with why it passed.

But really, how stimulative will this program be for auto sales?  It's not like consumers are getting these $3,500 and $4,500 vouchers on top of a trade-in allowance that the dealer is giving them for their used vehicle.  The trade-in for any consumer who takes advantage of this new program must be destroyed (I wonder if there is any public companies that do that...that might be a good investment angle).  That means that the used vehicle being traded in has to be pretty crappy because it cannot be worth more than $3,500 to $4,500.

Think of the demographics of people who own really cheap used vehicles.  You're not talking about Donald Trump here.  People who have used vehicles that are in good shape, but get bad mileage like Suburbans, etc... aren't going to be taking advantage of this program.  It's going to be people with legit clunkers.  Many of the used vehicles that are cheaper than $3,500 are small vehicles that get good gas mileage.  The cheap, bad gas mileage used cars that are out there are real pieces of junk in many cases.  If someone is driving a real piece of junk, it's not because they are millionaires who are chomping at the bit to buy a brand new car.  Probably in the vase majority off cases, the people with these clunkers are driving them because they cannot afford something new.  Even with Uncle Sam providing them with a larger trade-in allowance than they normally would qualify for, how many of these people are going to want a new vehicle?  Even if they do, chances are that many of them don't have cash to pay for a brand new vehicle with, so they would have to finance it.  That's probably not an option for people who have low incomes or bad credit in today's tighter credit markets.

So there's my $0.02 on the cash for clunkers program.  I'm sure that it will stimulate some additional demand for new vehicles, but I don't see it as being some sort of massive driver of sales.  Even so, I stand by my earlier statement that light vehicle sales in the U.S. have bottomed and that they will not drop below 9.5 million to 10 million units in 2009 and that sales will be better than that in 2010.

Consumers could get up to $4,500 toward new car


19 Comments – Post Your Own

#1) On June 19, 2009 at 7:33 AM, TMFDeej (97.71) wrote:

'Cash for Clunkers' Bill Passes Originally intended to get gas guzzlers off the road, it will mainly help automakers sell more pickups and SUVs

But in passing the bill on June 18 as an add-on to funding for the wars in Iraq and Afghanistan, Democrats also defeated the "green" wing of their own party, who wanted to do much more to favor the purchase of passenger cars over pickup trucks and SUVs.

I hate it when politicans slip junk in on legitimate bills.

Ford (F) and General Motors, for example, have increased the fuel economy of their pickups since the 1990s by 2 mpg, so truck buyers can pretty much trade up to newer versions of the same vehicle. Many SUVs have gained a few miles per gallon by going from pickup-based engineering platforms to lighter-weight car platforms. 

Left completely out of the program are car owners who might want to trade in an old car that gets, say, 20 mpg for a new one that gets 35 mpg or greater. Also, Senator Dianne Feinstein (D-Calif.) had sponsored a version of the bill that would have included an incentive to buy certain fuel-efficient used cars to put the program in reach of lower-income consumers. But the measure failed. An earlier version of the House bill, which passed on June 9, had given mass-transit vouchers to consumers who traded in an old gas guzzler that met the bill's criteria. That, too, was cut from the final bill. 

"Subsidizing vehicles that are only nominally better doesn't make a lot of sense." 

In the end, the bill was written to help companies, especially in Detroit, sell more pickups and SUVs, which earn the struggling automakers more profit than smaller, fuel-efficient vehicles. 

Congressional opponents of the program, mostly Republican, complained Thursday that the "clunkers" bill would increase the federal debt without doing much to get expensive-to-operate vehicles off the roads.

Car dealers, while happy about the bill, are bracing for confusion on the part of consumers. Perhaps the biggest source of misunderstanding, say industry analysts, will be when consumers realize that they get zero dollars for the trade-in value of their old car or truck, and that the only money they get toward the purchase of a new vehicle is the government money. Since the old cars will be scrapped, they have no resale value to the dealer. 


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#2) On June 19, 2009 at 8:16 AM, wrparks (78.98) wrote:

100% agree.  It's a payout to make it look like the bailed out automakers are doing better than they are.  Frankly, I doubt it has much real impact because of the reasons you outline above.

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#3) On June 19, 2009 at 8:31 AM, JakilaTheHun (99.92) wrote:

I hate to sound like a Libertarian, but it's just further proof that our government is completely incapable of doing anything competently.  Any time you push something through Congress, it comes out as a three-eyed fish with a beard. 

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#4) On June 19, 2009 at 8:46 AM, farmnut1985 (< 20) wrote:

JakilaTheHun, couldn't agree more with your last statement.

Another problem is the fact that this bill could also destroy good used vehicles that lower income people need.  So rather than that chevy, ford, whatever, that still has 8-10 years of life left for a handy person, is now not going to be on the lot to be purchased, instead it will be shredded.  Along with scrap yards that sell used parts, they get robbed of good parts, nailing low income again.  The congress is one sided to the dems who are supposed to be big helpers of the lower class are doing a poor job.

 One of my friends also pointed out the worst part of this bill that you missed in your main point.  The demolition derby quality cars are being targetted by this bill!!  This is an atrocity to think that we as Americans would stand by and watch all of these great derby cars be destroyed before getting the glory of sliding around in the mud and slamming into other such cars.

Good points Deej

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#5) On June 19, 2009 at 9:04 AM, wrparks (78.98) wrote:

Holy crap, talk about unintended consequences.  Higher demolition derby tickets could really ruin my weekends!!!!!!!!!!

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#6) On June 19, 2009 at 9:14 AM, ronb111 (73.47) wrote:

Gentlemen & Ladies: you have to understand that this bill was never intended to really help the people. The entire intent was to demonstrate that our government is trying to help us and our manufacturing base. This is nothing more than a political ploy, or am i giving too much credit.

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#7) On June 19, 2009 at 9:18 AM, portefeuille (98.81) wrote:

In a country like Germany with gas prices around 6$/gallon (over 50% of that is taxes) the program (its German version that is) is understood to be an aid to the car industry. The "environmental" aspect is an "add-on". There is lots of room for fuel tax increases in the U.S. but Americans love their cheap gas ...

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#8) On June 19, 2009 at 9:36 AM, russiangambit (28.83) wrote:

I was thinking of buying Toyota stock on this. You do realise that if anything this is going to benefit Japanese carmakers, dealers and sellers of used cars like carmax, right? May be I should buy Carmax instead, but I am still not clear on the whole bill and its unintended consequences.

I also think, hower that somone who has a car valued at less than 3-5K probably doesn't have the money to buy a new car either. Are the used cars allowed?

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#9) On June 19, 2009 at 9:58 AM, mas113m (< 20) wrote:

ok, so I drive a clunker. Why, because I am trying to save 30% of my gross income. I live close to work, and my wife has a late model car. I could actually benefit from this bill, but do not plan to. Here's why, if I wanted a new car, I would have already bought one. Financially, the value of a new car would drop almost as much as the voucher after purchase anyway. Also, when i do finally give up on this car, and I will, I'd like to give it to one of my employees. 5 miles better gas mileage on my 8 minute commute is not going to sway me. Just another bone thrown to the UAW.

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#10) On June 19, 2009 at 10:09 AM, TMFKris (89.23) wrote:

Since the old cars will be scrapped, they have no resale value to the dealer. 

I agree with farmnut and have a question.

Why are they being scrapped? Is that in the clunkers bill?

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#11) On June 19, 2009 at 10:18 AM, wrparks (78.98) wrote:

Yes, it's in the bill.  I think you also must buy new, so no carmax benefit.

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#12) On June 19, 2009 at 10:23 AM, Melaschasm (70.45) wrote:

How long do you need to own the 'clunker' before trading it in?

I have a friend who owns a car which is not safe to be drivin on the road.  It is only useful as scrap metal.  I told her to keep the car until this bill becomes law so that she can sell it to someone who wants to buy a new fuel efficient car, if that is allowed. 

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#13) On June 19, 2009 at 10:30 AM, StopLaughing (< 20) wrote:

This is a bad bill but the timing is worse. Obama and the Dems should have waited until Fiat and GM were producing small cars and the new CAFE standards were in.

They would have gotten more political traction if they had signaled they were going to have a clunker bill next year after the newer better mileage models are available. 

This looks like a highly  inefficient money throwing exercise at the auto industry. If the rest of thier approaches to "climate change" are as dismal they will be out of office soon. 

The health care bill is in trouble over concerns about the cost. Dems NEVER learn. They are like compulsive spenders.


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#14) On June 19, 2009 at 10:52 AM, wrparks (78.98) wrote:

Melaschasm, you have to have owned the car for 12 months to take the credit as well.  Prevents gaming the system, otherwise, I would be in the market for a Yugo.......

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#15) On June 19, 2009 at 11:28 AM, lemoneater (57.13) wrote:

What's to keep dealers from marking up the cars since customers will be able to "afford" more? Also has anyone considered the fact that insurance on a new car generally costs more than insurance on a good condition used car. (Since the American public has to be protected against adjustable rate mortages--I think Scrooge was in the business--who is going to protect the public against this hidden new "evil" of the government's own making: higher insurance payments?)

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#16) On June 20, 2009 at 11:10 AM, usefullidiot (< 20) wrote:

The bill would be more appropriatly named "The Auto Salvage Operator Recovery Act"

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#17) On June 21, 2009 at 3:34 PM, Melaschasm (70.45) wrote:

Good point, the people who are going to be paid to scrap all these cars should be able to turn a profit.

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#18) On June 24, 2009 at 6:15 PM, johnnyauto (< 20) wrote:

The Cars For Clunkers legislation is actually very focused and is only available for a limited four month time frame.  It offers participants the opportunity to trade in certain older cars for certain other new ones.  Unfortunately, many cars do not qualify for the program and therefore are still ideal for the 'traditional' car donor option.  Such non-qualifying cars let people give their cars to non-profit organizations who help people with many different kinds of needs, like supporting youth organizations or our older folks or to help promote the arts and health research.

Help yourself with the Cash for Clunkers program if you qualify or if you don't qualify or would like to help others, give your "clunker" to charity and take a tax write-off!

Here are 400 not-for-profit organizations that can always benefit from your 'clunker' or unneeded vehicle. To donate your car, just click on the link to the charity on the web pages below.

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#19) On February 04, 2010 at 3:44 AM, BrandonPaulChevy (< 20) wrote:

Indeed this is the reality..But I have to admit, cash for clunkers helped me a lot. I was able to sell my car with damaged fuel filter, valves, and wheels. This was really great.

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