Is Cash for Clunkers Worth The Investment?

August 7, 2009

clunkers

By Nicole Andriso:

Even though the wildly popular “Cash for Clunkers” automobile purchase program is breathing new life into the automobile industry, many are not convinced the economy will benefit by putting even more government money into the program. Even so, the Senate just approved a $2 Billion cash infusion to keep the program running through September.

The new program, dubbed the Car Allowance Rebate System (CARS), has seen deal-hungry consumers flock to car dealerships faster than officials anticipated. In response to consumer demand, the House of Representatives met on July 31, to authorize an additional $2 billion to extend the program, which the Senate has now approved, as well.  The question still being asked though is whether plugging more taxpayer money into the program will have the desired long-term effect as an economic stimulus that was originally expected.

Dealer Woes

According to the official National Highway Traffic Safety Commission (NHTSC) Car Allowance Rebate System (CARS) website, www.cars.gov, under the program, car dealers credit the amount of the $3,500 or $4,500 voucher to customers who buy new cars, then the dealers get reimbursed by the government. According to an article in The Washington Post, dealers are frustrated with the system the government put in place for entering vehicle data on the website. Many dealers also find themselves strapped for money as they wait for government payments, some of them waiting for nearly $1 million in reimbursements.

Consumer Criticism

In a commentary on CNN.com, Harvard Economics lecturer Jeffrey Miron criticizes the plan’s destruction of any used car that is traded in for a newer model, with key parts such as the engine and drive train destroyed. According to Miron, by doing this the plan is “paying people to junk cars that still have economic value.” Many people who might have kept their good, older car for few more years are given an incentive to get rid of it. Plus, those with older cars might have a hard time finding certain car parts because most of them will have been destroyed with the old models, per the “Cash for Clunkers” plan.

Good for the Environment?

One of the goals of the CARS program is to reduce oil consumption.

Some officials are concerned the program will affect its environmental goals. The question is whether there is even sufficient evidence in one week to determine if the program is reaching these goals.  Senators Diane Feinstein (D-California) and Susan Collins (R-Maine) recently drafted a letter to Transportation Secretary Ray LaHood posing the question. The letter asked for better data related to the actual mileage of the old cars and what kind of mileage the new cars offer, “to determine if the fleet modernization program delivered significant fuel economy gains and oil savings.”

Plus, according to Miron’s commentary on CNN.com, many people would have traded in their old cars for newer models in the next two years anyway, and with all the new cars on the road, driving and fuel consumption might ultimately increase because people typically enjoy driving newer cars.

Bailing Out Government Owned Companies

According to the Wall Street Journal, some lawmakers have criticized the program as a bailout specific to government-owned companies, and compared the role of government to a used car business. Some are also concerned about the plan’s short, quick fix and doubt the lasting economic effects.

It’s been two weeks and $1 billion distributed, with $2 billion more in the pipeline. In the short term, people seem to be buying new cars. The question is not only whether these consumers can really afford to buy the new cars even with the savings, but whether the short term fix is the best way to boost the economy.  And if part of the plan is to reduce fuel consumption and promote the environmental merits of fuel-efficient cars, there might be better ways to do this. Maybe figure out a way to make people drive less and use less fuel, not drive the same amount or more in a better car.