Cash For Clunkers We Say Scrap It!

by on
Style:
Category:
Sourcing Strategies

Late last week Congress passed an automotive stimulus bill better known as Cash For Clunkers. The bill essentially provides a voucher to a car owner whose current car gets less than 18mpg. The car must have been built in 1984 or later. The voucher in turn goes to the car dealer who deducts (for the trade-in) either $3500 from the purchase of a new vehicle or $4500 for a new vehicle depending upon the mpg delta between the trade in car and the new car.  ($3500 applies to the purchase of a new vehicle that gets more than 4mpg than the clunker whereas $4500 applies to the purchase of a new vehicle that gets more than 10mpg than the clunker traded in) SUV’s and light trucks also qualify for the incentive.

At first glance, I assumed that the incentive was on top of a trade-in book value (that would make for a meaningful incentive) but no, it is in essence, what you get for your trade-in according to the Cash For Clunkers website.  So what does it mean? Well, the only people that we can see who would take advantage of this would be individuals who own cars worth less than $4500 or $3500 respectively. And truthfully, aside from some older car enthusiasts (my father-in-law loves his old Mercedes’), I’d venture to say that people who drive cars worth less than $3500/$4500 probably don’t have the money to buy a new car anyways. A new car adds the extra burden of a car payment, something existing clunker owners likely don’t have to face today.

The other pitfall of the legislation involves what happens to the car after the trade-in.  According to this Q&A from USA Today, the engine, transmission and some other parts must be destroyed so they can’t be reused. Will the government regulate what happens to the scrap parts? I doubt it. Who gets the precious metals in the catalytic converters? We suppose the car dealer so there are some added economic benefits to car dealers. The legislation will be funded, according to this Wall Street Journal article from a war-funding bill. The bill calls for $4b yet only $1b is in place.

Is this bill designed to take the biggest gas guzzlers off the road? We don’t think so as any 70’s car won’t qualify. Will this encourage buyers to buy green? Perhaps incrementally, yes but all in all this doesn’t seem like a good piece of legislation.
Which market segment would most help automakers? We don’t think it’s this one. Too bad the government isn’t managing the recycling aspect of this bill ” we could add precious metals to our strategic stockpile, go green and create actual stimulus!

–Lisa Reisman

Comments (20)

  1. Kevin Davis says:

    The website you listed is not the official website from the government. When their site is live it will be CARS.gov, but in the mean time people should use http://www.fueleconomy.gov/feg/cash4clunkers.shtml for official information from the government.

  2. uscitizen says:

    Why do so many people, like Lisa Reisman, make the mistaken assumption that “people who drive cars worth less than $3500/4500 probably don’t have money to buy a new car anyways”? there are people like us who work hard to pay off our car — taking care of it in the process to make it last as many years as possible. We trade in our ‘clunker’ when we’ve squeezed every ounce of wear out of it. A car is a big investment and people like us could sure use a hand-up in this economy. The Cash for Clunkers would certainly do that. the Government rushes to bail out banks, investment companies, and big shots. Yet the Cash/Clunkers bill has been dragged out, watered down and criticized. How about some help for the hard working people who do all they can to pay their bills??

  3. zac says:

    what part do the dealerships play? will the $3500 or $4500 voucher be deducted fron msrp or listed price. I feel the dealership will try to get over

  4. Geo says:

    Perhaps I’m an exception from a national view, but it seems that a few of my friends and neighbors must be as well.

    I’ve been driving a 1996 Jeep Grand Cherokee for 12 years. It now has 235,000 miles and a few issues of its age, but it is otherwise dependable. I earn a fair salary and I can easily make a down payment, pay the taxes, make car payments, and cover the added insurance, but I have chosen instead to build up my savings and spend what is left on other things.

    My Jeep has a meagerly 160 horsepower six-cylinder engine and a combined rating of 16 MPG, but averages closer to 19 for my driving. I have endured the critics who see only the letters S, U, and V, but as I’ve told them, I can buy a lot of gas for what the [Michigan 6%] sales tax alone would cost on a new car.

    In other words, just because I could have afforded a new car long ago doesn’t mean I had any desire to buy one. Some of my friends and neighbors also drive older cars by choice. These tend to be cars that they bought new or near new, they’ve maintained them well, and they’ve found no reason to trade them just to have a newer car.

    I considered replacing the Jeep a few years ago when the employee-pricing-for-everyone was first marketed. I test-drove a few cars, but even with the incentive, I found nothing that I liked so much better than my Jeep that I was willing to spend thousands of dollars to have it.

    With all the hype of incentives in the news, I went shopping again at the start of this year. I found the actual incentives to be disappointing and I still didn’t find a car to get excited about. (Before the G-for-G program was introduced, I had high hopes for a new Jeep Liberty — until I drove one.)

    For some reason. the new cars that are “comparable” to my Jeep are physically much bigger and don’t get much better mileage — though they do have much more power. For comparison, my 1996 Grand Cherokee is physically about the same size as a new Jeep Liberty and Ford Escape.

    By the way, I’ve grown weary of salespeople pushing me toward the larger cars under the premise that bigger is better. “Step up” is a phrase I’ve heard way too often, as in “to get a better, quieter ride, you should ‘step up’ to the next bigger car” or “to get a power passenger seat, you have to “step up” to the next bigger model”. When will Detroit learn that some of us want quality and class in a smaller package.

    Of course, we’ve lived in a “bigger is better” culture for a long time. Seems now that we also live in a culture of “the only people who drive older cars are people who can’t afford new ones.” I had no idea how pitied I must be for having to endure the same car for some years.

    The moral to this story? With an added $4500 incentive, I’m willing to go shopping again, and I’m now thinking of buying a smaller car to ward off future gas price hikes. Clearly our old cars won’t last forever. My friends and neighbors agree that the added incentive makes it worth shopping for the replacement sooner than later.

    Hopefully, the car companies and dealers won’t get greedy by reducing their own incentives. Ultimately they will still need to convince me that a new car is worth the bottom line price.

  5. admin says:

    US Citizen, my apologies. You are right. There are certainly people that can afford to buy new cars who own cars worth less than $3500 but I still posit that they are the minority…LAR

  6. Geo says:

    Lisa,

    The answer to your assertion that “people who drive cars worth less than $3500/$4500 probably don’t have the money to buy a new car anyways” will be found once the program is in place.

    As I said earlier, I and a few of my friends and neighbors plan to at least go shopping. If we don’t take advantage of it, it will have more to do with not finding what we want at a price we’re willing to pay — not because we can’t find a price we can afford to pay.

    On a side note, I think it would be great if the scrapping of the clunkers were handled by recognized charities who already accept donations of old cars.

  7. Sean says:

    I disagree that people that are driving a $3,500 – $4,500 car can not afford a new car. Most people that have money are frugal and have a long term plan. I am the original owner of a 2000 Toyota 4Runner Limited that now has over 300,000 miles that I paid cash for. I purchased the vehicle because of its outstanding reliability record. I have less then $1,000 in total repairs over the years.

    I am in the market to buy a new car and I qualify for the $4,500 rebate. I am going to move to a 2010 Toyota Prius II that I am also paying cash for. It is very sad that the vehicle has to be destroyed because mine is in mint shape. If I keep the 4Runner I run the risk of a transmission or major engine repair that can cost $4,500.

  8. Rohan Pease says:

    Lisa,

    Thanks for the article, it always nice to hear a different point of view with respect to the proposed legislation. At first glance I believed that this legislation would create substantial demand for new cars, however I must agree with your opinion that it won’t be as effective as most think because of the 1984 cut off and because the voucher replaces the trade in value.

    Although there are many anecdotal stories about people with clunkers that can afford new cars, I must agree with the author that the majority who qualify for the voucher are not people who will be able to afford new cars and therefore cannot take advantage of the new law.

  9. Mike D says:

    Pardon me but isn’t this just another wealth redistribution scheme from this administration.

  10. ellen says:

    please take note that the clunker you want to trade in has to get less than 18mpg or it doesnt qualify.

  11. JimWHenry says:

    You can either Lease or buy a new car to use the cash for clunkers program. It has to be new vehicles and not used ones.

    jwhenry
    Blogger
    http://www.cashforclunkersfacts.info
    http://www.cashforclunkersfacts.info

  12. Geo says:

    Based on current reports, it appears that there are plenty of people with clunkers who can afford new cars. Not only that, but many cars in excess of $30,000 have been sold.

    I was shopping for cars in the $30- $35-thousand range. I’d find something close to what I wanted on a dealers web site only to learn it was already sold by the time I called.

    Patience and persistence paid off. I traded my 96 Jeep for a new Ford Escape Limited last night. I was able to get what I wanted as it rolled off the truck at the dealer lot. With options, the sticker was $33,000+.

    Maybe t is true that most people with clunkers cannot afford new cars, but there were enough to apparently blow through the first billion in a week or so.

  13. Jacob says:

    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.

  14. Geo says:

    No Free Lunches: There is a lot of talk out there about the success of the clunkers program.

    Given that it was available, I took advantage of it. The benefit I received from federal tax money is far less than what I pay each year in federal income taxes, so I don’t feel bad about taking some of it back.

    But economics is about choices — what we’re willing to give up to have something else. There is only so much money to go around.

    People who bought new cars because of this program now have less money to spend on other things. Perhaps they’ll spend less at restaurants or movies, cut back on travel, or buy less expensive clothes for their kids’ return to school. Perhaps they’ll decline the new furniture they had intended to buy, or the new kitchen appliances. You get the idea.

    C4C is not free money. It gives the auto industry a boost not only at the expense of the national debt, but also at the expense of those other industries that just missed making a sale.

  15. Blace says:

    Personally, I’m sick hearing lip service for this thing. We put loads of money into a 89 Chevy Celebrity and to have it regarded as just a piece of junk is heartbreaking! At least if you’re going to try and have a program, then name it aptly! I don’t believe the campaign for as it is being handled now is fair to a lot of people who have old cars. Scrap the damn program while you’re at it, besides all the unqualified clunkers.

  16. Geo says:

    C4C officially ends today, after $3 billion has been spoken for. Many pre-program editorials (like this one) suggested that those of us who drive older less valuable cars must certainly do so out of poverty, else we certainly would have bought something newer before now.

    Contrary to that status symbol mentality, not everyone considers having a new car to be that important, especially if the only thing “wrong” with our current car is its age. I guess we didn’t realize that we were expected to put “new car” ahead of saving for our future, traveling, improving our homes, or just being content with what we have.

    Now that the program has been tested, it seems that plenty of people driving “clunkers” were able to afford new cars. I did. And I would venture to say that a few billion dollars more could be spent if the program continued without limit until November.

    With the numbers in, any retrospective feedback from those who ventured to say that “people who drive cars worth less than $3500/$4500 probably don’t have the money to buy a new car anyways.”?

  17. John Ernst says:

    I wished we had this scheme in Australia, it would save many jobs in our Auto industry and would certainly clean up the air and save the environment the CO2 savings alone make it a cheap out for future damage.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.