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!