Cash for Clunkers has Burned Through $3b, What Now?

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Supply & Demand

We are a victim of our own success President Obama is reported in the Washington Post as saying this week, referring to the unexpectedly rapid rush to the dealer of the subsidized Car Allowance Rebate System, better known cash for clunkers trade in of old cars for new. The program, launched on July 24 was originally expected to generate 250,000 additional car sales over three months. Following the allocation of additional funding, it will probably trigger 700,000 new sales. GM says sales have run 60,000 a month ahead of its plans for the last two months but even so at 17.6% of clunker sales, the company is reported to be running second to Toyota at 18.9%. Two of Ford’s models have proved popular, the Focus and Escape consistently appearing in the top ten for sales. All the US car plants have ramped up production to meet the demand as we reported last week with Ford expecting a 33% increase in production in the 4th quarter over the same period last year.

The scheme claims to destroy gas guzzlers spurring the US auto industry to boost production. Boost production it has certainly done, at least in the short term, but dramatic a switch from gas guzzlers is less emphatic. The qualifying terms are not as simple as they are sometimes portrayed. To qualify for the $3500 credit, the minimum improvement in fuel efficiency is only 4mpg, for $4500, the improvement needs to be 10mpg. For trucks and SUV’s it is almost laughable, 2mpg for $3500 and 5mpg for $4500. Upgrading from any 9-10 year old car of the same model should see you the 2mpg improvement (although apparently the Cadillac Seville has virtually stood still for 20 years, the Ëœ89 model does 18mpg and the Ëœ09 model 21mpg according to What this shows is that whatever the scheme supporters may say this is more about boosting production for the auto industry than a major investment in the environment.

Nevertheless even though the incentives to make a significant upgrade in economy are limited the background climate of recession and family cost reduction has encouraged many buyers to opt for much more efficient new buys than the scheme requires. reports the top 10 list of cars traded in includes six SUVs, two mini-vans and two pick-up trucks, while in contrast only one of the top 10 cars being bought was an SUV.

Auto makers are just happy buyers are buying and production is up. Some economists however fear pulling forward car sales artificially into a 6-8 week window will siphon spending from other retails sales and when the scheme is finished cause car sales to crash a second time. The second issue is probably the greater danger, if a family is thinking of changing their car in the next year they will do it while the government is handing out $3500-4500. When that’s gone so is the incentive to make a major purchase in uncertain times. Auto makers and car parts suppliers are being sucked into ramping up production in the third and forth quarter, only to run the risk it will drop back in a second dip come the year end.

–Stuart Burns

Comment (1)

  1. Ford is selling more Fords with government help. That makes Ford happy. Ford claims to be a good environmental company — NOT SO.

    In my town, Glad to hear you like Ford’s Taurus and weren’t paid anything to review it.

    Even though I’ve been a loyal Ford driver for more than 20 years [multiple Ford vans], I won’t be buying another Ford because they are not as environmentally friendly as they say they are.

    In my town, Ford is partnering with a known polluter Pan Am Southern, to build a 25-acre parking lot to unload Ford vehicles over an underground aquifer that provides water to 15,000 people.

    There’s a lot 1/4 mile away Ford could use — but they’re not. Ford has the opportunity to do the right thing, and they’re not.

    I will not be buying a Ford for a long time — unless Ford takes this opportunity to DO THE RIGHT THING before it’s too late.

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