What is the Cash for Clunkers program?
The cash for clunkers program provides consumers economic incentives to purchase a new, more fuel efficient vehicle in exchange for trading in their less fuel efficient vehicle. The program is intended to stimulate the economy by boosting auto sales and putting safer, cleaner and more fuel efficient vehicles on the nation’s roads. The amount of credit is either $3,500 or $4,500 and is given in the form of a voucher. The voucher amount is determined by the type of car purchased and the difference in fuel economy between the new vehicle and the clunker. Dealerships reduce the purchase price by the voucher amount the consumer is eligible for and receive a reimbursement from the government.
To be eligible vehicles must meet all the below criteria:
1. Vehicle must be less than 25 years old.
2. Consumer must purchase or sign a minimum 5 year lease of a NEW vehicle.
3. Trade-in vehicles must get a weighted combined average rating of 18 or fewer MPG
4. Trade-in vehicles must be registered and insured continuously for the full year preceding the trade- in.
5. Trade-in vehicles must be in drivable condition.
6. Vehicles must be purchased from July 1st, 2009 until Nov. 1st, 2009 or when the funds are exhausted, whichever comes first.
7. The program requires the scrapping of the eligible trade-in vehicle and that the dealer disclose to the customer an estimate of the scrap value of the trade-in. The scrap value will be in addition to the rebate, and not in place of the rebate.
8. The new car bought under the plan must have a suggested retail price no more than $45,000, and for passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 miles per gallon.
FAQ’s
Can you purchase foreign cars? YES
Can you purchase used cars? NO
Is the program available at all dealerships? NO, dealers must opt into the program
Is the voucher tax-free? YES
What happens to my clunker? It is the dealerships responsibility to see that the car’s engine and drive-train be destroyed.
Are there clunker restrictions? The car cannot be older than 25 years.
What if my trade-in is worth more than $4500? Then I suggest you don’t take advantage of this program.
How do I know if my car qualifies? Visit www.fueleconomy.gov to calculate your MPG
History
Economist Alan Blinder first introduced the premise, and catchphrase “Cash for Clunkers” in his New York Times op-ed piece; “A Modest Proposal: Eco-Friendly Stimulus”. Touting the program as “the best stimulus idea you’ve never heard of”. He proposed Cash for Clunkers would provide an effective economic stimulus, more equal income distribution and a cleaner environment. It wasn’t until nearly a year later that the bill was introduced by Rep. Betty Sutton – D, OH, on March 17th, 2009. By June 24th the bill was passed with a $1 billion price tag, the program was to begin on July 24th and end Sept. 1st. Within a week funds had been exhausted and congress went in to discuss pumping more money into the program. On August 6th, 2009 congress passed a bill to allocate $2 billion to continue the program through September 1st 2009 or when funds run out, which ever happened first. (Track the bill here: govtrack.us)
Cost and Benefit
The Obama administration and the auto industry were caught off guard by the popularity of the Cash for Clunkers program. Consumers flocked to participating dealerships to trade in their clunkers for a new car, blowing through the allocated $1 billion. Congress decided to put in another $2 billion to continue the program through Sept. 1st. On paper this looks like a great success, both the government and the auto industry are saying so as well. If I spent $3 billion (plus interest) in tax payers money I probably would do whatever I could to show it was a success as well. Seeing as though some of the $3 billion is coming out of my pocket, I wanted to make sure they weren’t telling fibs. Here’s what I found:
Cost at $1 Billion Cap
According to Edmonds.com, 200,000 cars worth $4500 or less are generally retired every three months without this program in place. The Cash for Clunkers program would at best fund 250,000 cars in the same time frame at a $1 billion cap. The government only added incremental sales to the economy. Eventually those sales would have happened at some point, so we just moved our future sales into a smaller window, giving the illusion of a short term economic stimulation. The result is that the government spent $1 billion to gain 50,000 incremental sales from the program. The cost to tax payers per car comes out to $20,000 ($1,000,000,000 / 50,000).
Let’s do the math with the total Cash For Clunkers cost of $3 billion
Assuming the government average rebate is $4000: $3,000,000,000/$4000 = 750,000 available Cash for Clunker cars. Take away the 200,000 cars that would be retired regardless of the program. The potential incremental sales jump to 550,000. The cost to tax payers decreases to $5454 per car. That looks a little better. Are we going to sell the extra 500,000 new cars between now and Sept. 1st? I don’t know, it would be great if we did. The program still fails at creating a long term benefit to the economy. Once all eligible clunkers are traded in for new cars, more money needs to be pumped in again, and no jobs are saved or created. At the end of the day, we are just transferring one taxpayer’s money to another.
Can the new car buyers afford their new rides?
Based on my 2002 car
Car Payment: $0.00
Insurance: $87.50 a month
Gas once a week: $40 / $160 month
Oil Change every 3 months: $30 / $10 a month
Monthly Total: $257.50
Based on 2009 Toyota Corolla (number one Cash for Clunkers seller)
Car Payment: $275.14 a month (60 Months calculated on edmonds.com)
Insurance: will be doubled for a new car $175 a month
Gas once a week: $31.25 a week / $125 a month
Oil Change every 3 months: $30 / $10 a month
Monthly Total: $585.14
The new car will cost the consumer double what their old car cost a month. The majority of people I know that drive eligible clunkers, are driving them for a reason, they can’t afford anything better. Is Cash For Clunkers creating the auto industry version of the housing crisis? Several dealerships have started special financing plans to encourage even more showroom traffic. When the economic bubble crashes I think we’ll see several cars getting repossessed. That is going to hurt auto financing companies like GMAC, who may be feeling pressure by dealerships to approve car loans for people who can’t afford them.
“Your ego is writing checks that this country can’t cash.” – Top Gun
The initial funding for the Cash for Clunkers program was attached to a $106 billion war funding bill, of which $1 billion was set aside for the program. Since then an extra $2 billion has been added to the program. Last I heard our country was in debt. We are trying to stimulate our economy with borrowed money, either by printing more further diminishing the dollar or borrowing it from the Chinese whom we already owe $722 billion USD.
What regulations are in place to prevent fraud?
The NHTSA is in charge of enforcing the regulations to prevent dealerships from falsifying sales. Car dealers must provide proof that they killed the engine and scrapped the car before the government will grant them the rebate. The problem is they are retiring cars which are in perfectly good working condition, which lower income families could buy. Most likely the cars people are retiring under Cash for Clunkers are safer and more environmentally friendly than what the lower income families are currently driving. The program hurts the poor and the used car industry in one fell swoop. The other problem that has come up is the website in which the car dealers report their sales and deliver proof of car extinction keeps crashing preventing dealerships to report accurate numbers. It’s being reported that both the government nor the dealerships know how much has really been spent from the original $1 billion or how much was really needed to keep the program alive. We are possibly facing two dire scenarios, either the extra $2 billion wasn’t needed or car dealers have blown through the full $3 billion and there won’t be enough in the fund to pay out all deals. The car dealerships have gotten so nervous, some are making clauses in the contracts stating if the government does not pay off the rebate, the consumer must pay that money back. We could see a lot of litigation coming out of this at the end of the day.
Return customers stimulate the economy, not one time buyers.
Once the extra $2 billion has been spent the Cash for Clunkers program is over, people will not continue buying cars at this rate. To stimulate the auto industry successfully we need a steady flow of consumers, or the jobs will disappear again, dealerships will be failing and finance companies will be back to square one. This program is a temporary band-aid. if you look closely at the math, it really isn’t stimulating the economy as much as the government would like us to think. We need a long term plan that will put our auto workers back in a job.
Humanity seems to be going through an adolescence; destroying the environment, thinking we can get out of recession by consuming more instead of saving more, upsetting the balance of nature by over hunting and deforestation, we’re a mess! I always like to say we are just borrowing our earth from our children. Boy are they going to be upset when they inherit this mess! We need to turn this around and smarten up.
More Information: Official site: www.cars.gov
Follow me on twitter: @lajournalist My Homepage: LA Buzz
NaBlogSha 