Auto Bailout: Will Cash for Clunkers Program Work?

It looks as if the cash for clunkers program may not give quite the goose to car sales that was intended. Though the auto dealers are gearing up for a big push some analysts point out a couple items that might mute the program’s success.

From the WSJ:

The $1 billion appropriated in the bill is enough to fund about 250,000 vouchers for new-car purchases. It isn’t certain, though, that customers will rush to trade in their clunkers.

Because the program requires dealers to scrap the vehicles that are traded in, the most a trade-in will be worth to a customer is $4,500. So only people who own cars worth less than $4,500 — or $3,500 if they don’t trade up to a car with substantially greater efficiency — are likely to participate in the program.

Moreover, people driving older cars worth that little may be unable to afford a new car, even with the voucher, said John Wolkonowicz, an analyst at forecasting firm IHS Global Insight.

And because gas prices are far lower in the U.S. than in Europe, customers don’t have as great an economic incentive to trade up to a more-efficient vehicle.

The bill gives the National Highway Traffic Safety Administration 30 days from the date it is enacted to come up with rules for the program. NHTSA needs to devise ways to register participating dealers and make sure they scrap the cars traded in under the program, so they don’t turn around and resell them.

I can’t see how this program is going to appeal to any but a select few buyers. If gas were at $4 a gallon or more than more people might be incented but I just don’t see all that much of a rush to buy fuel efficient vehicles right now.

As for the plan to make sure the trade ins get scrapped — good luck! That part of the plan is just begging for scams. The autos may go from the dealer to the scrap yard but that doesn’t mean they’ll end up shredded. I suspect that there might be a really good market in Mexico for them.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

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