Cash for Clunkers: Good, Bad, or Ugly?

Exceeding all expectations, the new “Cash for Clunkers” program ran out of cash last week, prompting a quick vote by the House of Representatives to add $2 billion to the car buying program. Also known as the Car Allowance Rebate System (CARS), “Cash for Clunkers” is a stimulus program which encourages car owners to trade-in their current vehicles for a new car that gets better mileage, in exchange for a trade-in credit of $3,500 or $4,500.

Despite the program’s success, news reports suggest that “Cash for Clunkers” will face some serious challenges getting passed in the Senate. So let’s do a quick “Good, Bad, and Ugly Check” on the program.

Good: For the economy! Nearly a quarter million cars have been traded in! Although some of that amount may be attributable to retroactive credits (car buyers can take the CARS credit if they did a trade-in anytime after July 1st), “Cash for Clunkers” has boosted car demand, which had declined to record lows. Economic stimulus is happening!

OK: for the Environment! Early reports from DOT suggest that new vehicles purchased through the program, on average, are getting 25.4 miles per gallon, a 9.6 mpg improvement over the vehicles that are being traded in. This is great, except for the fact that our new CAFE standard is 35.5 mpg by 2016. The program should have supported a bigger push toward the new standard.

Bad: for the Consumer! Looks like the taxpayer will be swallowing another big bill. Equally important, early indications are that the surge in demand has encouraged some dealers to charge the full MSRP, instead of the lower invoice price, so basically the “savings” is a net zero for new car buyers.

Ugly: for US Innovation! Instead of providing greater incentives for US auto companies to change their offerings and accelerate adoption of energy-efficient technologies, the program seems to be rewarding obsolete behaviors. And while the US auto industry is crucial for us to support, the “Cash for Clunkers” program does not seem to be consistent with a national innovation policy for the US auto industry that will allow the Fords and GMs of the world to be competitive over the long-term with foreign automakers.