Did Cash for Clunkers succeed?

By Robert Schmidt
raschmidt1@cougars.ccis.edu


In the wake of reported successes in Europe in programs designed to boost sales of new cars and remove old, fuel-inefficient vehicles off the road, the U.S. government began putting into the works its own version, popularly known as Cash for Clunkers. Lawmakers began discussing the program in March, just after Britain began its program. Of course, with enough problems already facing the U.S., it took longer before legislation was created, and our own Cash for Clunkers did not begin until late July.

Initially, the program created confusion as vague definitions of a “clunker” were given, but the government and many automakers began creating Web sites such as Cars.gov to help explain to the public what classified as a clunker. Part of the confusion can be attributed to the fuel economy ratings, which were adjusted this year by the Environmental Protection Agency to show more realistic expectations. The varying refund amount did little to help the situation.

First of all, the buyer had to be trading in a vehicle that he had owned and insured for the last 12 months continuously. Second, according to Cars.gov, an amount of $3,500 would be refunded “if the new vehicle has a combined fuel economy that is at least four, but less than 10 miles per gallon higher than the traded-in vehicle.” If it was more than 10 mpg higher than the trade-in, the credit would be $4,500.

Now that Cash for Clunkers has ended and most of the confusion has been sorted out, it is time to look back on it and ask whether it was a success. Proponents can easily argue that the funds for the program were exhausted in a short period of time, so clearly Americans took advantage. Though it may be too soon to tell, opponents argue that Cash for Clunkers will cannibalize car sales for the rest of the year.

Fox News host Glenn Beck has argued that Cash for Clunkers has put people into cars they do not want. It seems he has not been paying attention to the fact we are in a financial crisis. If people needed a strong incentive to buy even a compact vehicle, how would they have been able to buy a large SUV or truck? They probably couldn’t.

Critics like Beck are focusing on the consumers, when this program is really designed to help someone else – the automobile manufacturers. Most consumers probably did not necessarily need a new car; therefore, they were not buying. With such a good deal available, it is hard to resist buying a new car when incentives like this probably will not happen again.

What effect did this program have on the auto industry? The short-term effect was definitely good, and it seems that the long-term effects may also turn out positive as well. Auto workers who had been ordered to stay home were rushed back into the factories as demand shot through the roof. In some cases Cash for Clunkers actually became a serious problem for auto manufacturers. Chrysler for example, still reeling from bankruptcy, had low stocks as demand for their vehicles hit rock bottom. With production halted months ago, they did not have a large amount of inventory available for sale.

Despite shortages, sales decreased only 15 percent in August from the previous year. That looks like a bad number, but Chrysler’s sales overall have suffered far worse this year. GM experienced similar results, with a 20 percent decrease in sales when comparing August 2008 and August 2009; however, that is much better than the 40 percent loss when comparing all of 2009 versus 2008. Ford Motor Company managed an increase of about 17 percent. Though these numbers do not sound like a lot, their effect will make a big difference. Workers are on the job again, and the companies are bringing in money which they desperately need.

So what effect did Cash for Clunkers have? So far, it has been positive. For $3 billion thousands of workers were back on the payrolls, the auto industry got a shot in the arm, and consumer confidence was boosted. For anyone who asks “Did Congress waste money with Cash for Clunkers?” Look at the effect of the nearly trillion-dollar bank bailout last year and compare for yourself.