Cash For Clunkers: Helping or Just Another Bailout?

The “Cash for Clunkers” program, which is the nickname of the Car Allowance Rebate System (or CARS) has been underway for over a week now, and is poised today to receive an extension from the government through at least Labor Day. The program has helped spur auto sales for the quarter and has aided at least 185,000 consumers so far in getting rid of their “clunker” and moving to a more fuel efficient vehicle. But the question comes to mind…is this program actually helping in the long run with helping the environment (which, believe it or not, is the original intent), or it is just another auto industry bailout thats costing us billions to have no positive long term impact?

Originally and still referred to as “Cash for Clunkers”, the CARS act is a simple bill passed through Congress that gives an opportunity to consumers to trade in vehicles below a certain fuel efficiency threshold and receive up to $4,500 for their trade in, so long as the vehicle they purchase has at a minimum 22 miles per gallon fuel efficiency for cars, and at least 13 miles per gallon for trucks. The vehicle they purchase must be new, not used, and must be bought through a dealer participating in the program. This program was intended to have a very small window of opportunity, but appears as if it will be extended for much longer than originally planned.

On the surface it seems this costs the government about $4,500 per car. Take into account the 185,000 transactions already reported for last week, and the cost JUST for the rebates to consumers is $832,500,000. But the money allocated to the program that was taken from the stimulus funds was $1,000,000,000 ($1 billion). Of that $1 billion, the government has said that $0.775 billion has been used for the program, with $0.225 billion still in reserve. So if $.775 billion has been spent to cover 185,000 consumers, that breaks down to an average of $4189 per consumer…showing that not all consumers are getting their $4,500 rebate (some consumers may only receive $3,500 depending on the car they purchase). An independent estimate concluded that $1 billion dollars…yes, thats ALL of the money allocated to CARS, was spent just setting up and administering the program. Between the website that had to be created very quickly, to the creation of the forms, to the hiring of beareaucrats to oversee everything, to regulatory oversight, to training the dealers, to phone support and down to the office space leasing and office supplies, just setting this up was a massive task. With $1 billion spent setting up and administering the program, and $775 million spent on the rebates, that totals up to $1.775 billion spent so far for the program. Divide THAT amount up between 185,000 consumers and thats $9594 per consumer. So the government had to spend over $9,000 per person to give out $4,500 rebates. Sure, 185,000 consumers helped seems like a lot, and that number is likely to rise, and may even double or triple with the extension of the program, but 185,000 is only roughly .061% of a country of about 307 million. That seems like an awful lot of money and time just to help a miniscule number of people to get a new car.

So who did this really help? Car dealers are loving it. Instead of shelling money out of their pockets for trade in’s they don’t have to pay a dime for a customers trade in. They simply offer up to $4,500 for your trade and thats it. In a typical car transaction outside of the Cash for Clunkers program, the price of your trade in comes off of the dealers profit from the sale of the new car. A majority of trade ins are junked or re-sold at auctions with little to no profit realized by the dealer. Their money is made on the sale of the new car and in incentives and kick backs from the auto maker. So now, without having to lose money on their new car, they can offer you $4,500 for your trade in and get that all paid back by the government. So even if they sell the new car to you at NO profit, they are making at least $4,500 per sale. Do you think the dealers like this sweet idea? You can bet your next stimulus check on it! Here are some quotes from dealers across the country:

”God bless them for coming up with this…This is what they should have done instead of giving the banks and AIG and everybody else money to bail them out. This is what they should have done to spur the economy.” — Steve Bussjaeger, owner of Star Ford in Glendale, Calif.

”We’re selling cars like candy bars. It really, really is a good program and I hope they keep it going…” — Bobby Soldano, general sales manager of Arrigo Dodge ChryslerJeep in the Miami suburb of Sawgrass, Fla.

”Most of the (customers) were either on the fence, waiting until next year, possibly not doing anything for quite some time and this program has definitely brought them into the showrooms,” — Scott Wellington, general manager at Paul Masse Chevrolet in East Providence, R.I.

So you can see the dealers are enjoying it. My local television stations are flooded with Cash for Clunkers commercials. Dealers are soaking it up. So the question then arises…with a cost per consumer of over DOUBLE the rebate they are getting for trading in their car, is it worth it? Or is Cash for Clunkers just a plan to get some more money in the automakers pockets? It seems they are the ones benefiting from this, not the consumer.

Lets say best case scenario, the program gets extended and it helps triple the consumers it has already helped. Thats 555,000 Americans helped. What happens when it ends? Car sales slump back to normal levels, and you have half a million people in cars that they may not have been able to afford without getting the $4,500 for their trade in. However, if you’re car is only worth $4,500 or less, it is highly likely that you didn’t have a car payment. Since the Cash for Clunkers program requires a new car to be purchased or leased, those that took advantage of the program now have car payments. With the average new car price this year at near $28,000, that gives an average car payment of $541 ($28,000 financed, 60 month term, 6% interest rate). So now we have half a million people with large car payments they wouldn’t have had otherwise were it not for Cash for Clunkers. Can everybody afford these payments? I’m sure some can, but what about those who can’t? Are we poised for another wave of loan defaults as in the housing market over the last couple of years? Just as before, the government has stepped in to “help” people purchase a big ticket item they wouldn’t have been able to afford otherwise. On the surface Cash for Clunkers appears like a good thing; help the environment, get people in better cars and make sure they get a fair value for their trade-in. But what ripple effects will it have, and who will benefit in the end? You decide!

UPDATE: I’m not a math wizard…I miscalculated the original amount of the program and the per person costs. The article reflects the accurate figures…my mistake :-) .


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