How Cash For Clunkers Failed American Taxpayers

Today, let us celebrate the end of an unjustifiable drain on the US taxpayer: the Cash for Clunkers (C4C) program.

True, C4C greatly boosted the number of consumers visiting car dealers. Doubtless, some new cars were sold to consumers who thought they had a clunker to trade in but, on discovering it didn't qualify, they bought a new car regardless.

But why did taxpayers, having already bailed out GM and Chrysler once, have to do so again to the tune of $3 billion through the $3,500-$4,500 C4C incentives? This taxpayer money simply enabled the dealers to avoid having to offer discounts off sticker prices and to extract higher profit margins than they would have otherwise obtained on the qualifying new cars. The program proved so popular that inventories of the qualifying cars soon dwindled, further boosting the dealers' negotiating leverage and unit profit margin.

Did C4C sell more cars? Maybe in the short term but, in reality, the promotion stole largely from future sales with taxpayers subsidizing over half a million new car sales that would have occurred anyway.

C4C disrupted the even flow of supply and demand. New car buyers held back in advance of the launch of the program; in fact, many prenegotiated with dealers to do so. And, now the promotion is over, expect year-on-year sales to be lower than they would have been because so much consumer demand has been concentrated in the promotion period.

And were these C4C sales helping poor people trade in unsafe vehicles or buy a new car for the first time? Hardly likely, because auto loans still aren't readily available and many poorer people would buy a better quality used car rather than a new car. Used car prices poor people have to pay are now higher thanks to the compulsory destruction of half a million used vehicles.

Who came up with the $4,500 figure, way higher than any prior manufacturer incentive? No doubt, our friends in Detroit. American consumers know a good deal when they see one and burned through the first $1 billion in five days. The promotion was way more generous than it need have been.

A $2,500 incentive would have attracted the older, most fuel inefficient used cars. Instead, a $4,500 incentive attracted many perfectly serviceable vehicles. Because of government concerns over fraudulent recycling of trade-ins, vehicles had to be destroyed.

Signs point to the C4C program failing from an environmental impact standpoint. Whatever the mpg improvement of the new car over the clunker, premature scrapping of functioning vehicles is hardly a contribution to environmental sustainability. In addition, C4C buyers may well drive their higher mpg cars more miles per year than they did their clunkers. And two car families that traded in their old SUVs for high mpg sedans may later trade in the existing family sedan for another SUV, resulting in minimal mpg improvement on a per household basis.

The administration of the C4C program has been cumbersome. Each clunker required dealer salespeople to complete 11 forms, the online computer system set up by Citi was slow and sometimes crashed, and extra workers had to be hired to process C4C claims. Only $145 million of $1.9 billion in claims have so far been refunded to dealers. Ironically, GM and Chrysler are using taxpayer bailout money to advance dealers the refund money they are waiting for from the US government! In the end, administration expenses might well reach 10 percent of total program costs.

The Federal government should not be in the business of initiating and administering short-term incentive programs designed to shape consumer purchase behavior. It has no experience in such initiatives and proved itself incapable of forecasting demand associated with different incentive levels.

And the auto industry hardly deserved special treatment, when home appliance and furniture sales, for example, are equally in the doldrums.

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