The 'Cash for Clunkers' Law Looks Like a Lemon

When President Barack Obama made the "Cash for Clunkers" bill law on June 24, supporters like Senator Carl Levin (D-Mich.) hailed it as a great way to modernize America's car fleet and "accelerate national economic recovery." But don't expect either to happen in any meaningful way.

The problem with the law is that it is both underfunded and too narrow to generate a spike in showroom traffic. Standard & Poor's (MHP) says the most it will do is boost sales by 3% for the year; a similar German program pushed sales up 30% a month this year. "This is a waste of taxpayers' money," says analyst John Wolkonowicz of Boston research firm IHS Global Insight (IHS). "There won't be enough people who can take advantage of it."

First off, the feds have approved only $1 billion for the program. That could help fund the purchase of just 250,000 cars—not much more than a week's worth at current sales levels—between August, when the program likely will start, and Nov. 1, when it ends.

Plus, the law makes little sense for most passenger-car owners. The government will cut checks of $3,500 to $4,500 to dealers so they can buy old cars that get 18 miles per gallon or less and then sell the owner a more fuel-efficient replacement. But most cars on the road get more than 18 mpg, so they won't qualify. And many that are thirsty enough to warrant the deal are luxury models worth a lot more than $3,500 to $4,500. If a consumer can sell the old car for more than what the government will pay, there's no reason to take advantage of the bill, says Wolkonowicz.

Yes, there are plenty of old cars that do qualify. But many are 10 years old or more, says CEO Jeremy Anwyl. People driving cars that ancient often buy used, and even with a $4,500 discount, they probably won't want to take on new-car payments during a time of economic hardship.

Paradoxically, the bill may help the Big Three sell more gas-guzzling pickups. There are a lot of old trucks out there, which typically get less than 15 mpg. The government only requires that a consumer buy a new pickup that gets 18 mpg or better or a heavy-duty work truck that gets 15 mpg or more—hardly the kind of performance that will help wean America off foreign oil.

The government will have a chance to revisit the Clunker program. Once it expires, on Nov. 1, the feds say they could approve a more robust $3 billion from the existing stimulus bill. Lawmakers also could open the program to more car buyers. But for now, it has a lot of squeaks and rattles.Return to the Auto Bailout and General Motors' New Landscape Special Report Table of Contents

    Before it's here, it's on the Bloomberg Terminal.