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Cash for Clunkers: The Revenge

This article was written by in Consumer. 45 comments.


The “Cash for Clunkers” program that we told you about on June 19 has received a shot in the arm in almost-last-minute actions by the House and Senate. They approved an additional $2 billion to continue the unexpectedly popular rebate program through Labor Day.

Opponents of the program feel like:

Richard Shelby, the top Republican on the Senate Banking Committee, said the program “has squeezed months of normal activity” into a short period of time.

But NPR’s Planet Money pointed us to at least one couple who wouldn’t have bought a new car if it weren’t for the program.

And though rebates are reportedly difficult to process, dealers and automakers love the program:

“There is no question that ‘cash for clunkers’ has succeeded,” said Dave McCurdy, chief executive of the Alliance of Automobile Manufacturers, the chief trade group for General Motors Co, Chrysler LLC, Ford Motor Co, Toyota Motor Corp and other big carmakers.

Have you participated? If so, were you going to buy a new car, anyway?

“Cash for clunkers” gets a $2 billion boost, John Crawley, Reuters, August 7, 2009

Published or updated August 7, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by .

{ 17 comments… read them below or add one }

avatar Paul

Yes, I bought a new car using the C4C program, even though I think the program itself is a bad idea. (I suppose that makes me a huge hypocrite).

I was looking to trade in my 96 Jeep Grand Cherokee which had over 225,000 miles on it back in May. Then I heard about the cash for clunkers law that was being debated in congress so I held off on buying until the law was passed (and prayed that the Jeep’s transmission would hold out until then).

So, I was already going to buy a new car, the C4C program just changed the time frame of my purchase. I suspect that many other C4C buyers acted similarly. If you were even thinking about buying a new car this year, it’s hard to turn down the government’s offer to give you $4500 to do so right now.

But, I still question whether this will actually help car sales long term. I am inclined to agree with senator Shelby; all this program likely did was compress several months worth of buying into a few days. Even the couple in the NPR article who say they wouldn’t have bought if not for C4C would probably have had to to buy a new car sometime in the near future, since they admit it had broken down on them. Thanks to C4C, they purchased a new car this month, but that’s one less car purchase that will be made in the next year or two.

Will we see a sales slump after C4C ends, since everyone who was thinking of trading in a guzzler has already done so, and those who don’t have a qualifying clunker may defer their purchase to see what the requirements are in the next round of C4C? That’s one of the problems with rebates like these; buyers get used to the rebates and learn to hold off purchasing until a good deal comes along.

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avatar Kirk Kinder

Paul is right on the money here. I think it is great for him personally as he was in the market to buy a car. However, I have seen several stories from dealers and salesman, and they say the people doing this deal were not in the market before C4C. So, the government basically took people who probably could only afford a clunker and got them a new car payment. Great for the auto industry, but it increases the consumers debt. It also affects other industries as these folk now have less to spend on other items such as vacations, clothing, dining, etc.

The Auto industry is trying to say there was a huge pent up demand to buy cars, and the C4C unleashed it. Total hogwash. Most people own cars with a trade in higher than $4,500 or $3,500, and these people aren’t buying in droves. This is bringing in folks who knew their cars were effectively worthless as a trade in. All this does is pull future demand to the present, and probably does it at a time when these people can least afford it. Plus, this is being subsidized by other taxpayers. Granted, it is through debt now, but eventually we have to pay this debt back. So this is nothing more than buying something we can’t afford at the present. Substituting present investment for consumption.

For Paul, it was perfect timing, but for most, it probably isn’t. The key decision is if you werent’ in the market for a new car before due to expenses or having a vehicle that is running well, then don’t jump on this program. If you need a new car and own a clunker, then take advantage of this deal.

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avatar KC

Time will tell with this program. One of the reasons for the program was to get less fuel efficient vehicles off the road. So measuring the results of that goal is going to take a little time. We know we’re putting more efficient vehicles on the road, but will this make much difference in energy use? And if so, how much of a difference? We can’t really measure that yet.

I read in my local paper that some used car dealers are offering similar incentives – $1500 off the price of a used car if you trade in a clunker. In other words it uses the same guidelines as the C4C program as far as the vehicle you trade in and the used one you purchase. Obviously the used car dealers aren’t going to destroy the clunkers. But the success of this program is going to spur some offshoots and may just be the shot in the arm the car industry needs.

I also found it interesting the top 10 cars being purchased in the C4C program – #1 Corolla, #2 Focus, #3 Civic, Prius, Camry, Hyundai Elantra, Escape FWD, Dodge Caliber, Honda Fit, and Chevy Cobalt. Although many of these cars are imports, most are made here in the states.

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avatar karenc

Cash for clunkers is bad for charity car donation becuase people that would have donated their car to charity are now turning them in for a voucher. The flood of cash for clunkers cars at the scrap yards has drastically decreased the price of scrap metal. When a charity gets a junk car donated, they are getting less money for it. As a result, charities are taking a hit on two fronts.

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avatar *flash*

Cash for clunkers gets a few smoky old clunkers off the road, but very limited. Especially age of a trade-in vehicle. CA. has a smog test which allows older cars to avoid testing. C4c will not get these older smoggers off the road, so many of them become daily drivers; cheaper to run with no tests/restrictions, lower insurance, no payments owed. Interesting how this program will work out in the long run- but I am very wary of a backlash when money runs out..

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avatar ST

Brought a 2010 Corolla with C4C money, Wrote a check for the Balance amount. Was going to buy a small car anyway. If there is not C4C money, I probably will drive my 97 Plymouth Minivan until it die. Blue book value is for my van is $ 1,300. I miss my roomy minivan. on the other hand I save lot of gas money !

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avatar Erica Douglass

Smithee, you have some smart readers on here. The first two commenters are particularly prescient. Like them, I’m not clear on what the couple featured in the article would have done differently had C4C not been around. They probably would have bought another car later — which is exactly what most economists are trying to say.

This is the broken window fallacy at its finest — a Keynesian debacle which will most likely sink car sales for the next 6-12 months after it expires (and possibly more.) Here’s an explanation, straight from my favorite economics book, Economics in One Lesson:

http://jim.com/econ/chap02p1.html

-Erica

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avatar Matt

I agree that this probably made a lot of people buy cars now instead of waiting, but the problem with the economy is that no one is spending right now. A lot of companies are having cash flow issues and therefore cannot support their payroll and laying people off. The hope is that this program gets people buying now, while an improved economy helps the industry later. It’s not some kind of fix that will magically make the car industry all better, but it definitely helps the flow of money. Not to mention that all these new owners will get the boost of keeping some money in their pocket instead of their fuel tank.

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avatar Bible Money Matters

I don’t see C4C having a huge impact beyond getting some people to move up their purchase time frame by a few months – and a few more maybe buying instead of waiting until their cars died. I’m not sure the program will have any real stimulative effect.

Alan Greenspan said as much this week.

The former head of the Federal Reserve gave a thumbs-up to the cash for clunkers program but said Sunday it is popular only because the economy was on its way back up and not because it was stimulative.

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avatar Trees Full of Money

I wrote an article on my blog about the C4C and how I feared it was setting thousands of families up for personal bankruptcy.

http://www.treesfullofmoney.com/?p=810

People driving around “clunkers” either have no car payments, or a very low monthly payment.

If they jump on the C4C bandwagon because they feel the deal is “too good to pass up” they will increase their risk exposure by assuming more risk.

Even though the economy is “recovering”, this may not be the best financial move for some people at this particular time.

Maybe I’m underestimating the financial savvy of Americans, but my gut tells me that at least a few of the people taking advantage of this program are going to regret their choice “down the road”.

I hope you people enjoy driving around my tax dollars! HA!

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avatar troy

cash for clunkers sucks. very little good, and lots of bad. and poorly thought out.

Here is a better idea. Rather than incentivizing people to buy brand new cars they don’t need with cash they don’t have to get into even more debt which cause this in the first place, congress, if they couldn’t control the 3 billion dollar hole burning in their pocket could have done the following.

Allot that $3billion to where it matters. Peoples homes, and notable their mortgages are far and away their biggest debt and liability. Give 3$B to the federal reserv to the mortgage backed security asset buying program, and immediately watch mortgage rates drop to 3%.

This is true. The fed announced $1.25B or mortgage security backing in December and rates dropped from 6% to 4.75% literally overnight. triple that number and guess what mortgage rates do.

Hello 3% 30 year fixed. Imagine what that would do to peoples finances. IT would help them LOWER debt, LOWER payments and keep good running cars on the road.

It would spur homeownership. Increase household discresionary income, thereby allowing people to spend more on other things.

I should be president.

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avatar Rick

Troy, don’t forget the long term aspects of the Fed program. Hyper inflation.
That’s not a joke. The Fed has doubled the amount of actual cash floating in our economy and they are hoping it will be spent in “non inflationary” items like hard assets. But even if it is, eventually it has to wind up somewhere – either in the bank where it will lower interest rates and spark the very result you hope for – and ignite massive debt and spending. Or it will be spent on goods and services, yielding price increases.

Do you realize that long term Treasuries are still above 4%? If this program really worked, long term Treasuries would be down at 3%, as you suggest are needed….but they won’t because investors in bonds REALIZE inflation is coming and are hedging in long bonds. It’s known as the “carry trade” – borrow short to invest long. The problem is it increases debt…which is what we are needing to reduce.

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avatar Rick

I have not participated – YET. But if the government is giving free money, I guess I should take it. Well, at least my wife thinks that way.

Here’s why Cash for Clunkers is bad:
1. All the cars MUST be destroyed. Many still have economic utility to someone. Someone is always willing to pay $1,000 for a lousy car that gets lousy mileage – and it makes economic sense for them to do so. Scrapping them is economic waste of a HUGE kind.
2. Most people trading in are like me. I have a car that is 14 years old, gets about 15 mpg, but costs only $1,200 a year to keep on the road. It’s in relatively good shape. The “gains” of trading it in are non-existent. Except that if I don’t, and wait another year, I won’t get $4,500. Then again, it may only cost me $1,500 a year to keep it running for 2 more years – still a value. As it stands, even with $4,500, I will be paying $3,000 a year in payments…not enough savings from mpg gains.
3. The $1bb spent is for cars that would be mostly trade ins in a year or so (like me). So, it’s only speeding up a process that’s happening anyway. That means we are paying about $1bb for 50,000 extra cars to be traded in. Basically, with each $1bb, we’re buying 50,000 people a new car….a tremendous waste of tax money.
4. This sped up process will cause an elimination of inventories (a good thing), but speed up inventory replenishment in the hopes of future sales which will not come (a bad thing). It’s a long term money LOSER for the auto manufacturers – they just haven’t figured it out yet.
5. Green gains are virtually nil. Since most cars are due to be traded in anyway, the gains made are temporary at best. It’s not a real green thing – besides, think of all the scrapped cars that are going to be polluting the landscape…..
6. Insurance payments will go up for everyone trading in. This imposes a much larger economic burden than the politicians realize right now…..this will hurt the economy.

But….I’m still taking part. Free money is free money. This program rewards the terminally stupid. I hate to say it – but since there is a SLIGHT chance my car may break down in the next 2 years, the money makes it worth it for me to be economically stupid.

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avatar Randy

I’ve been watching the program closely. I have a true clunker (no AC, broken mirror, other broken parts) that doesn’t qualify because it gets 20mpg (according to the website). It’s my son’s, if I could participate, I’d buy my wife a new car and trade her’s down to him.

I’ve posted twice on my blog about the program, once when it started, once when it was extended. One of the things I found in researching the program was that it was tried in several countries in Europe. It always resulted in a drop after the program ended. Also, the intent (orginally) was to improve gas mileage, but customers really don’t care about economy, new truck and SUV sales are up. Toyota shut down a Prius plat even before it opened. The program only requires a 2mpg increase for trucks and SUVs, 4mpg for automobiles.

There should have been no reason to extend the program, it had already met the goal, it spent $1B. And there’s no hard evidence on what was actually bought/sold for that $1B.

Here are the links to the subject on my blog…
Extension post – http://newfromclt.blogspot.com/2009/08/cash-for-clunkers-continued.html
Original post – http://newfromclt.blogspot.com/2009/07/cash-for-clunkers.html

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avatar SPT

I’m a graduate student about to embark on a year of clinical rotations throughout my state. My old car had some major maintenance/repairs looming that would have cost more than the value of the car (~$1200). I need reliable transportation for these clinicals, so I jumped on a $4500 CARS rebate and walked away with a much more reliable and safe car that’s twice as fuel efficient and will last me *many* years. I don’t see how that was a “stupid” decision, financially or otherwise. They’re my tax dollars too, and for once I can benefit from them!

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avatar Jon

If the governments goal is to reduce emissions, wouldn’t a more effective plan be to give away free windmills or solar panels with the billions allocated to C4C? In this case we could reduce emissions, stimulate the economy, and not waste perfectly good vehicles in the process? There’s plenty of questions about whether C4C will work out in the long term. It just seems much less wasteful and accomplishes the same goal to reduce emissions, to give away free windmills.

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avatar Anonymous

Cash for clunkers has greatly reduced car donations to charities. When the program was first discuss, politician were asked to have the c4c cars go to charity and allow them to determine the best use for the cars. Cars in bad condition would be junked. Those in good shape would either be sold or given to the poor. Our concerns were ignored.

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