Cash For Clunkers – What it is and How it Hurts the Poor

CARS – The Car Allowance Rebate System , or the recently revised name of Consumer Assistance to Recycle and Save program, known affectionately as “Cash for Clunkers” by the majority of Americans seems like a great idea at first blush. After all, it can get people in the hard hit auto industry working again, by helping new cars find homes. It has experienced plenty of takers, despite some trepidation among some dealers who are wondering if their deals will really go through or not. Now the program has exhausted its funds, and is waiting on Congress to authorize more billions.

How can the cars for clunkers program possibly hurt poor people and the environment? Wouldn’t the government credit help the poor buy a new car? Doesn’t getting the “clunkers” off the road help the environment?

First, the poor, and in many cases the not even poor. CNW Marketing Research in Oregon estimates the average price of a used car in the U.S. was about $9,000 at the end of 2008. In this current economic climate that is simply out of reach for many people, poor and otherwise.  This is especially true if people are trying to do the responsible thing and keep from becoming hopelessly indebted., something all too easy to do when buying a car.

Thankfully, if one needs reliable transportation there are plenty of solutions far below that figure….for now. Due to the vastly increased quality and reliability of vehicles manufactured over the last 15 years, a car with 80,000, or even 120,000 miles on it may still have plenty of commutes left in it.

That’s where CARS could actually end up hurting the poor.

Here’s how the cash for clunkers program works:

・    Qualified consumers may participate in the CARS Program between July 1, 2009 and November 1, 2009 or when authorized funds are no longer available.

・    Qualified consumers will receive a credit of $3,500 or $4,500 for an eligible trade-in toward the purchase of lease of an approved vehicle under CARS Program.

・    Qualified consumers will receive the $3,500 or $4,500 credit at the time the purchase their new vehicle.

・    Dealers must provide consumers with any other advertised rebates or discounts in addition to the credit they receive through the CARS Program.

・    Consumers should expect to conduct their deals at their dealership of choice, not on the Internet.

・    Consumers should expect the dealers to provide their best estimate of the scrap value for their eligible trade-in vehicle. Dealers are allowed to deduct $50 from this value for their administrative costs.

・    Consumers should expect that all information collected through the CARS Program will be kept confidential. Social Security numbers are not required for a CARS transaction.

What vehicles are eligible under the cash for clunkers program, and how does the dealer get their money?
・    Your vehicle must be less than 25 years old on the trade-in date
・    Only purchase or lease of new vehicles qualify

・    Generally, trade-in vehicles must get 18 or less MPG (some very large pick-up trucks and cargo vans have different requirements)

・    Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in

・    You don’t need a voucher, dealers will apply a credit at purchase

・    Program runs through Nov 1, 2009 or when the funds are exhausted, whichever comes first.

・    The program requires the scrapping of your eligible trade-in vehicle, and that the dealer disclose to you an estimate of the scrap value of your trade-in. The scrap value, however minimal, will be in addition to the rebate, and not in place of the rebate.

You’ll notice that vehicles submitted under the cash for clunkers program are required to be destroyed. They must have the engine disabled. Initially congress called the number associated with the vehicle’s destruction, and I’m not making this up, the “End of Life Vehicle Solution” number. Evidently some members of Congress though that sounded a bit too Nazi Germany, and with good reason. That nomenclature has since been replace with the more benign term “NHTSA Disposal Facility ID”

The engine destruction and vehicle salvage requirement potentially causes hundreds of thousands of good, used vehicles to be removed from the used car marketplace. Those a just the cars that people who can’t spend $9,000 for a new car would be in the market for. Anyone who has taken basic economics can tell you that when you reduce the quantity of a good supplied without reducing the quantity demanded, the price of that good will increase. So in this case you have thousands of good, used vehicles that can not be sold, but you have not reduced the number of people who want to buy these vehicles. That means that the price of the vehicles must increase.

If you have an older vehicle it gets even worse. In many cases folks that own these vehicles work on them to keep them running. Used parts, such as engines are often employed to make this happen. The supply of such used parts will also be reduced, because not only will the vehicles be off the market, so will their parts. Again, lower income people get screwed by the very government that is ostensibly out to help them.

Need a good , reliable vehicle to get the kids to school or practice? How about a Toyota Previa minivan? A 1994 Toyota Previa is hardly a clunker, yet it’s just the type of vehicle that will be snagged by the program, due to it’s 17mpg EPA combined rating. That is the new rating. The EPA changed their fuel mileage ratings a few months back and most of the figures were revised either up or down a few MPG. The Toyota’s average retail sale price, according to Edmunds is $2,700. Just the ticket for reliable, family transportation and a bargain price.

Maybe you need a good, used pickup truck for work. A 1996 Ford F-150 XL 2dr Extended Cab long bed with a 6 cylinder would be a great work truck, and again, hardly a clunker. Edmunds lists the average dealer retail price for one at about $2,700 and change. It would be reliable and give plenty of service to get you and your tools to the job site and back every day. Unfortunately, such vehicles will become harder to find and more expensive as a result of the CARS program.

Let’s see, fewer yet more expensive good used vehicles, and fewer yet more expensive good used parts with which to keep them running. That doesn’t sound like a program that is out to help the poor and other folks that don’t want to buy a new car, but still need good, affordable transportation.

So, how does the Cash for Clunkers program hurt the environment? It would seem that removing a resource (in this case vehicles) and requiring it to be replaced by a new resource cannot always have a net gain. No matter the extent of the recycling or the efficiency of the operation, you are removing a functioning resource and replacing it with a new one that required manufacturing.

In many cases these are not truly clunkers, either but good cars and trucks whose only sin was that they got less than 18mpg combined. If they were replaced by vehicles that got 23mpg, would that really help the environment once you take into account the loss of having to produce an entire, new vehicle to replace them? Forgetting for a moment the whole debate about weather or not taxpayers should help their neighbors buy a new car, how much gas can you save and how much does that help the environment?

If the old cars got 17mpg, and assuming they would have been driven for 75,000 miles after the  time they were destroyed, how much gas would that save? 75,000 / 17mpg = 4,412 gallons of fuel. 75,000 miles / 23mpg = 3,260 gallons of fuel. That means the fuel savings per transaction is 1,152 gallons. If fuel costs an average of $3.50 a gallon over that 75,000 miles the average consumer saves $4,032 in fuel.
In order for the environment to realize a savings, the environmental cost of the transporting and scrapping the old vehicle and manufacturing and transporting the new one must be less than the environmental cost of burning the 1,152 gallons of fuel.  That sounds like a nebulous proposition.

The program does help the auto industry – Good
The program hurts poor and low income Americans who need transportation – Bad
The environmental impact is not as easy to calculate.

5 Responses to “Cash For Clunkers – What it is and How it Hurts the Poor”

  1. I probably fall in the ‘poor’ category because I could not buy a new car. My car is a 2001 and in pretty good shape. The car before it I kept over 10 years and that was in a better economy when I was earning over 100k. I keep cars a long time and think that getting them off the street is actually a good idea. Technology advances make new cars cleaner – we should just figure out a good age at which this is a good policy.

  2. Agreed. Other problems:
    – Cars artificially increases demand in the short term, thereby giving (yet another) false positive economic recovery signal. When this signal vanishes form the radar 2 quarters from now COUPLED with those same buyers having been removed from the market, the pain will be huge.
    – The demand for environmentally friendly cars 2 years from now will be higher, thereby making the cars far superior to currently purchased cars yet all of the buyers for CARS will not be able to take advantage of these next-gen vehicles because of their recent purchases.

  3. This post doesn’t take into account another possible problem with the CARS program; the incentive for people to go into deep debt financing a depreciating asset, their new car. With the problems experienced by the credit industry recently, one hopes that dealers, banks, and finance companies are looking at credit apps more stringently than in years gone by. Hopefully stricter credit terms will prevent borrowers from getting themselves into financial trouble yet again.

    If the new, $2 billion extended cash for clunkers program is approved, it will end up removing approximately 500,000 used cars from inventories in the U.S. That’s sad for people that could have used just such a vehicle, weather for a good work truck, or family transportation, yet could not afford or did not want to purchase a new car. People commenting on other cash for clunkers related stories have said “Just check the classifieds for a good used car if you need one”

    What they fail to realize is that as a result of this program there will be fewer good, relatively inexpensive vehicles to choose from, and those that are available will be more expensive. Way to help out those without the means or desire to buy a new, or more expensive used car!

  4. michael

    Typical Obamanomics for you. The champion of the poor, the defender of the underprivileged, the hero of the helpless (aka the lazy, sittin on their butts not getting jobs cuz welfare pays more)! He has jumped into the clunker program without sound scientific data, without any forethought of the consequences of the program, with no clue of what he is doing…oh, that’s what he’s been doing since January 20, 2009! Number 1, the environmental footprint of all of everyone of the clunkers has long since been reduced to irrelevance compared to a new car. New cars are something like 65% plastic (a petroleum product) and they are designed to last a long time. Figure $3 billion will put about 750,000 new cars on the road. If they all last an average of 100,000 over their life (say 7 years) they will burn about 3,000,000,000 galons of gas or about 158,000,000 barrels of oil. Now is that environmental responsibility? Is it physcal responsibility? No and No! OH and by the way…NOBAMA!!!. But before you start complaining, ask yourself, “Did I vote for him?” If you answer yes…then shut the heck up! You got no right to complain. As for me…I didn’t vote for him and unless Britney Spears were his only competition, I’d never vote for him…oh dang, who am I kidding? I’d never vote for him even if she were running against him! Anyway, let’s not lie to everyone Blowbama…this was not about fuel economy, the environment, or anything else to do with anything like that. It has everything to do with trying to get GM (aka Government Motors) back to selling cars and letting Obama get a return on yours and mine investment into the company. Yeah, you know we pay to keep em in business, now the government owns 70% of GM even though you and I bought that 70%. Of course we will never see a dime from our investment. Another Blowbama Obamanomics move. Anyway, just keeping telling yourself…”There’s no time like 2012; there’s no time like 2012!” Either the world will end according to the Mayan calendar or Blowbama’s world will end with the demise of the Democratic party!

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