By on June 18, 2009

The so-called “Cash for Clunkers” legislation demonstrates everything that’s wrong with a political process playing in the market arena.  It’s legislation that will do little to improve car sales. But it will drive traffic to dealers—mostly credit bandits scurrying around trying to buy new cars they can’t really afford.

There is one fundamental issue which restricts the usefulness of either the House version or the Senate (Feinstein-sponsored eco-version) of the legislation. Simply put, many current owners of low-value vehicles are unlikely to possess the resources to acquire outright for cash or qualify for financing on a new vehicle. Such owners are typically used car buyers, not new car buyers, and are likely the second, third, or later owner of said vehicle.

The benefit of the voucher diminishes as the value of the new vehicle increases (on a percentage basis), so customers with larger passenger vehicles or trucks looking to buy new of comparable size receive less perceived value from the voucher.

And worse, the value of the voucher limits qualifying vehicles to those which have an actual cash value (ACV) below the voucher value and also have EPA combined mileage rating low enough to meet the required mileage threshold gain or the limit to qualify in the first place (18 mpg for passenger cars in HR2571 or 17 mpg for all classes in the Feinstein bill).

The combination of these two factors limits the pool of vehicles to mostly older large passenger cars, SUVs, and trucks. Smaller vehicles, such as more recent vintage Honda Civics and Toyota Corollas, would not qualify for vouchers, as their combined mileage rating exceeds the maximum threshold value already in either bill and are likely worth more than the voucher anyways.

One key provision is that the vehicle traded must be owned and insured by the current owner for at least one year and must be in “drivable condition.” This will limit the formation of a “secondary market” of voucher-eligible vehicles and hence will not raise the minimum value on clunkers sitting on dealer lots. (It cannot be assumed that everyone will be honest and it’s not far fetched to believe that there will be fraud on the ownership requirements.)

The one category of vehicles that will likely gain the most from this program: the compact truck segment, such as the Ford Ranger, Toyota Tacoma, Nissan Frontier, and, perhaps, the Chevy Colorado. The base models of these vehicles tend to be relatively inexpensive, with four-cylinder engines. Owners can maximize the value of the voucher on a percentage basis on a price basis, especially when manufacturer rebates and dealer discounts are included.

And the maximum voucher could be obtained by buyers coming out of larger engine passenger vehicles (such as an old Monte Carlo) trading for a new light truck to gain the bigger mileage boost to qualify for the biggest voucher.  These buyers need transportation (and financial assistance) in order to get a new vehicle – and the type of vehicle may be less important to them.

While this “cash for clunkers” program appears to be successful in Germany, there are other factors at work there. For example, small cars are more prevalent in Europe than in the USA (due to energy costs). Then there’s the qualifying restriction; it’s simply based on vehicle age: nine years or older. And the fact that the rebate is equivalent to the German VAT paid on smaller mass-market cars. Many manufacturers also matched the government rebate, making lower cost vehicles even more affordable. [NB: larger vehicles, particularly in the luxury class, saw very little benefit from the program.]

The net benefit of this program will not necessarily come from sales of new vehicles, but rather a government-sponsored marketing effort (courtesy of the news media and dealer promotion) to drive traffic to new car dealers.  Without a doubt, owners of low value vehicles of any type will consider exploring a new car purchase in response to the hype of vouchers providing a minimum value on their existing vehicle. But most of them probably can’t qualify for financing (and don’t have the cash anyways), so they’ll either leave disappointed or end up driving home in a newer used car.

All in all, don’t expect the proposed Cash4Clunkers legislation to create a big boost in U.S. new car sales. It’s just a promotion by the government to make it look like it’s a good thing for the environment and the economy.  But what’s really scary: it foretells a future where the government will really start to modify our taste for fun, powerful (but less fuel efficient) vehicles through coercive taxes and penalties—while promoting Pelosi-cars through government giveaways.

The Senate should kill this wasteful legislation now before things really get crazy. May I suggest you call yours?

Get the latest TTAC e-Newsletter!

42 Comments on “Editorial: The Truth About Cash for Clunkers...”


  • avatar
    97escort

    Before things get really crazy? They are really crazy already. Two major automakers in bankruptcy, cars sales down 30-40%, dealers being dumped right and left, gas prices rising again. Isn’t that crazy enough?

    Does anyone here think that the 50% owner (or more) wouldn’t have a promotion to move the metal?
    What’s the point of a bailout if there aren’t enough sales to make for a going concern?

  • avatar
    210delray

    I agree it’s wasteful legislation and deserves to die. Is that ’64 Olds for sale? Brings back memories!

  • avatar

    97escort

    In for a penny, in for $200 billion?

  • avatar
    Ronman

    so if someone say has a Geo Metro, falling apart, and wants to trade in for a motorcycle, can he do that? or it doesn’t apply to bikes?

    the American version of cash for clunkers seems more complex than the German one, and Ken…you just brought up the complexity

  • avatar
    RayH

    But most of them probably can’t qualify for financing (and don’t have the cash anyways), so they’ll either leave disappointed or end up driving home in a newer used car.

    If I can’t use the $3500 or $4500 I was entitled to get for my $200 automobile toward a brand new car, I’m feeling pretty dang disenfranchised. Jesse Jackson or the ACLU will be called depending upon my respective race.

    I tend to disagree this program is targeted/ most beneficial toward deadbeats (at the moment, at least). Many families I know have cars like this that would qualify, be it a child’s car, dad’s old car, the weekend worktruck beater. At least half of my father’s friends have cars that qualify that they bought new. They didn’t get enough for it at trade in time, and wouldn’t you know, they still drive it to Bob Evans.

    And the maximum voucher could be obtained by buyers coming out of larger engine passenger vehicles (such as an old Monte Carlo) trading for a new light truck to gain the bigger mileage boost to qualify for the biggest voucher.

    EVERYONE with a older Monte thinks it’s worth more than $4500. That primer makes it ready to accept whatever color you want it!

  • avatar
    JSForbes

    “But what’s really scary: it foretells a future where the government will really start to modify our taste for fun, powerful (but less fuel efficient) vehicles through coercive taxes and penalties – while promoting Pelosi-cars through government giveaways.”

    I fail to see the problem with this. An incentive system is by completely voluntary; there is nothing stopping you from buying the high performance car of your dreams.

    If it does not work and no one uses it the money does not simply vanish. If it does work the program can be expanded.

  • avatar
    grog

    From a personal greedy standpoint, I love this bill.

    But I note that people from both sides of the political spectrum outside of Congress see this bill for the stinky turd that it is. Okay, wildly different reasons for why it’s a turd but, that’s telling.

    I keep saying, any bill that won’t let my cubicle neighbor get rid of her POS 01 Aztec ain’t no Clunkers bill.

  • avatar
    Pch101

    it will drive traffic to dealers – mostly credit bandits scurrying around trying to buy new cars they can’t really afford.

    That is only going to be an issue if credit is freely given to everyone. These days, that isn’t happening. We’ve gone from having an oversupply of credit to a credit crunch. The broke and down-and-out won’t be able to get financing.

    don’t expect the proposed Cash4Clunkers legislation to create a big boost in U.S. new car sales.

    I don’t know why anybody would. The number of sales that would qualify is too low to make much of a difference.

    If you crunch the numbers on this, it would appear that it would have a positive multiplier effect (the tax revenue lost would be lower than the benefits.) It’s an indirect bailout of the industry, the dealers and state governments, who each get something out of it. It’s not meant to save the universe, but is just part of a larger effort to kick start the economy. Overall, it’s fairly small, and will be more of a base hit than either a home run or a strike out.

  • avatar
    Robstar

    I’d love to know if I can

    1) Get credit for an 89 chevy blazer
    2) Use said credit to buy an $10k street legal completely electric motorcycle….anyone?

  • avatar
    Steven Lang

    I’ve already offered two versions of a ‘Clunker Bill’ that would be far better than the current one.

    Here’s a third.

    1) Extend the current period of ownership to three years and have the incentive run out by June 1, 2011. This will eliminate much of the fraud and glorified susbsidization that the ‘Clunker Bill’ currently offers to those who can now simply buy and flip a rarely used clunker.

    2) Extend the ‘improvement’ portion to at least 10 mpg if the daily driver currently gets 20 mpg or less, or 7 mpg if the current driver has a 21 to 25 mpg rating.

    3) Mandate that the person must keep and drive the vehicle for 10 years and/or 100,000 miles, or lose the subsidy.

    4) The dealer does not get the trade-in. Period. The trade-in is instead given to an auto salvage company (Copart would be a great partner in this) who then can generate the needed paperwork and check for the transaction. This way the vehicle is guaranteed to be scrapped. It’s already on location which eliminates transportation costs. And it allows no manipulation of the current laws.

    I think this would work…

  • avatar
    MisterB

    The current bill is way too complicated to be effective in selling cars. One would have to be a poor person driving a big car or truck to benefit. How many people driving a clunker can aford a NEW car? Very few. (The one scenario that I see is the teenager clunker that the middle class family owns.)

    This bill is intended to “do something” without costing the government any real amount of money. Political factors were paramount. The limit on mileage is to be eco correct. The limit that the same owner had the car for 12 months is to prevent “the wealthy” from participating. (Wealthy is anyone middle class and above.)

    Washington liberal are of a split mind here. They want to save (UAW) jobs but they don’t like autos and really don’t want to sell more autos. In their ideal world, we average people would all take the train or bus to work and not destroy the world with our cars. (The rich and the liberals have always resented the fact that us regular folks are clogging up the highways and slowing them down in their own cars.)

    A general government rebate of $3,500 on all new cars would truly move cars and help the economy. This would have been a very good use of the stimulus bill money. I don’t see that happening.

  • avatar
    Airhen

    I wonder how many more federal jobs this is going to require to manage? Oh the joy… more government workers to pay for.

  • avatar
    xyzzy

    to 210delray who wrote:

    Is that ‘64 Olds for sale? Brings back memories!

    It might be but delivery could be a problem. Look closely at the license plate.

  • avatar

    Am I correct in assuming that under the current proposed program that since the older vehicle must be scrapped that the trade in value of the vehicle must already be almost nothing. I mean how many people driving cars worth almost nothing can afford a new vehicle even with a voucher. In my opinion there are two types of people driving cars worth almost nothing. Ones who are smart and cheap and ones who are poor. I don’t think this program will do much to improve sales.

  • avatar
    skor

    I stopped buying new cars in three year cycles some time ago. Now I buy a new car, or clean used, and drive it until the wheels fall off.

    I currently have two old cars, a 92 Mazda with 200K miles on the clock and a 96 Caddy with 70K miles.

    The Mazda is registered inspected and insured, but it doesn’t qualify for the Cash for Clunkers Program because the combined mileage of the car, when new, was 24mpg. I would trade this car for the $4,500 credit, but the gov doesn’t want it.

    The Caddy only gets used for family trips. It’s almost as new condition, and I could probably get more money for it I sold than if I exchanged it for the gov credit.

    Because of all the restrictions, I doubt this program will help anyone except corporate swindlers who will come up with some loophole that they can exploit.

  • avatar
    wsn

    If the bill is not as complex, it would be more fair. If it’s fair, it won’t help D3.

  • avatar
    xyzzy

    Sherman Lin wrote:

    I mean how many people driving cars worth almost nothing can afford a new vehicle even with a voucher.

    Or people can cash in on their beaters. For example I was contemplating how I could do a 3-way deal to upgrade my Miata to a new one by trading in my 1987 Dakota with about a $500 book value using cash for clunkers on a new Miata and then selling my current Miata privately and paying down part of the loan with the proceeds.

    But turns out my Dakota doesn’t qualify, it’s rated 19 mpg combined and I probably wouldn’t have done it anyway because the marginal value of upgrading still wouldn’t be worth the post-voucher cost.

    But it is an example of the kind of machinations you’ll see with Cash for Clunkers. People will find a way to squeeze that value out of their beaters.

  • avatar
    ray_g

    This could be useful to folks like me, who buy a vehicle and keep it at least 10 years. I currently have a 1993 Jeep Cheroke with 140000 miles, which I bought new. According to the blue book, if it was in excellent condition (which it is not), I might get $1100 on a trade in. According to the EPA web site, it’s mileage rating qualifies it for this program. So, if I could get $4500 credit for it I’d go get a light truck, e.g. Ford Ranger, today.

    Problem is, I think the number of people in this situation is pretty small.

  • avatar
    John Horner

    I think the idea is to get people like ray_g to pull the trigger now on a new car instead of waiting a few more years.

    The vehicles likely to get scrapped under the proposed bill are the hordes of Explorers, Cherokees, Blazer and such which sold oh so well in the 1990s. Ten year old Silverados and F150s are likely candidates as well. These thing have a market value of almost nothing now, sold by the millions and yield a bunch of scrap metal when crushed.

  • avatar
    Vash

    I think the no.1 problem with this bill is that it assumes that all cars get the same mpg when they are old that they did when they were new. Your old civic may have gotten 28mpg, but when the rings are worn out it might get 16mpg.

    Of course, actually testing each clunker might prove expensive.

  • avatar
    Gunit

    If ‘cash for new’ is such a good idea why doesn’t the government do it right across the board? Got anything old? A house, clothes, furniture, the govt will give you credits so you go buy something new. And while your at it stop recycling, your taking jobs from all those people mining, drilling etc. for natural resources. Consume, consume, consume, that’s the answer!

    And the argument that it reduces pollution doesn’t hold water, when all things are factored in creating a new vehicle is much more pollutant than running an old one.

  • avatar
    Prado

    Sherman Lin wrote: I mean how many people driving cars worth almost nothing can afford a new vehicle even with a voucher.

    One scenario I can envision is where the car makers offer short term leases on entry level cars…maybe 18 – 36 months. With a $4500 down payment, the lease payment could be in the $0 to $100 dollar range.

  • avatar
    Waiting2Trade

    This will help new car sales and the manufacturing industry (JOBS). Our daughter drives an older SUV (15 mpg) and I would very much like to trade it for a newer more fuel efficient vehicle. But when you go to trade as you well know you don’t get much for your trade with having an older car, making it discouraging to want to buy a new car. I don’t mind owing more for a reliable car that will be under warranty. It will give me the peace of mind knowing she has something reliable to drive back and forth to college in. I do know people are WAITING for this to pass and by WAITING it only hurts car sales even more. That’s why its so important to get this passed as soon as possible. It worked in Europe to stimulate the economy it will work here too. Its ok to give billions to bailout various banks, insurance companies, car companies, etc. its time to help out the American people now. It passed overwhelming in the House ,now if only the Senate will get it together. The President’s for it and the American people are too. This needs to be done A.S.A.P.

  • avatar
    ConspicuousLurker

    Is the taxpayer getting it’s dollar worth with this legislation? I don’t think so.

    Yes, the market for new vehicles is in the toilet. Could it be because the market is saturated? Why not let the market recover by letting some of the older vehicles fall to attrition.

    Oh, because certain automakers and dependent industries will fail in the mean time? And with this Cash4Clunkers program, they won’t?

    It’s a drop in the bucket that’s going to cost us, as a society, a lot more than we’re going to gain.

    When this economy rights itself, it’ll be because it dumped the excess capacity, the inefficiency, and the obsolete. Propping those elements up only delay the recovery and cause more harm.

  • avatar
    ragtopman

    Waiting for the government to act is hurting sales right now.

    Just another example of government meddling (or the announced intention to do so) harming the private sector.

  • avatar
    George B

    I suspect the unintended consequence of Cash for Clunkers is newer cars on high school parking lots. The vehicles that would qualify are well worn 90s SUVs that were handed down to teenage children. The middle class family sells the old SUV, buys something new, and the kid gets a newer school car.

    Saw many potentially qualifying vehicles driven by Mexicans here in North Texas. If the stereotype is correct, many of these vehicles will not qualify due to the insured in the prior year requirement.

  • avatar
    fredtal

    I can’t see how I could take advantage of this program, to that end, I’d like to see the numbers after a few years of this programs existence. What folks traded in and what they bought. Yea I have to agree with most here, it’s a waste of government.

  • avatar
    capdeblu

    I really wish the US would go with the Europeon version of this bill. Where any older car is included.

    For example I have a 1995 GM car with a V6 as a weekend car. Under the current bill this would not qualify as a clunker because it gets 20mpg. As anyone knows a 1995 GM car is most certainly a clunker.

    And I am getting anxious for a new Japanese model.

  • avatar
    Old Guy Ben

    Kelly Blue Book trade in for my Civic is $300.

    It still gets around 30 mpg.

    I can’t see trading it in and making payments again.

  • avatar
    bomber991

    I think most people here are missing the target audience of this cash4clunkers bill.

    The idea is that you’re a consumer that likes to purchase new cars and then keep them for 10 years. After 10 years it’s safe to say that you’re $20k car is probably worth less than the $4500 the clunkers bill would give you. Money’s tight, so maybe you think you’ll just try and hold onto that car for another year or two. I mean, why would you want to trade in your running car and get $1 to $2k for it on trade in? Now you can trade it in for $4.5k off of that new car you wanted.

    Let’s just look at a real life example of a non-poor person this bill would have helped, my dad. He bought a brand new 1997 Dodge Ram. Fast forward to 2006, gas is $3 per gallon and he has a 50 mile commute everyday. (wasn’t always a 50 mile commute but changed into one in 2005) It’s a dodge so it’s been dripping oil and dropping grease everywhere for the past year or two. Time to get a new car or truck. He ended up getting a Prius, and I think he only got something like $1.5k for trading in his truck. With this bill he would have gotten $4.5k for his truck, right?

    If I remember right, the economy was doing a lot better in 2006 than it is now in 2009. So other people facing the “Keep the old car and repair it or buy a new car” delima are probably thinking about just keeping the old car since they won’t get much for it on a trade in.

  • avatar
    long126mike

    And the argument that it reduces pollution doesn’t hold water, when all things are factored in creating a new vehicle is much more pollutant than running an old one.

    There’s always claims going both ways on this old question.

    Generally speaking, a normal vehicle made today puts out 15% of its pollution in the material mining phase, 5% in production, 80% in use, and less than 1% in scrappage. This varies, obviously, from vehicle to vehicle and depends on what kind of pollution is in question, but that’s the general percentages.

  • avatar

    I’d much rather the government subsidize and incentivize than simply regulate and dictate which cars I should buy.

  • avatar
    wsn

    # long126mike :
    June 18th, 2009 at 3:23 pm

    Generally speaking, a normal vehicle made today puts out 15% of its pollution in the material mining phase, 5% in production, 80% in use, and less than 1% in scrappage. This varies, obviously, from vehicle to vehicle and depends on what kind of pollution is in question, but that’s the general percentages.

    —————————————

    You are right, if that new car doesn’t cost money.

    But since that’s not the case, you are wrong.

    What you are counting is “emission of certain pollutants”. But that is different from “pollution” itself. You didn’t take into consideration the equivalent pollution of the purchase price itself.

    A new car typically costs $20k. And we all know $$$=environment.

    If everyone has $20k to spare, we can convert all coal burning generators to wind powered generators. That, would cut pollutions much more efficiently.

  • avatar

    This measure is very unfair.
    A small group of people (the worst polluters no less) get to enjoy a $4000 windfall from the government; what about everybody else?

  • avatar
    50merc

    Why did you use a picture of that Oldsmobile? I tell you, that is one damn fine car. Oh, the paint might need a little buffing. But that humongous V8 has the torque to tow a boat, or a camping trailer, or get a Space Shuttle to the launching pad. And there’s plenty of stretch-out room, though admittedly most of it is under the hood and trunk lid.

    Seriously, here’s a question for you guys in the biz. Old Explorers, Durangos and Blazers are most commonly mentioned as target clunkers. So nowadays, what’s, say, a 1996 Explorer in typical condition and typical mileage typically worth at wholesale? A good bit less than $4,500 I suppose.

  • avatar

    Yes, that is a ’64 Olds. Very nice.

    If they had been at the right point in the cycle, my sister and brother in law might well have taken advantage of this cash for clunkers. But I don’t think either the Cherokee, the Durango, or the XC90 are old enough. (They did not ask MY advice when they bought those trucks.)

  • avatar
    Dynamic88

    The Senate should kill this wasteful legislation now before things really get crazy. May I suggest you call yours?

    How’s it wasteful if few buyers can make use of it? As legislation it may be a waste of time, but it doesn’t seem that it’s going to cost the taxpayers a lot of money.

  • avatar

    Dynamic88

    It’s a crazy world where a billion dollars is considered pocket change. And PLEASE. No Iraq War comparisons.

  • avatar
    golden2husky

    But what’s really scary: it foretells a future where the government will really start to modify our taste for fun, powerful (but less fuel efficient) vehicles through coercive taxes and penalties—while promoting Pelosi-cars through government giveaways.…

    For years, the government has been subsidizing gas guzzlers by allowing for “business” to depreciate medium weight class vehicles over one year. While I would not have a problem with that if it was used to buy a bucket truck (the real intent), most of the time it went to buy an overweight SUV for the owner (or his wife) to commute in. So, if that practice is ok, I see no problem with giving breaks to encourage efficient choices. You also are still free to buy whatever you want.

    That said, the way this clunker bill is being proposed is, in my opinion, flawed. Seems to me that the government should not be in the business of creating marketing programs for consumer items, unless the goal is to reduce the societal cost of the said item. With cars, the best cost/benefit ratio would come from culling cars that are gross polluters or, to a lesser extent, very poor mileage cars. Today’s older cars can run for years in atrocious condition, leaking all sorts of fluids and belching smoke. Focusing on these would have the most impact. Of course, the vast majority of people who have crappy vehicles like this are poor, so they can’t buy new anyway. But they could use a voucher to buy another, cleaner, safer used car. But that won’t stimulate sales of new cars, so it will never happen.

  • avatar
    RetardedSparks

    As an earlier poster said, at the max rate the billion$ will cover 222k vehicles, at the minimum rate about 285k. The current US sales rate is about 750k vehicles a month. We’re talking the equivalent of 10 whole days of sales here. So this bill will help a very few people for a very short period of time and will cost, in the grand scheme of government spending, nothing.

    Sure, the program sucks (especially for me – my old car missed the 18 mpg cut off my 2 measly mpg!) but it will have little effect and little cost. It’s political window dressing, but not the worst window dressing imaginable.

  • avatar
    Dynamic88

    It’s a crazy world where a billion dollars is considered pocket change. And PLEASE. No Iraq War comparisons.

    I didn’t make any Iraq war comparisons, nor was I planning to.

    Like it or not, a billion dollars, or two, or five, isn’t a lot of money – in terms of total federal spending. For the reasons pointed out, not a lot of people are going to be able to take advantage, therefore, it’s not going to cost a lot.

    I thought a better line of criticism would be to ask whether the bill (either version) is just window dressing, or incompetence. If it’s window dressing, the costs are being held down (relatively) by ensuring few Americans will actually be eligible. (The article implies it’s just window dressing).

    OTOH, it may be that Congress actually intends to stimulate new car sales (In a Germanic sort of way) but just can’t come up with something that will actually do the job.

  • avatar
    Jaywalker

    The program fits me – well-off and cheap – as I’m still driving my bought-new ’98 Explorer with 150,000 miles. Unlike a lot of people I did need the off-road capability when I bought it, but I no longer do. What I do need is cargo capacity, but don’t want a minivan (crap mileage anyway). What I’d pay real dollars for is a mid-sized station wagon, e.g., 2010 Chevy Malibu Wagon, or maybe a Ford Taurus or Fusion Wagon, but I’ve looked on the lots and can’t find any – it’s as if Detroit stopped making them years ago. Volvo, Mercedes, and BMW make them, but $4,500 doesn’t make much of a dent in their prices.

    My Explorer is in really nice condition and is worth maybe $3000, so getting C4K $3500-$4500 for it isn’t really that useful to me – a $500 to $1500 difference. I’ve been ignoring price givebacks of that magnitude for years. Hell, I’d spend that much on the 70,000 mile service on a BMW wagon – no thanks.

Read all comments

Back to TopLeave a Reply

You must be logged in to post a comment.

Recent Comments

  • mcs: @toolguy: No, it wasn’t his vehicle. In my world, I’ve never seen people buying cars to impress...
  • Arthur Dailey: @KC; I have not personally seen any masks that are just one layer, at the least two layers. if there...
  • Detroit-Iron: F1, like the IOC, supports slave labour, human rights abuses, and validating dictators and other...
  • mcs: One of the things they discovered about the effectiveness of conventional masks with kids is that it kept them...
  • kcflyer: I did find it interesting that the n95 filters particles smaller than the openings in the mask by magicly...

New Car Research

Get a Free Dealer Quote

Who We Are

  • Adam Tonge
  • Bozi Tatarevic
  • Corey Lewis
  • Mark Baruth
  • Ronnie Schreiber