Friday, August 14, 2009

Cash For Clunkers Interest Fades

A fine example of how a government program works (or doesn't work).

Interest Fizzles in Cash for Clunkers (8/14/09 Newsweek)

"What started with a bang could end with a whimper. The government's cash-for-clunkers program was a smash out of the gate. People stampeded showrooms after its late-July launch to trade in an old car or truck for a check of $3,500 or $4,500 to put toward buying a new, more fuel-efficient vehicle. But since the early days of the program, interest is fading."

Well, that was quick. Inquiring minds want to know why (if only to be polite).

"Carmakers would be happy to build more compact cars and family sedans, if that's the only thing slowing the success of the program...

"But, which tracks vehicle pricing and buying data, says there's something else at play. When the public thought the program would cease after the first $1 billion was spent, it rushed to dealerships. Now that there is more money, there's no urgency to get there. In fact, car shopping on the Web that is tied to the clunker program is down 15% from its peak. By Aug. 20, we could be back to pre-clunker sales levels, says."

A local radio show host gave another possible reason this morning. He was talking about the cash for clunkers program and how cumbersome the program was for the car dealers. According to this radio show host who talked to enough number of dealers in the area, the participating dealers have had their cash for clunkers applications (40-page long) returned, because of some minor error here and there. Instead of correcting only those errors and re-submitting the applications, the dealers have to restart the application process from the scratch.

It seems that the government computers are still mainframe computers from 1970s.

Maybe it is a matter of time before the dealers say "@#$% it, it's not worth anyone's time."

The interesting part of the article for me is the next to last paragraph [emphasis is mine, my comment in italic]:

"J.D. Power & Associates (which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP)) thinks that most of the cars purchased through the program were simply sales that would have happened this year but were pulled ahead a few months. [yeah who could have known?] The company believes as few as 20% of the cars bought in the program are really new sales to the market. That means as many as 80% of the cars would have been sold this year anyway, says Gary Dilts, president of J.D. Power's auto industry group. That means that there will likely be payback with some slower sales months after the program expires."

So, this $3 billion (taxpayer-funded) cash for clunkers money provides for 750,000 new cars and trucks and SUVs, and only 20% of these are new sales to the market. That means the government is pouring $3 billion to generate new sales of 150,000 cars/trucks/SUVs.

That's $20,000 per new sales.

I don't know the average price of cars/trucks/SUVs purchased, but let's see, according to US News and World Report Rankings & Reviews,

  • Ford Escape average price paid: $18,197 - $24,678
  • Ford Focus: $13,561 - $15,891
  • Jeep Patriot: $16,346 - $22,204
  • Dodge Caliber: $15,517 - $23,224
  • Ford F-150: $19,055 - $38,709
  • Honda Civic: $13,761 - $21,568
  • Chevrolet Silvarado: $17,826 - $36,815
  • Chevrolet Cobalt: $14,179 - $21,547
  • Toyota Corolla: $14,316 - $18.101
  • Ford Fusion: $17,495 - $25,031

The government could have simply purchased 150,000 brand-new small cars (they can be had for much less than $20,000) and spared the dealers the headache and paperwork, saved at least part of consumers who bought from going deeper into debt.

Better yet, they could have turned around and sold them to the public at a later date at a small discount, and recouped most of the money spent.


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