So last Saturday, I'm on an early flight home from our Outer Banks vacation, trying to read the NYT while hoping that the baby would fall asleep in his car seat (no such luck). But, I see an article on "Cash for Clunkers." This seems like the government is giving away coupons on new cars. I'm not above clipping coupons, so I read on. The program is officially titled the Car Allowance Rebate System (CARS, get it?). If you trade in a qualifying car to buy a qualifying car, then you get a rebate of up to $4500. Sounds pretty sweet. The whole point is for people to trade in gas guzzlers and buy cars with better gas mileage. I'm for gas mileage, and $4500 coupons. This could be a match made in heaven. But, no.
So, the first thing is that your trade-in will be scrapped, so the most you can "trade in" your car for is $4500 plus the scrap price, which I'll assume is pretty low here. WikiAnswers told me $250/ton, so we'll say $500. So, if you trade in a $10,000 car, you won't get to apply $14,500 toward a new car, you'll just get to apply $5000. Logically, no one will take advantage of the program if the trade in value of their car is less than $4000 or so.
OK, $5000 still covers a lot of cars on the road, so I'm still interested. But, the trade-in has to qualify. It can't be more than 25 years old (still a lot of cars on the road) and must have a combined new mpg of 18 or less. This website tells you what the combined (city/highway) mpg of your car is. The car we would want to trade in is a Honda Pilot, which we bought in the summer of 2002. However, because car things are silly, my husband tells me that our Pilot is a 2003 model. Woo-hoo! The 2003 Pilot's combined mpg is 17!
So, we have an eligible trade, and now we just have to buy an eligible car. An eligible car just has to be a new car (not pre-owned) and have a combined mpg of 22. Wow, that's pretty low. I thought it would be at least 30. Well, I can't imagine that any car we would look at wouldn't qualify under that mpg.
As I'm looking this up, Paul is reminding me that we don't want to trade in the Pilot and that it is worth more than $5000. But, I argue, in two years, this coupon will be gone, gone, gone, so we should think about taking advantage of it. However, I look up the Bluebook value of our car, and Paul is right. Even with the heavy wear that three kids have caused, I can't imagine this makes any sense at all for us.
So, who theoretically does it make sense for? People with old cars worth a few thousand dollars or less on a trade in who were going to buy a new car anyway. The NYT article didn't seem to find many car dealers who were optimistic. Besides the occasional person who keeps cars for 10-15 years (like us and the guy in the article), most people who are driving around in $1000 cars can't afford a brand new car, they say.
This of course leaves open the question of whether the program makes any sense at all. Presumably, the thought is to get cleaner, more fuel efficient cars on the road, giving a boost to auto manufacturers in the process. But the minimum mpg's are not all that great. Even if a lot of people took advantage of the program, it might just succeed in replacing cars with only marginally more efficient cars. I'm also not sure if it would save drivers that much money. I remember in Texas, the government would host these "tax holiday" weekends with no sales tax. On those days, though, retailers ran no sales. Why run your normal 20% back-to-school sale if the government is going to subsidize a 9% sale? The weekend after had more bargains. Likewise, is a dealer going to negotiate off the sticker price very much when the government is giving you a rebate anyway?
Finally, although I'm assuming that the primary goals are upgrading cars on the road and increasing demand for new cars, the program distinguishes between "owners" and "speculators." To qualify, the car must have been registered to you for a year. So, you can't raid Craigslist and then use your "$2000 or best offer" find to upgrade to a Prius, even if the effect meets the program's primary goals. This distinction seems silly to me, unless it's just a way to limit the number of users of the program. The goal can't be to get people without drivable cars into a drivable car (a qualifying car must be drivable) or really even to get people into cars that are cheaper to drive (the difference in the qualifying mpg's is so small).
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1. Posted by BDG on July 2, 2009 @ 7:00 | Permalink
Christine, until recently I shared your intuition that dealers would likely capture the benefit of tax incentives to buy cars. But the two studies I've seen on "green" incentives both claim that most of the benefit is captured by buyers -- that is, that sale prices don't increase by nearly the value of the tax savings.
The studies don't attempt to explain why that happens, but the standard interpretation would be that demand for new cars is highly elastic.
2. Posted by Mark S. Devenow on July 2, 2009 @ 7:23 | Permalink
This analysis is right on the mark. It demonstrates, writ small, how in general Obama economics consists in will o' the wisp "incentives" toward various goals in service of nationalizing and socializing an economy which would recover in its own course without this nonsense. I have been dismayed with the ignorant (and left leaning) posts of some of Conglomerate's contributors. Now, I'm glad to say that Christine Hurt is a breath of fresh air. posts
3. Posted by Paul on July 6, 2009 @ 7:53 | Permalink
I like this idea. It's nice to know that there is a way for people being hit hard by the current economic climate to buy affordable cars. Also, gas prices are back on the rise again, so this seems like a great plan.
4. Posted by Janet on July 18, 2009 @ 14:16 | Permalink
It is not the consumer. While good intentions may win some, it is what is really happening with this program that is troubling. There are scams and more. See, http://butasforme.com/2009/07/17/cash-for-clunkers-the-ultimate-bait-and-switch-marketing-tool/
5. Posted by Jaxon on July 25, 2009 @ 11:46 | Permalink
Car dealers are increasing prices for good MPG cars because of the increased demand (artificial) from the cash for clunkers program. Not being critical, but it is basic supply/demand economics.
With the price increases, some markets will will give consumers no net benefit. It is poorly written legislation. Especially since the turned in cars have a trade-in value of equal the scrap metal — because all cars under this program must be taken off the road. So some cars that qualify, may actually be worth more than the redemable voucher.
I don’t qualify for cash for clunkers because my car already gets good gas mileage. But my dad swears by the car buying process here:
http://tinyurl.com/laub3m
6. Posted by Brian Smith on August 2, 2009 @ 14:51 | Permalink
So it seems, many of your concerns were plain wrong. The rules are not too restrictive. People driving sub $4000 cars can afford new ones. They are simply waiting for the right motivation to do so. As they either have cash or credit available to them we need them to buy as our less financially secure consumers are unwilling or unable to do it.
Cash for Clunkers generated sales because people perceived a deal and took it. No different than a manufacturer rebate people took the government voucher and then paid sales tax to the state and made an average purchase of $20,000.
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