Cash for Clunkers, an Idea Tried Already in Germany

Old Toyota? No, up to $4,500.00!

In the United States, finding a car owner is a pretty easy task.  In fact, according to a 2006 study by the Department of Transportation, there were 250,851,833 registered vehicles in America.  A very large percentage of these owners also vote so it would be a natural connection to draw a line between car owners, voters, and politicians eager to curry their favor.  As such, the Cash for Clunkers bill is making its way through Congress right now.  The bill, if it becomes law, will surely change from its present form but would, in essence, give an owner of a vehicle registered for at least one year up to $4,500.00 from the U.S. government if traded in on a new, more fuel efficient model.  The money to pay for this program, an estimated $7 billion, would come from the already-signed $787 billion stimulus program signed into law by President Obama earlier this year.

Supporters of this bill maintain that it will reduce American’s dependence upon foreign oil by allowing consumers to buy vehicles that get better mileage than their current cars do, will stimulate automobile sales at a time of decreasing sales, and will remove “gross polluting” vehicles from circulation.   “Cash for Clunkers” has already been tried in Germany, in fact, and some of what supporters claim has, in fact, happened.  The plan has boosted car sales in Germany and business for junkyards (cars turned in under the program must be scrapped to qualify for the money).  As a result of the program (in Germany it was more modest adding up to only $3,320.00 in maximum per vehicle) sales in April of 2009 were up 18% versus the year before.

On the negative side, careful study of the program showed that up to 75% of the money went towards people who would have bought a car anyway and, during the same time the program was in force, retail sales dropped 1.5% that German stores blamed on consumers’ shifting their spending from products to vehicles in order to take advantage of the program.

So is this program right for the United States and what side-effects can be expected from it?

As somebody who has worked in automotive sales for the previous six years I know the industry fairly well from an insider’s perspective.  My experience has been that when a special incentive is offered (either by a manufacturer, a bank, or a government) car dealers suffer from the famine-feast-famine syndrome.  What is this?  Basically, when consumers catch wind of a possibly upcoming special program they will delay their purchases (the famine part) and sales dry up.  Once the program is in force there is an orgy of spending as consumers seek to cash in on the free money.  Once the program ends or all of the consumers who could have bought did buy sales taper off to nothing as those customers who would have bought cars over the next 1-6 months are pulled out of the market early.  In short, the side effects of such programs can often be worse than what the condition was before as the normal buying cycle is altered.

One effect of this program which was definitely felt in Germany was where German tax money was going.  Germans build many fine automobiles but most of them are not known for being very fuel efficient (Porsche, BMW, and Mercedes-Benz come to mind).  So when Germans were given their $3,320.00 credit many of them took it to foreign brands such as Ford, Opel, and Renault.  Many economists questioned whether using German tax money to support company’s from other countries was wise.  Many Volkswagen dealers did benefit from the program, but companies like Porsche did not (Porsche said not one of its cars was sold through the program).

In the United States, one of the biggest arguments in favor of this program is the environmental benefits it will have (replacing gas guzzlers with fuel sippers).  Unforuntately, as with any government-developed program, special interests have swooped in to seek maximum benefit for themselves and the Cash for Clunkers bill is getting more and more watered down as regards fuel efficiency standards.  For example, trade in a car and buy a new one that gets only 4mpg more and you get $3,500.00 but for SUVs and trucks you only need to improve your mileage by 2mpg, not a difficult task.

In theory, the program could produce many benefits for consumers, automotive sales people (not the ones at high line dealers generally though), automakers, and junkyard operators but, in reality, this program is more likely to create the famine-feast-famine cycle mentioned above.

 Harrison @ Just Politics..?

Related posts:

1. Follow Up: Cash for Clunkers Kills Donation for Cars

Like this post? Subscribe to my RSS feed and get loads more!