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A Clunker Of A Program

The Cash for Clunkers program, which is scheduled to expire today, is widely seen as one of the best efforts this year to stimulate the lagging economy. I disagree.

While the clunkers program may have been a boon for those who sell new cars and those who can afford to buy them, it was disastrous for people who need cheap, reliable transportation.

Until now, low-wage earners and young people who needed a car to get to work or to school could find plenty of drivable vehicles for a few hundred to a few thousand dollars. These cars were not always pretty and they did not always get the best mileage, but they got people where they needed to go.

Cash for Clunkers aimed to take those very cars out of circulation. Cars that might have been resold or given away to eager friends or family were instead taken to the lots to be exchanged for a $3,500 or $4,500 credit towards a shiny new car.

The cast-off clunker then had to “be crushed or shredded so that it will not be resold for use in the United States or elsewhere as an automobile,” according to the government’s official question and answer page about the program. With fewer cheap cars left in circulation, the ones that remain in service will be more expensive. Cars under $4,500 are harder to find, since many owners were able to do better by sending them to the junkyard rather than selling them to people who needed them.

While some parts of the cashed-in clunkers could be resold, the most expensive ones, the engine and the drive train, could not. As a result, people who have older cars that they cannot afford to replace may not be able to get the parts they need to keep those cars running.

Individuals are not the only would-be recipients of discarded cars who are suffering. Jim Hartman, the vice president of vehicle donations at Volunteers of America, told Reuters, “The cars I'm seeing cashed in as clunkers, like older SUVs, are absolutely the typical donation to us.” Rick Frazier, director of the car donation program at The Military Order of the Purple Heart, estimated that about 25% of the vehicles traded in under Cash for Clunkers would otherwise have gone to charities.

Those who supported Cash for Clunkers on environmental grounds argued that it is better for the planet to kill the gas guzzlers. But continuing to run an old car, even if it uses more fuel, saves the resources that would go into making a new replacement. The best economy usually comes from using something as long as it does the job, not from throwing out the old as soon as there is a newer model.

As an economic stimulus, also, Cash for Clunkers was a hollow gesture. It has indeed increased the immediate demand for new cars, which is good. Car manufacturers report that their fuel-efficient models have been flying off lots, and both General Motors and Ford Motor Company announced that they would increase production to keep up with the higher demand. But the clunkers program never actually created demand. It just compressed it.

An analysis by Macroeconomic Advisers estimated that “roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway.” As a result, the analysts said that they “do not expect a boost to industry-wide production (or GDP) in response to this program.” Now that the program is over, all those newly created jobs will likely end as well, and the auto industry will have an even harder time finding buyers than it did before.

Even as the administration winds down the program after today, car dealers who participated in good faith are suffering from delays, and in some cases outright denial, of their claims. Rep. Joe Sestak, D-Pa., said recently that only 2 percent of claims submitted by dealers have actually been paid by the government. Four out of every five applications have been rejected for minor oversights.

For dealers who took the credit off the price for customers but never actually receive any money from the government, the consequences could be disastrous. One dealer, profiled in The New York Times, said he had given $450,000 worth of rebates to customers but had not yet had a single claim approved. As Sestak pointed out, “Failure to address delays with the cash for clunkers program will adversely harm auto dealers in the commonwealth of Pennsylvania and around the country—undoubtedly forcing many out of business.” Putting small companies out of business is not the way to boost the economy.

Cash for Clunkers was not an effective conservation measure, nor a real stimulus. It hurt those whose budgets are already stretched and gave handouts to people who didn’t really need them. And it has run roughshod over auto dealers in the bargain. Cash for Clunkers itself was the real clunker.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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