Saturday, August 1, 2009

Cash For Clunkers

I find that most complex issues can be easily understood when broken down into their basic roots. Such is the case with the new federal program dubbed "Cash For Clunkers".

This federal program pays qualified participants up to $4,500 for their trade in when they purchase a new car that gets better gas mileage. The trade-in (clunker) must have an EPA estimated Miles-per-Gallon that is 4 MPG less than the new car that they purchase. This program also stipulates that that the trade-in must be destroyed and recycled into scrap metal, plastic and glass. None of the used car parts may be sold.

Click on video below to view the destruction of the engine of a "cash for clunkers" trade-in as required by federal regulations.

The stated purpose of this federal program is two-fold. First, to stimulate car sales in a soft market. Second, to improve the gas economy of the average vehicle on the road. However, like most well intentioned federal programs, there are always unintended negative consequences.

When I break down this program to its basics, one thing becomes very clear. This program will reduce the availability of used cars in the marketplace by destroying many usable vehicles rather than reselling them. Although new car sales will be stimulated by this program, there will be less used cars available, thus the price of used cars will increase and the sales of used cars will decrease. This will immediately have a negative economic effect on the used car business, the auto-repair business and the auto-parts business.

Also, poor people and young people who don't have trade-ins or have not established good credit, will now be priced out of the used car market. This program will make used cars unavailable or too pricey for those who would have been able to purchase used cars previously. This program reduces the number of cars on the road, because it destroys used cars rather than reselling them. There is no doubt that this program will make cars unavailable to many Americans.

In addition, some people who previously did not qualify for car loans, may now be eligible because of the huge down-payment provided by the "cash for clunkers" program. Undoubtedly, many of these newly qualified buyers will default on their auto loans, just as many under qualified "sub prime" borrowers defaulted on their housing loans.

Another negative economic consequence would be that many people will be induced to buy new cars now , rather than waiting for their car to wear out. They will be trading in a car that was already paid for and they will now go into debt in order to finance their new car. Although the improved fuel economy will save them between $25 and $100 per month, their new car loan will likely cost them between $300 and $500 per month. Due to their higher expenses, they will cut down on spending in other areas thus having a negative impact on other segments of the economy.

Finally, there are negative environmental consequences when you destroy usable vehicles, even if the glass, metal and plastic are recycled. There is much hazardous waste contained in each and every junk vehicle. This waste includes used motor oil, transmission fluid, grease, brake fluid, anti-freeze, battery acid, explosives contained in airbags, mercury contained in switches and lead. It is costly to recycle or properly dispose of this hazardous waste. It is also impossible to properly dispose of it all. Residues that remain will find their way into landfills along with many other auto parts that can not be recycled. Also, it takes a lot of energy and natural resources to produce a new car, even if some of the materials are recycled. It is much cleaner for our environment to keep an old car in good working order, as opposed to destroying it and building a new one from scratch. The auto plants and their suppliers use lots of energy and raw materials to produce each new car. All of that energy and most of the materials can be saved by stretching the life of the older cars.

Common sense and my personal experience tells me that when economic times are hard, it is best to repair and patch what you have, rather than destroying it and buying a new one. At the very least, our nation will be better off is we fix up our assets during tough economic times. At the very least, we can sell them so someone else can make use of them, rather than destroying them and forcing many people to do without.

It is fundamentally wrong to destroy usable assets. This is true whether it be done at the hands of vandals or at the hands of the federal government under the guise of the "cash for clunkers" program.

1 comment:

Anonymous said...

There is one additional item you did not mention. The day "Cash For Clunkers" went into effect car dealers increased the price of their cars $4500.

My wife and I were looking to buy a car, test drove it, received an offer we were going to "sleep" on. Two days later we went back to the dealership to complete the deal and the salesman told us they could no longer honor that price of all the cars in the lot had been increased by $4500. However with the new price and the "Cash For Clunkers" program the price of the car would remain the same. There is no actual real savings with this program.