In debating the subject of cash for clunkers I recently heard talk show host Tom Sullivan make some interesting comments. One point he made was the fact that the program is probably not really helping with the people it was intended to help. The theoretical goal of the program is to get polluting cars off the road and to get people into cars that are in better condition.
The problem is that while the program does provide $ 3,500 to $ 4,500 in cash as a down payment it does not help people who can’t afford the resulting car payments. If you look at the people with real clunkers, the truly polluting old piles of junk, most of them are in fairly limited economic circumstances. In most cases this is not enough to purchase the new vehicle so you are going to have car payments. Many people can’t afford those payments and so they are sticking with the car they own outright.
As a result it seems most of the people getting newer cars under the program are those who probably would be able to purchase vehicles on their own, the only impetus this program has provided is to speed them up a little. I’m not downplaying that and it certainly is a good thing. But it’s not really meeting the stated goals of helping people who really need to replace their cars.
In general it has allowed people with adequate, if fuel hungry, cars to purchase nicer ones. A good accomplishment but not one that helps those with the true clunkers. This of course does not take into consideration the fact that some of those who have purchased cars will be unable to keep up the payments and so we’ll see lots of loan defaults in the next year or two.
The program has also had a negative impact on many charities who would have gotten donations of these vehicle in the past but now are seeing their income drop. Obviously any time you benefit segment A with a program you are going to hurt segment B or C.
In addition, it is debatable as to the real impact this program has had on the economy. If you assume an average subsidy of $ 4,000 (midway between the two levels) and divide that into the $ 3 billion allocated that works out to roughly 750,000 cars sold.
This works out to roughly 10% of the approximately 7.5 million vehicles sold each year (per 2006 stats). Certainly this is an measurable impact but not a very big one overall. When you consider the drop in car sales caused by the bad economy it is debatable as to whether the program will even make thing even. In addition once you’ve bought a new car you aren’t going to be in the market for a new one anytime soon.
Which brings us to a proposal that seems to be worth considering if you think cash for clunkers is a good idea. Right now we are all seeing restaurants going out of business left and right. Why not send vouchers to every household to provide $ 100 in free purchases at your local restaurant ?
This would allow people to get out and put money into their local economy and it might very well spark people to go back to the restaurant again to spend their own money. You are far more likely to do that than to go out and get a second car in the next year.
Just some food for thought