Cash for Clunkers Senate Deal

Local car dealerships are — or were, until last year — the economic life blood of most communities.  But since the recession sank in, these guys, along with their buddies in the home construction business, have been in pretty dire straights.  So the Congress decides to “fix them”, first with the multi-billion automakers’ bailout and then (because that hasn’t done more than prop them up temporarily and had no boosting effect on the economy) they added the Cash for Clunkers program.  

A billion dollars of your money to “encourage” folks with older, gas guzzling cars to trade them in for a new car — on the State approved list of models — and get $3500 to $4500 towards the purchase of that new car.  

Sounds good, right?  The program has many flaws.  there are too many foreign and luxury cars on the approved list. (Have you always wanted a Lotus Elise?  If so, bang on down to your local Lotus dealer and buy one of the hottest cars in Europe.  Cool wheels, even if they are British.)

And it’s a losing proposition for dealers.  The process of destroying these cars is so labor intensive, dealers are getting very little benefit from the sale of these cars.  But, the bright side is that most dealers make their profits off of service and if these folks can stay in these cars, there will be an increase in the service departments of participating dealers.

The Congress didn’t take into account the auto repair and after market part of the industry.  Taking older cars off the roads means a drop in business for parts stores and local mechanics.  There are always unintended consequences and in Cash for Clunkers, one group of businesses, the ones with the UAW at their side, was picked over the free market side of the business.

The government is taking cars off the road that are paid for and replacing them in most cases with a new car with a car payment.  Don’t be surprised if in 6 months, Congress touts the “Cash for Clunkers” bailout package.

Actually, they’re doing that right now. Having spent most of the first billion dollars, Congress is trying to add another $2 billion.

As of late Wednesday, $775 million of the initial $1 billion had been committed. Senate Majority Leader Harry Reid announced there was a bi-partisan breakthrough in the negotiations of the addition of 2 billion more dollars being added to the plan.  Correct me if I’m wrong, but there are hundreds of billions of dollars still unspent from the stimulus program.  Couldn’t that money be reallocated to Cash for Clunkers and not spend additional dollars?  I guess when you are so far down the pit of spending money you don’t have, it really doesn’t matter any more.

On Friday, there will be a vote and with the House already out of town on recess, it will have to mirror the House version to prevent an interruption in the rebates of up to $4,500. That means that most of the amendments will be scrapped so the Senate bill will match up with the House bill. Harry Reid, Senator from Nevada and Majority Leader said the Senate agreement “accomplishes what we need to accomplish.” 

While the top model being sold are the Toyota Corolla and 6 of the top 10 cars sold are built by foreign manufacturers, Detroit automakers account for about 46 percent of sales dollars and Japanese automakers about 36 percent. Michigan ranks number one in trade ins, followed by California and Ohio. Sales are up but did it create new sales or just get buyers out a little earlier which will create another slump later in the year.

Based on the “success” of Cash for Clunkers, be prepared for a “Cash for Computers,” or “Cash for Analog TVs” to be close behind.  We need to get those old computers and energy inefficient TVs out of circulation. Now that the government is in the business of picking winners, why not go all the way and have the government pick all the winners.

Finally, this is a real Catch-22 for dealers.  Most of them are small business owners and have lived in the free market.  They don’t like the plan or the hoops they have to jump through to make it happen but they want to sell cars and these are the rules they’ve been given for the moment and they are playing.

What about the cars that are being taken off the road that lower income people can afford? When you take that many cars on the low end of the price range out of circulation — and these cars will be have their engines blown, fluids drained and be parted out, never to be driven again — it will drive the overall prices in the used car market up.  It’s basic supply and demand.  There are folks out there that need a thousand dollar car to get around.  In many places in America, if you can’t drive you opt out of full participation in the economy.
Government shouldn’t pick winners — there are unintended consequences and we haven’t seen all of them yet.  But there is a bright side to all of this.  This is a glaring example of the government having no idea how to run anything. 

They put a little 1 billion dollar program in they thought would last 6 months and blew it in one week.  You might say to yourself, “and these are the guys who want to takeover 1/7th of the nation’s economy with healthcare reform?”  This little program, Cash for Clunkers, might serve to seal the deal against the passage of Obamacare, and that’s a good thing.