“Cash for Clunkers” is Stimulus Plan on Steroids

But will the Obama administration find more money to continue the program?

By Brendan Moore

07.31.2009 

united_states-one-dollar-bill-obverse1Until we can get a better accounting of the deals in queue, it seems that the program formally known as the Car Allowance Rebate System (CARS), which was supposed to be offered until Nov. 1, or as long as the money ($1 billion USD) was available, is already tapped out.

That happened in less than a week.

The Department of Transportation got nervous and told auto dealers late Thursday night that the program was suspended.

The CARS program offers owners of old cars and trucks $3,500 or $4,500 toward a new, more fuel-efficient vehicle.

Now, the Car Allowance Rebate System, usually referred to as “Cash for Clunkers” is  not suspended – despite news reports that it was, as a result of the Department of Transportation message.  It will still be available as Washington tries to get some more funds allocated to the program.

There was some confusion late Thursday night as to whether the program was suspended, with the Transportation Department telling auto dealers to stop taking deals at midnight under the program, but with White House officials saying the program had not been suspended.

Robert Gibbs, the White House press secretary said: “We are working tonight to assess the situation facing what is obviously an incredibly popular program. Auto dealers and consumers should have confidence that all valid CARS transactions that have taken place to date will be honored.”

Many automobile dealers seemed to have been caught unawares by the Transportation Department “suspension” late Thursday. Many more dealers were unaware that the White House then refuted the suspension.

From the dealers’ standpoint, and the NADA’s (National Automobile Dealer Association) standpoint, the program is manna from heaven. If the program’s funds are zeroed out, they  hope that more funding will be allocated to the program quickly.

Transportation Department officials and members of Congress are working with the White House to figure out if, and how, funding could be added to the CARS program. The Michigan congressional delegation has a meeting early Friday morning at the Transportation Department.

There is speculation that the Troubled Asset Relief Program (TARP) may be the one that provides funding to continue the program as disbursement of funds from TARP happens quickly.

The calls from Congress for more funding started even before the news yesterday that the program was out of funding, as it became apparent over the last couple of days that the program was a hit with consumers.

Rep. Candice Miller, R-Mich., penned a letter to House leaders on Wednesday requesting additional funding for CARS.

On Thursday, after the announcement of the suspension that was then rolled back by the White House, Rep. Miller stated, “This is simply the most stimulative $1 billion the federal government has spent during the entire economic downturn. The federal government must come up with more money, immediately, to keep this program going.”

The representative of House Speaker Nancy Pelosi, D-Calif., said they would work with “the congressional sponsors and the administration to quickly review the results of the initiative.”

On Thursday evening, the government web site that tracks the program showed $779 million available for deals. However, electronic and phone surveys of automobile dealers done by the NADA suggested a massive backlog of pending deals, prompting the Transportation Department to freeze the program.

Dealers have been doing tentative deals since the beginning of July, when the cash-for-clunkers program officially kicked off, but did not start processing deals until Monday of this week, when the federal government finally provided the rules of the program for dealers.

If indeed the program’s funds have been wiped out already, that means the cash-for-clunkers program notched approximately 250,000 sales in a little less than a month.

Bailey Wood, a spokesman for the NADA association, when asked about how dealers feel about the program, said, “Two hundred and fifty thousand vehicles in four weeks? One word comes out of my mouth: Wow.”

Really, it is astounding.

Which is part of the dilemma for the Obama administration. The immediate effect of the program makes it a very successful part of the national stimulus package. The extra money helps the auto manufacturers, the new-automobile dealers and the local governments that get much-needed tax revenues from the sales of new cars.

So, that’s good.

But, taxpayers are the ones that provide the money for the stimulus. Any more funds allocated to the CARS program gets added to the deficit. Citizens and lawmakers are getting very nervous about all the money spent in the last eight and one-half years by both the Bush Administration and the Obama administration.

So, more money added to the deficit would be bad.

Lastly, the other angle that the administration has to consider is, of course, public perception. There will be howls from consumers, manufacturers and dealers if the obviously popular program is simply ended without satisfying considerably more demand. There is an expensive television commercial from an auto manufacturer on about the CARS program blaring right now in my office as I type this, and that money wasn’t spent with a dead program in mind.

Giving voters something “free” like a tax rebate is good; snatching it away from them while they’re waiting in line to get it is definitely bad.

Look for some more funding to be added to the program.

COPYRIGHT Autosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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14 Comments

  1. And now it’s live again. I’m getting the feeling that no one really knows just how many deals there are for this thing.

  2. Dean, you’ve hit on the program’s biggest problem. The system for processing the payments to dealers and validating that the transactions met the rules appears to be the bottleneck. Also, the fact that there was already a giant backlog built into the system by virtue of the fact that deals could begin on 7/1 but rules weren’t announced until 7/4 certainly didn’t help get the system humming along.

    I hope the program is able to continue. A dealer friend of mine who owns a Pontiac-Buick-GMC and a Honda franchise was thrilled with the program earlier this week. He kept giving a rolling commentary of how many C4C deals he had – he was up to 22 at last count in a relatively small dealership. He said that the trade-ins were mostly Explorers, ’90s Chrysler vans, older Cadillacs, and a few older trucks.

  3. it’s working so giv it mor money

  4. And the other thing is that there’s no way of getting an accurate count of “deals in queue” until the rate of new deals slows down. The only sales pipeline report available is the phone calls to dealers.

  5. I’m curious to know the proportion of $3500 rebate eligible trades to $4500 eligible. (The latter requires 10 mpg better combined cycle fuel efficiency than the trade-in).

    I support Sen. Feinstein’s call for a 2 mpg increase over the current rebate threshold before the additional $2 billion in funding is appropriated.

  6. Hey, where are those guys that were saying this program was not popular with consumers? Wasn’t that just yesterday?

  7. Actually what I said was we didn’t know.

    And frankly we still don’t know. The dealer’s association is saying that there are 200,000 deals currently in the pipeline, whereas the .gov is saying that there are only 30,000 in the pipeline and plenty of money left.

    When all the smoke clears I will be really currious to see the breakdown of viehicles by age and model destroyed via this program.

  8. Hard to believe that someone didn’t consider this best-case scenario. I guess everyone went with worst-case scenario in terms of volume.

  9. But now this on-again, off-again stuff will really confuse people. It’s not a good way to run a program.

    I know it’s the government and all, but come on!

  10. Some consequences I’m foreseeing of the cash for clunkers rebate:
    – New car sales are simply being shifted from the next 12 months to now (i.e. sales will pick up for a month or two and then come tumbling down in the next year).
    – Used car sales are being replaced by new car rebate sales (so it’s not just “this generated 250k car sales” so much as “this generated 250k car sales instead of 150k used car sales”)
    – In 6 months we’re going to start hearing about people who bought a new car under the program even though they knew they couldn’t really afford one (even with the rebate) and are now getting them repo’d. In hindsight, they will say they should have kept their clunker, or bought a cheaper used car.

  11. AS someone else noted, it is an incredibly sweet deal if if you have a $500 car that is still on the road. There’s your downpayment, the 4500.

    Wish I could do it.

  12. I think this is just a giveaway program that costs the taxpayers money and benefits only a very small sliver of Americans.

  13. It’s a good idea, although I’d like to see a broader based program. It’s hard to argue that it hasn’t been a success. I admit to not thinking it would be that big of a deal. Needless to say, I was grossly incorrect.

    M Reeves: It benefits a pretty broad swath of people: local banks, dealerships, scrapyards, and manufacturers, all of whom have payrolls. It’s a pretty direct stimulus. And it has worked pretty well. My worry, like Jimbo, is that it will simply move forward purchases, thus depressing the market a year or two from now.

    Ultimately, I do not think the depressive affect will be large. First, it applies to a narrow range of people–not everyone has a “clunker.” Second, car sales have been depressed for a year; many people are putting off purchases until they are on better financial footing. Those people will flock to dealers in droves once the economy improves. A boom market generally follows a recession. Finally, contra Jimbo, there’s no reason to think that the people buying these cars cannot afford them. They may get assistance on the down payment, but they still need to have good credit to get financing. That is, I hope the banksters aren’t just letting anyone get loans anymore.

  14. Te extra money was approved in the House, but everyone says approval in the Senate will be harder. Pelosi and her friends want to make the fuel economy provisions tougher, so you have to wonder whether it’s over this week.

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