Cash For Clunkers Faces Funding Speed Bump

Posted by: David Kiley on July 31, 2009

The White House and Congressional leadership on Friday are reviewing the popular Cash for Clunkers program that gives consumers thousands of dollars for trading in old cars so the program can be extended into the Fall.

The program proved so popular that the Department of Transportation warned lawmakers that the program appeared to have burned through its $1 billion funding in just one week.

Under the program, a buyer who trades a vehicle that gets 18 mpg or less for a car with a mileage improvement of more than four miles per gallon but less than 10 were eligible for $3,500; a buyer whose new vehicle was rated 10 miles per gallon or better than the old one was eligible for $4,500; an old pickup truck could be swapped for a new one with just a 2 mpg improvement for $3,500. The trade in vehicles have been old with high-mileage because there is no other trade-in value on the car, unless automakers and dealers add to the government rebates (which most have),and the engines of the cars are recycled.

Congress funded the program with $1 billion as a measure to boost the ailing auto industry. The original bill called for $4 billion, but debate bogged down when California Democrats wanted the bill to be more tilted to higher fuel economy vehicles and include fuel efficient used cars that would benefit lower income people.

Midwestern Democrats, the United Auto Workers and the auto industry lobby wanted the bill to favor more pickup truck and SUV sales, which are more profitable to the automakers. Congress planned to revisit the debate in the Fall after recess, but lawmakers underestimated the popularity of the program.

Also, dealers had been making sales since July 1, and swamped the DOT system with transactions when it opened its computers for processing the applications July 27.

Dealers and automakers will need clear direction Friday about whether the funding of the program will be interrupted, otherwise their flow of transactions will be thrown into chaos heading into the weekend.
Automakers said mid-week they thought July auto sales would clock in at an annualized selling rate of 12 million, which would be a more than 20% gain from June and the monthly average for the first half of the year.

Transportation Department officials called lawmakers earlier Thursday to alert them of plans to suspend the program as early as Friday. But a White House official said later the program had not been suspended and they were reviewing their options to keep the program funded.
White House press secretary Robert Gibbs said they were working 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.”

Though the program has been controversial, with many Republicans not wanting to support subsidized auto sales after tax-payers bailed out General Motors and Chrysler, it is unlikely that the White House and the Democratically controlled White House will let the program slip off a cliff, especially when the Administration is struggling with healthcare reform and the President’s approval ratings are slipping.

Reader Comments

Steve Garcia

July 31, 2009 11:49 AM

Going into this program it was impossible to believe that the Federal Government would be able to put together a successful program of this magnitude and complexity within the time frame they were given. Now we are assured of that. The sad reality of it all is that the chaos will allow the needed opening for extensive fraud. Further, negative comments and sentiment - some of it anger - target the imbalance in vehicles sold being heavily weighted to the import manufactures. "Those are my tax dollars going offshore!"

Brother Can you spare..

July 31, 2009 12:49 PM

I've met three people that took advantage of the Cash for Clunkers. They all bought Japanese or Korean cars. I don't see why we don't add an incentive to the plan to buy American built cars with American tax dollars. Say $500 extra

RJD

July 31, 2009 1:49 PM

This is a great program if the goal is to stimulate the economies of Japan, Korea and Germany, where half of all US car purchases originate. Without a buy-American provision to help the Big 3, the program is highly inefficient, losing half it's bang for the buck. A better option would be investment tax credits to help US industry buy equipment to be more competitive. Targeting consumers is the wrong approach, since so much of what consumers buy in this country is made abroad and consumers need to reduce their debt, not add another car loan to it.

JCAT

July 31, 2009 2:46 PM

I think that the plan is a great idea, it just was not thought out well, as with many other government plans. The incentive should only apply to American made cars. When it applies to foreign vehicles, it doesn't help out our Auto industry. A friend of my did this and bought a Honda Civic, and i know of many others that also bought foreign vehicles. German auto industry however is also in need of a boost, at least porsche anyways, but i'm fairly certain that trading a car with lower MPG than a porsche is going to be fairly limited.

JCAT

July 31, 2009 2:46 PM

I think that the plan is a great idea, it just was not thought out well, as with many other government plans. The incentive should only apply to American made cars. When it applies to foreign vehicles, it doesn't help out our Auto industry. A friend of my did this and bought a Honda Civic, and i know of many others that also bought foreign vehicles. German auto industry however is also in need of a boost, at least porsche anyways, but i'm fairly certain that trading a car with lower MPG than a porsche is going to be fairly limited.

Jaxon

July 31, 2009 2:50 PM

It doesn't matter if they dole more money. They problem is still the backlog. Read this article: The Real Reason for the "Cash for Clunkers" Suspension. The ex car salesman blog shares exactly why they stopped the program. Even reports that some sales managers are calling asking for the money back because they were denied the rebate when the final paperwork was submitted but their car was already ruined by dumping a solution in the engine. They now have no car. Scary. See: http://tinyurl.com/ml9sdo

The Mad Hedge Fund Trader

August 1, 2009 4:48 PM

This is a surprise? Perhaps it was the newspaper gene in me that made me screech my car to a halt when I saw a near riot in progress at my local total Toyota dealer. The showroom was more jammed than the unemployment office, with eager salesmen recalled from vacations manning card tables set up in every available space. I managed to grab one peripatetic salesman by a lapel, who gushed that they sold 45 cars yesterday, compared to ten for a normal Friday, and that 35 of these were due to the Cash for Clunkers program. Sure I could get a $4,500 credit for my 1995 BMW (17 mpg), and apply it to a new Prius (50 mpg), taking the price down to $19,500 and the monthly payment to $450/month for five years. In fact, the government stimulus program was so successful, that it ran out of money in the first four days, and congress rushed to triple it to $3 billion on Friday. It was like the survivors of a ship torpedoed at sea were swimming frantically for the only piece of wreckage that floated. Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports. I asked to see the cars that were traded in and was told that the lots for the dealer, the used cars, and the detailer were all full, but I could see some if I went to the Target nearby where they were renting extra spaces. There I saw the fleet condemned to clunkerdom, GM Safari’s, Jeep Cherokees, Buick Regals, Dodge Ram pickup trucks and vans, and Chrysler minivans by the dozen, all with “CFC” marked on their windshields, a certain death sentence. These sorry excuses for transportation will never belch blue smoke, nor drip oil on our interstates again. I can’t imagine a sorrier commentary on the management failure of the US car industry for the last 30 years. www.madhedgefundtrader.com

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