Posted by: David Welch on July 31, 2009
Okay, I have to admit that the government’s Cash for Clunkers program worked better than I expected. With the program running low on cash right out of the gate—and Michigan lawmakers requesting $2 billion on top of the original $1 billion that is all but spent—plenty of dealers and analysts are surprised at how fast it worked. The law’s critics, including me, figured it had been hammered into mediocrity like so many pieces of legislation in Washington. I wrote that the program was lousy legislation in this magazine story. I still don’t think it was a great bill for improving fuel economy. And the sales boost will be short-lived without more money. But the program has worked.
Why has it been so popular? For starters, the government made some changes between the time it was passed and when the feds rolled it out. Some cars didn’t qualify under the original legislation because the mileage rating as calculated by the government was too high. You had to trade in a car that got 18 mpg or worse to get the money. But there was a problem. After 2007, the government changed how they calculate fuel economy ratings for every model in order to match real-world driving. Before that, the government’s mileage rating for most models was unrealistically high and consumers griped that they didn’t get that kind of mileage out on the road. So the government decided at the 11th hour to apply the new rating system to older models, thus lowering the mileage rating and making them eligible for a scrappage check. That helped. Some older models and even minivans that wouldn’t have qualified under the original proposal could be scrapped to get cash for a new car once the program started.
Another assumption made by analysts at IHS Global Insight and Edmunds.com was that people owning old cars worth less than $3,500 aren’t in the new-car market. They bought used cars and will do so again. They may not even have credit to get financed for a new-car purchase. And for many people driving those older cars, that’s the case. But in many other cases, dealers told me, families with good credit have their teenage or college kids driving the old beater. So they are trading it in for a new model.
And last, there’s just good old-fashioned buzz. As long as banks, carmakers and Wall Street are getting bailout money, a lot of consumers figured they’d go and see if they could get their government cheese from Uncle Sam, too. So the program generated showroom traffic and got people shopping.
I do stand by the key points from my original column. One, it is a great bill for selling new pickup trucks, which hardly greens the planet as its proponents originally stated. And my bigger point was that the program was grossly underfunded. It was. We’ll only get about a 2.5% sales increase for the year if the House and Senate don’t approve more cash. That’s in the works as we speak. The House of Representatives approved another $2 billion today. It will be a tougher sell in the Senate, according to sources on Capitol Hill. But it could be approved next week. If so, it could boost sales by 7% to 8% for the year. That will help ailing carmakers. If not, the Clunbker bill’s success will be short lived.