Cash for Clunkers: A Failure of Big Government

As we are now hearing, the much anticipated "Cash for Clunkers" program is running out of money faster than ever expected. Many are touting this as evidence of the program's incredible success. The truth of the matter is, however, that this program will become an abject failure as it will fail to meet the goals of economic stimulation and demand creation.

To begin with, though President Obama has done his level best to desensitize us to large amounts of government spending, $1 billion is a substantial sum of tax dollars. However, in auto industry terms, it is merely a drop in the bucket and was never enough to stimulate the sector. This is not evidence that it was underfunded, this is evidence that it should never have been undertaken in the first place. The program included enough funding for approximately 250,000 transactions nationwide. Compared to June 2009 auto sales, which were historically low, this program would have increased sales less than 3%. For a billion dollars, that is an unacceptable return on investment.

Here's what the National Highway Traffic Safety Administration says about Cash for Clunkers:

"Manufacturers' and dealers' employment levels are unlikely to be impacted by the Act. The impact of the Act will most likely not be large enough to increase production by manufacturers, and dealers on average will only be selling an additional 12 vehicles (250,000 estimated number of vehicles sold during the program divided by 19,700 dealers as of early 2009) during the course of the program."

The program was only available to individuals interested in purchasing a new car. The problem with that is most people who drive "clunkers" as their primary vehicle do it out of need. They do it because they cannot afford a new vehicle. These consumers buy used cars. By eliminating used car purchases from the program, Congress eliminated the only chance they had of actually stimulating demand.

The customers that are taking advantage of this program are customers who were planning to trade-in their vehicle anyway as well as customers who do not use the clunker as their primary vehicle. In fact, many customers surveyed have said that they have actually been postponing their purchase to wait for the government money. Many others surveyed have said that they would have traded the vehicle in within the next 1-2 years anyway. This is not a stimulation of the economy. This is transferring demand that already existed; essentially stealing business from future years to inflate, ever so slightly, current business. Taxpayers are subsidizing people who could afford, and were already planning, to purchase a vehicle.

The program puts an undue burden on dealers nationwide. The application process is horrendously complicated and time consuming. It requires dealers to purchase document scanners. It forces them to front large sums of cash to participate as well.

If a customer purchases a car on Monday, that is when the dealership allots the credits (either $3,500 or $4,500) while the dealership gathers the necessary documentation (proof of insurance for the previous 12 months, proof of registration for the same period, a free and clear title, fuel economy comparison, certification of driveability, as well as others.) Once these documents are collected and the transaction is approved by the lender, the dealer must disable the trade-in before applying for the credits from the government. Once the documents have been scanned and submitted, and the online forms filled out (a process that can take over an hour assuming the site doesn't crash which it has every single day since the program began) the submission goes to a status of "under review." This process can take up to 4 days before you receive an answer.

Now and only now does a dealer find out if they will receive money they have already given a customer. If the application is denied, the dealer must figure out why by an electronic code that accompanies the decline message. At this point they may attempt to resubmit and the process begins again. If, however, in this time period, the program has run out of money, the dealer is left holding the bag on the $3,500 or $4,500 given to the customer and is left with a trade-in that has been disabled and cannot be sold. This is bad for small business and displays a fundamental misunderstanding of the burdens of car dealers.

This program has met none of its stated goals and may do more harm to the auto industry than good. It has cost too much money and now may cost more with little to show for it. This, once again, displays all the evidence you need to know that government should stay out of business.