Monday, June 22, 2009

CASH FOR CLUNKERS LEGISLATION IS A WASTE OF TAXPAYERS' MONEY

Once again our Congress and Senate have proven that they are out of touch with reality or, perhaps more likely, simply inclined to pass any legislation that will get them reelected.

The “Cash for Clunkers” bill passed the House and the Senate and awaits President Obama’s signature. It is supposed to be help energy conservation because it will take higher gas mileage vehicles off the road. It’s also supposed to help our floundering economy because it will incentivize owners of “clunkers” to buy new cars. When the driver of a clunker, defined to be a vehicle with relatively poor gas mileage and worth up to $4,500, trades it in he gets a voucher for either $3,500 or $4,500. Then the dealer must scrap that vehicle.

Here’s why our politicians are out of touch with reality. Our country is in the worst economic condition since the Great Depression. The most severely affected are those at the lower end of the economic spectrum. Arguably even more important than housing to this class of people is transportation [you can sleep in your car]. It’s not possible for many to get to work without a car. It’s not even possible for many to look for work without car. How about taking your children to school or getting to a doctor or hospital? These are the people who buy “clunkers” because they don’t have the credit to buy anything more expensive. Or, maybe they can’t get any credit at all and can afford only cars cheap enough to afford to buy for cash.

If this legislation works the way the politicians say they want it to, it will remove most clunkers from the road and drive up the prices of those few remaining to make them unaffordable to those that have no other transportation option. Of course, a lot of the economically challenged are already driving clunkers. The new law doesn’t permit them to use the $3,500 or $4,500 voucher to buy a nicer, more reliable used car. They may only buy a much more expensive new car. Unfortunately, most people with bad or no credit who are forced to drive a clunker, won’t be able to get financed on a new car even with the $3,500-$4,500 down payment.

Logic dictates that no one would have his vehicle scrapped for a $4,500 voucher if was worth more than $4,500. But, who is to say what a clunker is really worth? I can tell you from my 40+ years in the retail auto business that you can show a used car to five different used car managers and get five different opinions as to what it’s worth. I advise consumers to shop their trade-in to at least three different car dealers before they accept a trade-in allowance from the dealer they buy from. Typically you will see a $2,000 to $5,000 difference between the 3 professional opinions. I see nothing in the legislation to control this variable. I can guarantee you that there will be thousands of vehicles scrapped that are worth more than the voucher amount. How will you feel knowing that you paid $4,500 of your tax dollars to scrap a car that had a market value of $6,000?

To the extent that lower gas mileage vehicles are taken off the roads, this is good. But energy conservation is not our country’s top priority right now. We need to think about cutting our 10%+ unemployment in half. Scrapping the only cars that many of our unemployed can afford to buy and driving up the prices of those that remain is not the right way to go about this.

The car dealers love this because of the general lack of understanding of this new law will likely drive potential buyers into their showrooms. You can argue that this is good because it will stimulate new car buying. But, is it good to stimulate the economy through deception? I’m already getting solicitations from marketing companies with all sorts of cute ideas about how to exploit this legislation. You can expect to see an advertising media blitz on “Cash for Clunkers”.

I will end this column on a positive note. One Congressman who voted against this legislation is Tom Rooney from my district, the 16th. There are always a few who vote their conscience and not what will get them reelected. Unless we recognize and vote for guys like Tom Rooney, this endangered species will vanish.

6 comments:

  1. One aspect of the bill is that all vehicles that are used to get the credit must have their engines made unable to ever run again and so the cars will have only their value by the pound. So the only tade value will be what a scrap yard will give us dealers and any discount for a net trade.

    ReplyDelete
  2. Most cars that are currently donated to charity will be eligible for a voucher under the cash for clunkers program. Since the tax deduction for donating a car is only $500 or what the car sells for, charities will lose millions of dollars. A better idea is to just go back to allowing the donor to claim the book value for their car donation. This way every car is eligible, the government doesn't have to spend $4 billion on vouchers and administering a program with rules which are not enforceable! Since many of the cars donated to charity are recycled there is an environmental benefit as well!
    Karen Campese, CEO
    Cars4Charities
    www.cars4charities.org

    ReplyDelete
  3. Dear Karenc,

    Thanks very much for your posting. This is something I had not thought of and another good reason why "Cash for Clunkers" is a bad law.

    Not only does it deprive those at the lower economic strata from transportation but it's robbing money from worthy charities.

    ReplyDelete
  4. I say we send the clunkers to Cuba - to replace all their old post-war clunkers...

    ReplyDelete
  5. Thanks for your input, Russ, Kelly and Ju.

    Russ, remember that a car that won't run can still be worth thousands when torn down sold for its parts. What I predict happening under this program, is dealer being "kicked back" cash by junk dealers. The junk dealer will give the dealer a written receipt for the amount allowed by the government and give him cash "under the table" for a lot more. The government/taxpayer and the customer gets no part of this extra profit.

    Kelly, I also predict that a lot of these "clunkers" will not be scrapped but exported [not to Cuba] but to South America where the registrations and VIN's can't be traced. An old car that runs is worth a lot of money in Venezuela where gas is 19 cents a gallon.

    Ju, thanks for your posting and link to your Web site. You are exactly right about how a lot of car buyers will be "baited and switched" by unscupulous car dealers using this program as cover. You warning for buyers to be especially sure that there car isn't worth more than the $3,500 or $4,500 government voucher is very important.

    ReplyDelete
  6. Now that we know the success of this legislation, do you still believe it's a waste? Hasn't your shop seen a large increase in sales when the Clunkers was in effect, compared to this time last year?

    ReplyDelete

Earl Stewart On Cars welcomes comments from everyone - supporters and critics alike. We'd like to keep the language and content "PG Rated" so please refrain from vulgarity and inappropriate language. We will delete any comment that violates these guidelines. Oh yeah - one more thing: no commercials! Other than that, comment-away!