Monday, August 24, 2009


*Now that the cash for clunkers program has ended, I thought it would be good to rerun my original column on this subject. My belief about the program being ill thought out remains, but I’m hopeful about there being some economic benefit. This will be decided in the next few months based on whether the demand for new vehicles “falls off a cliff’ because clunker deals were not fresh business. There is a fear that we merely borrowed sales from the future from those who would have bought a new car in the next few months anyway.

The cash for clunkers program was not only wasteful of taxpayers’ money but it was administered just about as sloppily and inefficiently as is possible. Ray LaHood, the head of NHTSA did not have a clue as to how car dealerships operate, what paperwork is pertinent to a sale, or how a dealership’s cash-flow would virtually dried up by not paying dealers promptly. You will be reading about dealerships that were literally put out of business by this program because they did not receive the money from their sales from NHTSA. As I write this preface, less than 10% of the $3 Billion dollars has reached dealers. My own dealership is owed well over $1 million. Because dealers make far less than $4,500 or $3,500 on a sale, every clunker transaction drove them further into a negative-cash position….some to the point of bankruptcy and thousands were forced to quit the program early.

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.

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