Are you driving your grandmother’s 1995 Saturn, handed down to you by at least three older cousins who had the pleasure of driving it first? Do you hate your car and desperately want a new one? Then surely you took some interest in this Cash-for-Clunkers program. Of course, it didn’t take long for you to discover that your car is not considered a clunker. There will be no free money for you and sadly, the new car will have to wait.
This isn’t as bad as it sounds. Americans may be surprised to hear that this Cash-for-Clunkers law has more flaws than benefits, and may actually be disadvantageous to those who qualify for it. In addition, it has added insult to injury to an already devastated industry, and has the potential to further damage our sensitive economy. Take a few minutes and look at the big picture from another point of view. I did not run to a dealership to trade a gas-guzzler for a shiny new coupe. Instead, I paid close attention to the situation from the showroom of a disenfranchised Chrysler store. I watched and I learned and I waited for the media to disclose the facts to the public. I am still waiting. You don’t have all the facts.
First of all, consider the consumer. The vehicle that Mr. Jones plans to trade-in must meet certain requirements. Most importantly, it should get 18 miles per gallon or less, according to Cars.gov, the official U.S. Department of Transportation web site. Therefore, Clunkers essentially rewards those individuals who previously purchased a gas-guzzler, typically a sport-utility vehicle or a pick-up truck. In fact, according to Automotive News, the top five traded vehicles that have been accepted through the program are the Ford Explorer, the Ford F-150, the Jeep Grand Cherokee, the Jeep Cherokee, and the Dodge Grand Caravan. At the same time, it ignores citizens who have been driving more fuel-efficient vehicles, however old or unsafe those vehicles may be. In addition, all tax-paying Americans, regardless of the qualifying status of their vehicles, have contributed monetary funds to this program. Yet not all people are awarded the rebate. In other words, Clunkers takes from me and you and gives our money to Mr. Jones, but refuses to share any with us. This is not a very democratic policy. It was Thomas Jefferson who said, “To take from one…in order to spare to others…is to violate…”the guarantee to every one of a free exercise of his industry and the fruits acquired by it.””
Even worse, it can be a detrimental policy. When Mr. Jones receives $4,500 in (what we now know to be is not) free money, he may purchase something more expensive than what he would have otherwise purchased. Even though his monthly payments may be lower because of the rebate, they are not necessarily so low to make them affordable. After all, had that payment been an option for Mr. Jones, don’t you think he would have traded his clunker in a long time ago? It is eerily similar to what occurred in the housing industry, where people purchased outside their means, and when the economy changed, they found they could not change with it. If Mr. Jones loses his job, will he still be able to make the payments? Or will his car be repossessed, damaging his credit?
Ironically, last month he may have been able to buy a pre-owned vehicle at a buy-here-pay-here establishment, but next month, those affordable vehicles may not exist. According to cars.gov, when you trade in your gas-guzzler, it will be destroyed. It will not be recycled into the market, even if it is otherwise a safe and reliable vehicle. Ultimately, the price of all cars will be driven up by the lack of inexpensive cars available. So be sure to tell your teenagers that they may not get that first car until they can afford to buy it! Actually, this may disproportionately hurt the blue-collar worker who needs to buy a truck for his business, but is not in a position to purchase something brand new. Will there be an SUV or pick-up truck left in his price range?
One statistic that has not been readily disclosed is what model year vehicles are being traded most. I ask because it is my educated guess that most of these vehicles are much older and have high mileage. They may even be the extra car in a household, and have now become a valuable commodity. I feel quite certain that most people are not trading their brand-new Jeep Grand Cherokee because these vehicles have higher fuel-efficiency ratings. Plus, if you trade in a car that you purchased in the last year or two, you actually lose money on the transaction, rebate or not – especially if you have less than stellar credit. This is due to the fact that your car depreciates much faster than you make your payments. So it is worth much less than what you still owe on it in the first few years. How great is that $4,500 rebate if it costs you $6,000? Of course, very few sources will inform you of this while encouraging you to go ahead and trade that SUV!
Moreover, people who have recently purchased newer trucks and utility vehicles have done so because they are of value to them. They provide some benefit that a smaller car does not. Believe me, no one is forced into buying these vehicles that are generally much more expensive than their smaller competitors! If the cars that are traded are generally older models, many may not even be worth $4,500. In other words, we are funding a very bad business practice of overvaluing someone’s vehicle in order to make a deal. Again, it sounds like the housing industry. We should know by now that bad business practices, no matter how beneficial in the short-term, tend to do more harm than good in the long-term. Our economy does not need another setback.
Unfortunately, there are currently injured parties that are already hurting from this program. For one, there are the suppliers that are facing bankruptcy, with no bailout in sight, according to Automotive News. They do not have the funds to continue producing parts, but the Clunkers program has depleted inventories, requiring that new vehicles be built. How can a supplier provide the parts to build them, when the supplier cannot afford to operate their equipment? What long-term effect might this have? In addition, thousands of innocent businessmen and women lost their livelihoods this year when Chrysler and GM entered bankruptcy court and were required to cancel franchise agreements. Some of those dealers are struggling to get by on a used car operation. However, Cash-for-Clunkers does not drive business to used car dealers, because the rebate cannot be used on a pre-owned purchase. Instead, it adds insult to injury by redirecting more customers to those dealers’ competitors. Again, this is not a very democratic policy.
But alas, Americans will continue to take advantage of these unbelievable savings, blissfully unaware of the damage it may cause around them. When will we learn that when something sounds too good to be true, than it probably is? Or maybe the question should be when did car buyers start believing that there are no strings attached? Perhaps the cynicism and distrust that plagued the industry were values worth keeping.
Jefferson on Politics and Government: Property Rights
The University of Virginia
Statistics on Uncle Sam’s Rebates
Auto task force watching suppliers, but holds off on aid