The biggest news about the ‘Cash for Clunkers’ program has been, of course, that the plan ran out of cash in one week and needed its funding tripled to $3 billion. Now, some may wonder if it’s really appropriate for tax payers to help pay for car purchases (Murdoc sure wonders, for instance), but I guess I can see that there was at least some justification for the program in the short term.

Long term, however, I wonder if we’re going to see some problems because of this. For example:

Cash for Clunkers throws some into reverse

Cash for Clunkers is rolling on after President Barack Obama signed a $2 billion extension for the program last week, and new car dealers say buyers are continuing to flock in for the deals. But at the other end of the market, companies and organizations whose business models are built on used vehicles say they’re hurting badly as Americans who might have come to their doors suddenly find themselves better placed to afford a shiny new car.

It’s not just dealers, who say their customers are disappearing. It’s also auto parts businesses, which fear that the cost of used parts could skyrocket as clunkers are destroyed rather than sold for parts. And it’s charities, many of which depend on donated cars to raise cash at auctions.

Though many of the cars traded in during the program aren’t really “clunkers,” they’re all being destroyed. Though used car salesmen may be hurting a bit right now, I suspect that used car buyers are going to feel the effects of this program for years to come, particularly those who can only afford cheaper and older cars.

Some of the parts on the clunkers can be sold, but nothing from the engine or the drive train. Generally, these are the most important and most expensive parts.

Also, I wonder if we’ll be seeing an uptick in defaulted auto loans as people who took advantage of the program find that they’ve bitten off more new-car-payment than they can chew. Even if everyone manages to pay their loan, it seems likely to me that many new cars bought under the program were bought by those who would have spent less otherwise.

So we’re using taxpayer money to bail out car owners who have previously chosen to drive cars now deemed “clunkers,” and those of us who drive cars with better mileage are funding the program.

While some folks got a good deal on a car they would have bought anyway, I suspect that a lot of people, particularly those near the lower end of the income scale, are going to suffer for this in the end. We’ll see.


  1. CfC is going to have a massive long-term effect on the used car market. Taking 666,666 ($3Bil/$4500) used cars out of the sales and parts streams will inevitably drive up prices for the remaining cars and parts.

    One bit of data that could help a speculator/arbitrageur is to know the population of cars destroyed under CfC. Pick the top 2-3 cars destroyed, buy some junkers of the same, and one might have a tidy (yet unsightly) investment.

    Here in VT we have a charity run by (I think) the Methodist Church that takes in donated used cars and refurbs them for gifting to low-income people with no reliable transportation. The donor gets the Blue Book value as a tax credit. Taking perfectly-good late-’90s/early ’00s cars out of that donor pool seems stupid to me, but what do I know. I’m just a moron economist who understands that when gov’t subsidizes something, you get more of it.

  2. So, what if lots of folks start bailing out on their car loans? Kinda reminds me of the sub prime real estate mess.

  3. Darrell: Yes. I can see what they were trying to do but it doesn’t seem to have been thought through beyond the first six months or so.

  4. @Murdoc:

    The program wasn’t thought through at all. Instead of cars made in the last 25 years being eligible, it should have targeted those 70’s behemoths still staggering around our roads. There’s plenty of ’em here in Vermont and I can only imagine that they are more plentiful in places where rust means Neil Young. Besides, the small-block V8s that motivate all that ’70s iron remain ubiquitous in both NOS and new build parts, so slagging the motor on a ’73 Monte Carlo may cause some mullet-head to cry but doesn’t materially alter the parts situation for cars of that era.

  5. Captain Ned: Well, if the goal was to truly do good for the environment and get the worst greenhouse gas guzzlers off the road forever, yeah, maybe it wasn’t thought through “at all”.

    But if they had done something along the lines of what you said, it wouldn’t have helped enough people or sold enough new cars to boost car sales for a month or two and make everyone feel all hopey changey.

    I think they thought it through to boost numbers for a few months and deflect a lot of the criticism at a time when poll numbers are starting to go south while the health care issue is discussed.

  6. This has been done in the UK for the last few months… seems to work, but it’s obviously just an interim solution.

    Pointless if the markets don’t recover… and will just leave us in a worse position than before. I believe if such measures should be done, it should only be permitted for purchases from home markets. No point doing it for imported cars… same problem lies here in Europe too. So many Japanese and S. Korean cars! They must be loving it! Sort of is more a kick in the teeth than a real help to the local economy. It’s not like the spares are even manufactured in-country.

  7. What “seems to work”?

    Spending money to destroy capital (i.e. cars that otherwise could have been used another couple of years) is perverse. Of course there are unintended consequences. Creating an avalanche of scrap, distorting the markets for used cars and car parts, pushing down the resale values of leased vehicles… Creating artificial demand now means that new car sales will be lower in the next 2 or 3 years. What then?

    Yes, other countries are doing it, and they suffer the same problems. It´s not as if the UK or Germany have money to burn.

  8. I agree with your article. Cash for clunkers is really hurting charity car donation since it’s the running cars, like the ones being turned in under c4c, that generate the most money for charities. Also, when charities currently receive a non-running car as a donation, they are getting less money for it at the scrap yard due to the glut of c4c cars there.

  9. Goodwill and the Kidney Foundation accepts cars as donations. The former uses proceeds from sale to help make disadvantaged (displaced workers, physically-challenged) more self-sufficient through such ways as job training/placement programs. The latter helps those who need kidney dialysis and to fund kidney research. It’s admirable what you want to do.

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