Why "Cash For Clunkers" Won't Work

Our Congress is on the verge of passing a $1 billion plan to give people as much as $4500 to buy a new, higher mileage automobile (See Full Story).

Under this proposed law, if you buy a new car that is 4 mpg more efficient than your old one, the government will hand you a voucher for $3500. For a 10 mpg differential, the voucher will amount to $4,500.

While this may sound good politically, it is, in practical application, doomed to fail.

First, the true clunkers on the road are all well over 9 years old. The people driving these cars, even with a voucher from the Feds, are not going to go out and buy a new car. They just don't have the money. That's why they're driving a clunker in the first place.

Besides having to commit to high monthly payments against something that they currently have no monthly payments on, they will wind up paying more in annual fees and insurance payments. In most states the vehicle registration fees are age and value based. In Nevada (as an example), a 10-year old car costs about $40 a year to register. A new car will cost nearly $500. Additionally, a new car would probably add another $400 to $600 a year in higher insurance costs. Combined, you could be looking at a new expense of $850 to over $1000 a year that is over-and-above any monthly expenses for a new car loan.

The average mileage on a new car is about 27 miles per gallon and that car is destined to drive about 12,000 miles a year; once off the lot. That means that this new car will probably need about 450 gallons a year to operate. At the current rate of $2.60 per gallon, the annual fuel expense would be about $1170 dollars. A 4 mpg increase in a mileage rate is only a 14 percent reduction in annual fuel expenses. The resulting savings for buying that new car would be a little over $13 a month for the buyer. Not much of an incentive to spend $10,000 or more (even after the voucher) to save such a small amount of expense in gasoline.

In essence, this program is only going to benefit the middle class that have enough money during this recession to commit to buying a new car. It will appeal to those people who had already planned to buy a new car and who plan to move from high mileage SUV's to a lower mileage sedan or hybrid. This would attract people whose life style has changed for some reason; like recent empty nester's or retirees who no longer need that Chevy Suburban to haul kids around. But, the high mileage car that they leave behind them will still remain in the marketplace as a used car. And, given that the average car is 9 years old, that used car will remain on the road for a very long time.

The people in Congress don't seem to understand that minuscule savings in gas mileage won't warrant the high cost of buying a new car; even with vouchers. That's why Prius sales are down almost 50% from just last year. The actual savings in gasoline expenses just don't compute when compared to the increased cost of any new hybrid. Only the ideological "greens" are willing to forgo the true cost of buying a hybrid so they can impress their friends at the latest dinner party and tell everybody how they, personally, are saving the planet.

Lastly, the biggest problems with the "Cash For Clunkers" spending bill is that it will drive consumers to buy Toyota's and Honda's. That's because, the Japanese vehicles have higher mileage capabilities than most U.S. models of the same class or type. In fact, most Japanese hybrids are at least 4 mpg more efficient than any equivalent U.S. branded hybrid. Standard fueled cars are even more efficient. That means that many new car buyers just see this as a "government give-a-way" for something that they planned to do anyway.

Furthermore, the reason the U.S. car sales have slipped over the years is because resale values are lower and repairs higher. If you just look at any Cadillac, two years off the showroom floor, there are constant and reoccurring problems with things like the electrical system. That's why resale values are lower and why their Japaneses counterparts are more desirable. The quality and finish of a car on the showroom floor is one thing. However, the repair history is something completely different. U.S. namesakes can't compete with the Japanese after 2 or 3 years of operation. Just look at consumer reports or other rating agencies.

I just think that this "Cash for Clunker" program will be a cash cow for those who intended to buy a new car anyway. The true winners might be the Japanese and South Korean manufacturers who excel at high mileage vehicles. It might sway some to buy a hybrid because the $4500 voucher can ease the pain of having to foot $6000 or more for the price of a hybrid over the equivalent conventionally powered car. But, the bottom line will be that there will be just as many "clunkers" on the road after the program is over. If you really wanted to get those clunkers off the road, the program could be wider spread and more effective by giving any American a voucher if "they trade up" by 5 years on a "newer" and, not necessarily, new car.