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Cash for Clunkers: Possible Side Effects May Include'¦

by Jeffrey N. Ross
August 14, 2009

In an age where there is a magical pill to cure just about any ailment known to man, the whole idea behind the Cash for Clunkers (officially known as Car Allowance Rebate System or C.A.R.S.) system seems too much like a pharmaceutical drug commercial to me - only there is no fine print or stated side effects. Instead of short-term drug side effects that may include nose bleed, rash and the numbness or swelling of limbs, the Cash for Clunkers system could have a more lasting effect that won't be felt until after the current $3 billion is spent.

When the Cash for Clunkers idea was first talked about, the purpose was to remove older, less fuel-efficient vehicles from the road and replace them with newer, safer and more fuel-efficient vehicles. By the time the rebate system came to fruition, the U.S. auto market was in such a severe slump that Cash for Clunkers suddenly became a way to stimulate the automotive market, and this is where I feel mistakes will be felt later. While I remain a fan of any system that removes old cars from the roads that are spewing oil from the exhaust pipe or are just generally unsafe to be driven, I fear that the good nature of Cash for Clunkers could be far outweighed by negative effects in the future.

The biggest problem I have with this system is the fact that it is spurring new car sales that normally wouldn't have been made. I am by no means an economist, but looking at the current state of the unemployment rates and unemployment claims it would appear that there is still some instability in the job market. Getting people to buy a car in this market may take us down the same path we saw in recent years when it came to people buying houses who probably should not have been buying a house and subsequently went through costly foreclosures that may have been a leading factor in the current recession. Most people who are regular car buyers generally buy a new car every three of four years, but these buyers don't even qualify for the C.A.R.S rebate since their car is most likely worth more than $4,500 in the first place.

Even for those who were considering purchasing a car this year with a vehicle that is now classified as a clunker, this rebate system may have created a premature spike in auto sales. Yes, the whole point was to stimulate the growth of the auto market and kick start the sales, but it may have forced people to either hold off on buying a new car before the program started or rush into a purchase that they would have made later which may hurt new car sales in the future.

Secondly, though no fault to the government, is the fact that foreign automakers are likely to benefit from Cash for Clunkers far more than domestic automakers. Not surprisingly, three Toyota vehicles (the Corolla, Prius and Camry) are in the top five vehicles sold through the first few weeks of the program. The Ford Focus surprised many by becoming the top seller in the program's early stages, but is only joined by three other vehicles built by domestic automakers: the Ford Escape, Dodge Caliber and Chevrolet Cobalt. This means that while the government's rebate is being used to increase the U.S. auto market, the foreign auto companies are likely to reap more benefits than the domestics. Either way, the good sign for the U.S. auto industry is that in addition to the four domestic vehicles, a total of seven of the top 10 best-selling vehicles under the Cash for Clunkers are assembled in the U.S.

Like I said, it's not the government's fault that the Big Three chose to stick with large SUVs instead of developing their small car programs sooner, but hopefully each learned their lesson as is evident by the advanced-technology vehicles being developed by each automaker. A more positive sign is the fact that the Big Three have reduced their dependence on big trucks and SUVs and have begun offering smaller, more fuel-efficient cars.

Finally, the net result of this bill is to scrap the 'clunkers' and disable its engine which is not only destroying some quality cars that are still road worthy, but it's probably destroying a few good cars that have potential to be collector's cars in the future. Although not many people are generally concerned about the well being of used car dealers, junkyards or classic car collectors, these industries could be directly affected by Cash for Clunkers. Then the whole debate becomes which creates more pollution: a sport utility vehicle that only gets 13 mpg or a factory working overtime to produce brand new vehicles from scratch.

The rebate applies to certain vehicles that are less than 25 years old and have been registered by the current owner for at least the last year. Depending on the vehicle being purchased and the one being traded in, customers are eligible for either a $3,500 rebate (for a vehicle with 4 mpg higher than the trade-in) or a $4,500 rebate (for a vehicle with 10 mpg higher than the trade-in) that is to be deducted from the price of the car. To qualify for the program, new cars must get combined fuel economy of at least 22 miles per gallon, while trucks need to average at least 15-18 miles per gallon; no vehicles with an MSRP of more than $45,000 will qualify for the rebate. Here's how the Car Allowance Rebate System works: Following the initial $1 billion funding, the government has since injected another $2 billion into the program and states that the program is expected to continue until November 1, 2009 or until the money runs out. As of August 13, there have been 338,659 clunker transactions submitted form the dealership totaling $1.4 billion according to the Department of Transportation's Web site.

For now, automakers love the increased demand and some have even begun increasing vehicle production to meet the demand, but only time will tell whether government's implementation of the Car Allowance Rebate System is a cure for the ailing automotive industry or an ailment that will have consequences far worse than the original concern. After all, with headache medicines on the market that have possible side effects of stroke, heart attack or death, I think I'd rather be stuck with a headache.


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