Monday, August 24, 2009

The Real Impact of Cash for Clunkers

The Cash for Clunkers program is ending today. Most news reports are stating that the program was wildly popular and very successful in stimulating auto sales. In fact, Transportation Secretary Ray LaHood stated "It's been a thrill to be a part of the economic news story in America."

However, here at PriceHub, we think the Cash for Clunkers program has had an overall negative impact on our economy. Let us explain why.

1. The increase in auto sales is a short-term, one-time spike and will not continue after the refund program ends. The economy is still struggling and consumers will not continue to buy new cars at the current rate. Demand for new cars will fall (perhaps even more so now that so many people have already purchased new cars under this program) and the car manufacturers will struggle again for the remainder of the year and likely through next year.

2. As of last week, around 450,000 new cars were purchased which means approximately 400,000 new car loans were initiated. The Cash for Clunkers program has saddled 400,000 consumers with more debt, and assuming that the average car loan is $18,000, that means consumer debt has just increased by $7.2 billion.

3. Business at independent repair shops is down since people are trading in their old cars for new cars, and they no longer need repair services. Since most independent repair shops are "mom & pop" owned, this service sector is struggling and taking a major hit. Potential consequences may include shops closing and/or higher service cost for consumers as a result of reduced competition (shops that stay open may need to charge higher rates to stay afloat.)

4. Owners of cars that fall under the Cash for Clunkers classification but don't qualify for the program (ie, car was not owned for at least a year, car was in the process of being restored and was not insured, etc) could find fewer replacement parts as legislation requires the engine, transmission, and other drivetrain components be destroyed.

All in all, our summary of the Cash for Clunkers program is that it helped stimulate a one-time spike in sales, but sales will return to sluggish levels once the program ends. Other than this one-time benefit for car manufacturers and their dealers, we believe the economy is worse off due to other groups that are negatively affected by this program.

Send us your feedback - what's your take on the Cash for Clunkers program?

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