The Latest Bad Idea: Government Sponsored Vouchers for Car Purchases

Here is a quick look at a plan to offer government funded discounts to people who trade in old cars for new:

(From the WSJ): "DETROIT — An Ohio congresswoman unveiled another iteration of a cash-for-clunkers plan, a bill aimed at spurring car sales by giving buyers $3,000 to $5,000 to turn in their old wheels for something new and greener.

"This is a very comprehensive bill with multiple beneficial effects that I think will make it palatable to enough of the Congress that we can enact it," says Rep. Betty Sutton, D-Ohio, who introduced the bill Tuesday. "It not only assists consumers who need a lot of help in this economic downturn, but it will stimulate our economy, reduces emissions, and reduces our dependency on foreign oil."

An earlier attempt to pass such a plan failed to gain broad support throughout Congress. But European car sales are benefiting from such efforts. A recent analysis by CSM Worldwide showed vehicle sales in the several nations with such plans will be 400,000 more this year than they'd be without the bonus.

The bill would give $3,000 to consumers trading in cars more than 8 years old if they buy a new car that gets more than 27 miles per gallon or truck getting more than 24 mpg. The rebate would rise to $4,000 to $5,000 for cars getting more than 30 mpg and for commercial trucks getting better mileage than their older counterparts.

Ford Motor (F) , with sales down 44.1% in the first two months this year, favors such a plan. "By providing incentives to purchase a new vehicle, the legislation would help reduce consumer costs, jump-start the economy and help support millions of good jobs in every state across the nation," says Ziad Ojakli, group vice president for government affairs. A Ford analysis shows it has 10 cars that fill the bill, General Motors (GM) has 12, Chrysler, 10, Toyota (TM), nine and Honda (HMC), five.

Though the bill has automaker support, the potential cost could doom it, says Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. "The bill could become the victim of its own success. If everyone takes advantage of it, then the costs shoot up."

Although Talbott says he supports the bill's goals, he's not sure if many legislators are willing to sign on for another costly stimulus bill."

To be sure it's hard to perform a detailed analysis on this plan until it's finalized because so many things can change between the proposal stage, and the time the bill passes. However based on the proposal's high-level concept, I think it will benefit the foreign automakers more than it will the domestic ones.

Just think about it: domestic cars are already heavily discounted and in some cases are selling for 50% off, while the foreign automakers aren't offering discounts of anywhere near the same magnitude. Based on marketing practices that began back around '01 the domestic automakers have already established themselves as the low cost provider, while the cost of foreign cars has slowly increased. As a result the vouchers may be more attractive to consumers for us in purchasing a foreign car than a domestic one. Especially since there is more demand for many of the foreign models in the first place.

A quick look through autotrader.com revealed that brand new Chevy Malibus often sell for less than the cost of a used Accord or Camry, which seems to support the idea that consumers who are already ignoring the heavy discounts from domestic dealers may be more interested in using the vouchers on foreign cars.

Another issue is that people who drive cars that are 8+ years old may not have the financial strength to buy a new car, and/or may be enjoying life without a car payment. Considering the state of the economy they might be unwilling to take on a new expenses, or may find that getting a used car that's 3-4 years old may still be cheaper.

Still it's hard to assess the potential impact of the plan until it's finalized, and there is still a good chance that it won't get passed in the first place.

I personally hope the proposal dies because I don't like the idea of subsidizing car sales with taxpayer dollars, and I think the long-term impact could be fairly negative in terms further cementing the role of the Detroit automakers as low cost providers. It's really hard to put the genie back in the bottle when it comes to pricing.

You can read the original article here, and the web site of the Congresswoman who proposed the plan can be found here.

Sources:

USA Today: "$3,000 - $5,000 incentive for car buyers proposed" -- Sharon Silke Carty, March 18, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[Mbuna:]

Not a bad idea IF the US auto industry really had some real green cars to offer. At this time though it's a pipe dream and there will be a whole lotta grief to go through before we get anywhere close.

Mar 20 05:40 AM

[User 375138:]

WE ARE GIVING THE BIG 3 BILLIONS OF TAX DOLLARS. LETS FOCCUS ON GETTING THEM BACK TO PROFITABILITY SO THEY CAN START PAYING THE MONEY BACK. WHY WOULD YOU GIVE TAX DOLLARS TO BUY FOREIGN AUTOS?

Mar 20 07:05 AM

[Thadeus Tho...:]

Cars are selling up to 50% off? What brand, where,? Perhaps you are talking about the "buy get one free" thing. I've only see that involving left over 2008 unpopular models like the Chevy Uplander mini van and you get a free Cobalt. So you end up buting something you don't want at almost full price to get an higher mpg compact you might want. Where's the deal in that? I've not seen any specific deals for new, 2009 models 50% off. I'd like to know where, specifics. For 50% off I might be in the market. Otherwise this is just more "foof".

Mar 20 09:17 AM

[G. Kahn:]

Author is nuts. A $5000 discount on a cheap car is more incentive than $5000 discount on an expensive car. Ask yourself how much an incentive it would be on a $5000 car. Duh.
Further, read The Millionaire Next Door. Most millionaires drive older cars, and would jump on an opportunity like this. That's how they got to be millionaires, by being smart with their money.
That said, I suspect most people who buy "domestic" don't have an 8+ year old car. Big-3 cars don't last as long, so it's Honda/Toyota buyers (which are also made domestically) who would be able to take advantage of this.
And yes, it's a bad idea just because we don't pay tax to buy each other the cars the gov tells us to buy, when the gov. says to buy them. It's outrageous.

Mar 20 09:17 AM

[Thadeus Tho...:]

It's too early to tell much from this article.
----> "To be sure it's hard to perform a detailed analysis on this plan until it's finalized because so many things can change between the proposal stage, and the time the bill passes." <------

Mar 20 09:20 AM

[Thadeus Tho...:]

Germany has been doing the voucher deal on cars since last Fall. From what I read, it only applies to German made cars. Wake up U.S.A. If this goes through, support American BRAND and made cars. Some people will label this protectionist. What do you think other countries like Japan do?

Mar 20 09:23 AM

[Paul Killinger:]

Why not? Just another facet of the Socialists' plans for our future.

Mar 20 10:08 AM

[BTC:]

Great idea!!!!!! How come this is being done all over the world, but not here? How do you help the economy? You start with spending money in America. That saves jobs of more people who will spend more money in America. This is so simple. Just invest in America!

Mar 20 11:54 AM

[babyray:]

I love the idea!!Anything to jumpstart the industry! I dont know where this author gets his 50% discount on Domestics. I think he made it up!!Be American!!! Buy American!! Drive American!!

Mar 20 12:29 PM

[Evets:]

The author of this article says that he opposes this idea because, "...I personally hope the proposal dies because I don't like the idea of subsidizing car sales with taxpayer dollars...".

However the author apparently chooses to ignore the fact that the federal and state governments already heavily subsidize the car and truck industry by using taxpayer dollars to build highways. How is it that using tax dollars for car sales is significantly different than using tax dollars for the road system that our cars use?

Mar 20 01:42 PM

[Josh G:]

For those to say Domestic cars do not have green options. I beg to differ. The 2010 Ford Fusion Hybrid gets 41 mpg in the city. It is a little on the costly side, but with an additional 5,000 I would definately entertain the thought.

Mar 20 02:48 PM

[Markham Lee_:]

G. Kahn - people who can afford new cars but are sitting on the sidelines due to the economy, aren't likely to be swayed by further discounts. Saving $3, $5, $7k isn't the issue, the issue is that their current vehicle works just fine and they don't want deal with the larger costs around buying a new car.

I personally put off buying a new car because of the economy and the voucher program wouldn't sway me one bit, it's not an issue of saving $5k it's an issue of saving the rest of the purchase cost.

The other issue is that if this program is co-sponsored by the automakers they would be selling the cars for a loss, something they already do with their big incentives (the boys in Detroit at least) how does that help anyone?

As for 50% off I'm basing that on the prices some local domestic dealers are charging now based on the historical price, it's not advertised that way but between the incentives, employee pricing, etc, it's in the neighborhood.

The local Ford Dealer is offering Explorers at about 1/2 of what they would've cost about 18+ months ago.

-M

Mar 20 05:37 PM

[Tony Petroski:]

I agree with the author, I hope this proposal dies. Free people don't need a master to place cheese at the end of a maze and reward all the rats that make it that far.

Mar 20 08:22 PM

[Reclined:]

Thadeus,

you wrote "Germany has been doing the voucher deal on cars since last Fall. From what I read, it only applies to German made cars."

The second part is not true. The deal applied to all cars (starting this year). It actually made foreign car sales increase from around 30% share to 50% (not exact numbers, I would have to look them up).

I believe protectionism would be the last drop to move us into a severe depression. I hope governments will be so wise as to minimise moves towards protectionism despite widespread public requests to do so.

Mar 20 08:28 PM

[Rwig:]

I agree with G Kahn on May 20th 9:17am,

That if I already own a car with no payments why would I want to get into debt, never mind if your credit is so shot that you can't get approved for a loan, I think about once I get this newer vehicle the cost of those expensive parts to repair them is what is really going to hurt. I'm used to being able to maintain my own car and not have to worry about the crazy stuff like those electronic key replacements that cost so much. What really gets me is the fact that cars aren't made out of anything but plastic and cheap materials for higher prices. I laugh when people say deep discounts and 50% off car prices they should never been this high in the first place. $30,000 - up for a car is rediculous and the dealers ought to eat crow for selling them for so much in the first place I don't feel sorry for them myself.
If you pay that much for one you ought to be taken. Homes used to cost that and you can at least use them for something other than riding to the store or vacation in.


Rwig

May 17 01:41 PM

[Ken in Florida:]

It is my understanding that this type of voucher arrangement has been in use in Europe and has spurred a large increase in fuel efficient car sales. There is no doubt that this is an excellent idea. What I don't understand is why anyone is opposing this legislation. It is a win win for everybody. Only an ignorant fool would oppose this idea.

Ken in Florida.

Jun 12 03:22 PM

[Thueringer:]

Government Voucher, for whom they offer half the value for my trade in wich is paid for, offer me higher payments, Insurance, taxes, repair bills, so that I can feel good about the enviroment. I think that the US Government should take this poison pill themselves. Stop buying LTD Squad cars, F-350 Pick-up and all of those gas hogs for BLM, Fish WildLife and Parks, all Law Enforcements, and put them all in Volkswagons, make them buy their own vehicles and gas- Insurance. That means Mr. Obama would be riding in Subcompacts, like they expect us too do, no more half million Limos' and Mega million jets, just an observation from this peasant that actualy works for a living !

Jun 13 11:49 PM

[Jennie:]

Its a good Idea, helping people buy something that's not only good for themselves, but the economy, and helping some idiots to do the right thing. Some people need their hand held to move in the right direction.

Jul 07 02:50 AM