Why 'Cash for Clunkers' Is a Bad Idea

In case you haven’t heard, Congress will soon implement a “Cash For Clunkers” program. If you trade in your old car, you’ll get $3,500 towards the lease or purchase of a new one. If you have an old SUV you’ll get $4,500. Seems like a good plan doesn’t it?

Yesterday I had a short phone call with Bob Meigan, VP of TurboTax and we discussed the short-comings of this program. First of all, your car has to be a clunker. That is it shouldn’t be worth more than $3,500 since you won’t get anything extra if it is worth more. By law, the dealer will have to scrap the car so even if its worth $5,000 he’s not going to give you a dime more than the $3,500 he’s getting from the goverment.

So basically you need to be driving something like a salvaged car that you’ll trade in for a brand new one. Secondly, the salvaged car needs to be getting 18 miles or less (I think its 16 for the SUVs) according to the EPA sticker when you first bought it.

Don’t you think that people who are driving around worthless junk with terrible gas mileage are doing it because they can’t afford a nicer car? Do you think a $3,500 incentive will enable them to afford a new car? The incentive is probably worth only $70/month over a 5 year period on a car loan – I’m pretty sure you’ll need to come up with the rest.

And in order to prevent people from gaming the system and buying salvage cars for a thousand dollars and using them to get a bigger discount, the plan enforces that you must have owned the car for a year. (And the promotion only runs from July to November 2009).

So probably the only people who will be able to use this program are students who were driving around clunkers and now having found jobs despite the tough economy are looking to upgrade. However, these people would’ve bought cars anyway, so there’s no real stimulus to the economy or the car companies. Just another waste of time and money.

However, if you are in the market for a new car, remember you can deduct the sales tax this year.

Comments

[Davewmart:]

I can see a group of people it will help.
Well-off people who keep and older second or third car as they do very little mileage in it.
A nice example of regressive benefits.

Jun 28 06:47 AM

[optionsgirl:]

I read that only 250,000 car sales are projected from this program. That's a spit in the bucket. This is just another wasteful, go nowhere Obama solution. It is based on a model from Europe, where they keep cars much longer.

Jun 28 08:09 AM

[rwu74alpha:]

good argument. This program is typical: sounds good but much ado about nothing. Besides the uselessness, it has a loophole: how do you stop people to sell their (much subsidized) new car and make a quick buck? Say a guy trade in a junk for $4500 and buy a new Jeep for $20000-$4500, and turn around sell it for $18000 (just pick numbers). Who will buy it? I will.

Jun 28 08:24 AM

[john s. gordon:]

well gee if the europeans keep cars longer it is because they are better built to start with.
> jack

Jun 28 08:26 AM

[a fat panda:]

What no one is talking about is the impact on lower income Americans who actually need "clunkers" to get to work and the like. This idea is the unavoidable outcome of giving intellectuals other people's money.

Jun 28 08:31 AM

[axelrod608:]

Thanks for the program details. I was starting to look for an old Suburban beater I could get for $100 to trade in.

Jun 28 08:42 AM

[yellowhoard:]

I looked into the cash for clunker bill yesterday.

The car must be in operable condition and have been insured for a year and titled to one person.

I'm going to trade my son's 1994 Jeep Grand Cherokee in for a new Malibu.

$4500 for the Jeep
$2000 GM card savings
$1000 GM loyalty because I bought my daughter a GM 2 years ago
$2500 rebate on all Malibus

That's $10,000 off on the $21,000 Malibu before I even start my negotiations.

I'm thinking of offering around $17,000.

It's possible that I can get my son a new car for about $7000.

Jun 28 09:25 AM

[fireball:]

will this also cause a little bit of quick fix by cutting out some actual future demand? i guess it may keep government motors above $1 awhile longer. so now uncle sam will be in the used car business too.
government if you really want to help, don't.

Jun 28 09:49 AM

[OB38654:]

The law should have allowed any car in drivable condition to be used as a clunker, it wouldn't be "gaming the system" to go out and acquire a clunker for a trade, it would get the car off the street and sell a new car, which is exactly what the program is supposed to do.

In addition, if people were able to buy a junker for the express purpose of trading it in, those with the clunkers would be able to sell them for a good price and get a better car, sort of a trickle down effect.

This law will do nothing to either get junkers off the road or stimulate new car sales. It's another joke from Congress, that's all.

Jun 28 10:20 AM

[Glen L.:]

How about the idiocy of subsidizing new car purchases with tax dollars? If 250,000 people gain while 100,000,000 lose, what is the net loss? Oh, maybe the air will be a little cleaner and we'll all live a nanosecond longer. Or maybe not.

Jun 28 10:31 AM

[User 689427:]

I would fall into the category that Davewmart mentions with a 1990 Chevrolet truck with 58,000 miles but I have no intentions to use this plan. Using the $3,500 vs. what I would get on a trade-in, I would guess I would be coming out ahead $1,000 to $2,000 with the clunker plan.


On Jun 28 06:47 AM Davewmart wrote:

> I can see a group of people it will help.
> Well-off people who keep and older second or third car as they do
> very little mileage in it.
> A nice example of regressive benefits.

Jun 28 11:04 AM

[American in...:]

You're wrong. The clunkers emit most of the pollution on the roads.

And you're also wrong to characterize a car with a trade-in value of $3,500 as junk. It isn't. The second hand value of most cars is very low ....

This is a highly successful European idea and the only ones who oppose are your typical ideologue right wingers.

On Jun 28 08:24 AM rwu74alpha wrote:

> good argument. This program is typical: sounds good but much ado
> about nothing. Besides the uselessness, it has a loophole: how do
> you stop people to sell their (much subsidized) new car and make
> a quick buck? Say a guy trade in a junk for $4500 and buy a new
> Jeep for $20000-$4500, and turn around sell it for $18000 (just pick
> numbers). Who will buy it? I will.

Jun 28 12:22 PM

[Swiftcreek1:]

One other thing to think about.....Like others have said here, it's generally being directed at a demographic that doesn't have a great deal of extra disposable income otherwise they would already have upgraded. (other than the college students mentioned above)

Inspite of how they came to be driving clunkers I think it's safe to say that most of these people are still capable of doing basic math.

Let's say for the sake of conversation that I drive a piece of junk 10,000 miles a year and I get a whopping 16 miles a gallon in combined driving. I use 625 gallons of gas for the year. If I trade that in for something that gets 24 mpg in real world conditions I'll use about 417 Gallons. Gas where I live is $2.80 a gallon so I would save $582.40 in fuel cost for the year.

This savings would cover about a month and a half of payments and insurance on a new vehicle, since it's a safe bet that most people driving clunkers have little credit or some credit issues that would prevent them from getting the interest rate that better qualified people are given. In simple terms.....Why would I go out and heap and additional $5,000 a year in debt on myself just to save $600 bucks on gas.

Unless people are in a situation like "yellowhoard" above I don't see much benefit coming from this plan.

It certainly won't benefit me, I have a 22 year-old Mustang that I use for a grocery getter that get's 27 around town and 35 on the highway. It also has 160,000 miles on it and was built here.

For John S. Gordon (from above)

The biggest problem we have with automotive longevity in the U.S. is that too many people just gas up and go with no thought to proper maintenance.....I think it's probably safe to say that the average car sold in the United States has a shorter life-span than the average car sold in Europe......but that's a topic for another place and another day......

Jun 28 01:07 PM

[Swiftcreek1:]

I left out the qualifier......The average car sold in the United States has a shorter life-span than the Average car sold in Europe REGARDLESS of make, model, or location of manufacture.

Thanks

Jun 28 01:12 PM

[Old Trader:]

CLH,

Bloomberg had a fairly in-depth article a couple of days ago, comparing the European program with our's, and as optionsgirl pointed out, the US plan will be MUCH less effective in achieving the plan's stated goals of getting old, higher polluting, less efficient cars off of the road, while stimulating auto sales.

Even the several car dealers quoted in the article, while certainly happy for ANYTHING that would increase showroom traffic, don't see the plan as a "game changer".


On Jun 28 12:34 PM CLH wrote:

> Europeans are not noted for any intelligence--along with Obama.

Jun 28 01:49 PM

[TeresaE:]

Very few people "choose" to drive "clunkers," they are driving them because that is what they can afford/their credit allows.

Stupid plan to make the country feel better about gifting the automakers to the unions.

This plan is going to work as well as Cap & Trade, health care and stimulus.

Not at all.

Jun 28 03:03 PM

[notsosmart:]

i drive a 1991 caprice around town.low ins. & prop.tax.huge trunk for lots of stuff that i would have to rent a truck or a pick up guy.they want to give me $2035 for this car.the folks in wash.dc are getting dumber when it comes to the middle class.they are smart only for themselves.my 18 year old car is well maintained by my good mechanic who knows that the repairs are his as long as he keeps it going for me.i hope the americans arent fooled by this dumb plan.think about your job & current debt.it could justbe another gimmick to ensnare so many dumb-dumbs in the middle class.

Jun 28 04:03 PM

[casey00001:]

Why not give it on a rebate on a persons tax return. That way at least people that are paying taxes are getting a deserved credit. Anybody not paying taxes shouldn't be shopping for new car. Oh, and put your immigration status on the tax return, that's always nice.


On Jun 28 08:31 AM a fat panda wrote:

> What no one is talking about is the impact on lower income Americans
> who actually need "clunkers" to get to work and the like. This idea
> is the unavoidable outcome of giving intellectuals other people's
> money.

Jun 28 04:48 PM

[Alfredo Mar...:]

At the end of the day, does anyone think it's a good idea that taxpayers should directly subsidize people who want to buy a new car?

I consider a new car purchase to be something only wealthier people should be in the market for. Someone with modest means has no business buying a new car. I myself make a good living and yet I usually buy used cars because it's a much better value. This program is essentially welfare for the well off.

This money has to come from somewhere, so next time you look at your pay stub and ask yourself why you have to split your paycheck with Uncle Sam, just know that chuck of that is paying for someone else to buy a brand new car.

Jun 28 06:15 PM

[TinyTim:]

I can't wait for the law of unintended consequences to take effect here.

My understanding is the traded in clunkers have to go to boneyards. Well, typically, yards will strip out any usable parts like body panels & drive train parts before crushing. There is nothing in this new law to prevent it.

So when you blow the motor in that old clunker, just stop by the local boneyard and pick up a replacement. With the abundant new supply, I'm sure the prices will be down to about scrap value.

If you're lucky enough to own a qualified clunker second car, this is a great opprtunity to pick up a few grand underselling your local dealer on a new car.

Does this law apply to used car lots that hold title? A perfect opportunity to upgrade their inventory or provide new car benefits to employees.

Jun 28 07:26 PM

[dcb:]

Just the government doing it's best to get the average american consumer deeper in debt.

Jun 28 07:44 PM

[Swashbuckler:]

Another damn fool program that does more harm than good. There are too many holes in the program to count. More mindless nonsense from our trusted legislators. The article is fine, but the program is a typical crock of sh#t. Thanks for nothing Congress.

Jun 28 08:13 PM

[joes:]

It gets some junk off the road, puts some new cars on the road, why not. Every plan doesn't have to solve all of the problems, in fact data indicates that we aren't very good at large complicated projects in the are of social, financial, corporate or software initiatives.

Once the project gets larger than a million bucks the cost overruns go up and the delivered features go down. By the time we get to $10 Million 50-100% overruns are typical with a 30-50% paring of features from the original expectations.

It is also evident in government programs, the Pork Barrel bills that McCain and other bitch about that make up less than 1% of the Federal Budgets but deliver a nice return in the form of jobs and services, in other words what government is supposed to do.

Jun 28 09:38 PM

[Mr. Ed, Jr.:]

Well, let's see.....

$1 billion dollars for the Cash for Clunkers program. And it was tucked into the bill to fund the troops in Iraq and Afghanistan. No point wasting anybody's time debating the merits-- just stick it in a troop funding bill so that anybody who votes against it gets smeared with "not supporting our troops." And, truth be told, Congress really doesn't have time to field calls from angry constituents, either, so best to just pass it and get to the next giveaway program. Besides, it is only a billion dollars.

The Obama stimulus bill already gives everybody (income 125k or less) a new car sales tax deduction on their tax return, even if they don't itemize. What is interesting about the car programs is that Congress has not finished writing the rules. The clunker program gives them 30 days after passing the law, and the IRS will get around to the sales tax credit some time later this year. But they are still giving away the money-- they just haven't thought it through yet.

There is an existing $8,000 credit for first time home buyers-- I believe that means that you have not bought a home in the last 5 years.

And mortgage modifications. Let's not forget those.

So, now we have the $4,500 clunker gift, $8,000 home buyer credit, mortgage modifications, and a new car sales tax deduction for just about everybody. With many more gifting programs to come.

Of course, none of these programs will actually have much of an impact, but it is nice to know that we have a very generous government.

Jun 28 10:30 PM

[Brad Johnson:]

Another sop to the UAW.

In addition to bailing out GM and Chrysler, and picking up the bill for any sales tax incurred on new car purchases, now the federal government is going to actually get in the business of paying people to trade in their cars.

The delicious irony is that despite all the billions Obama will throw at the UAW, they will still fail.

Jun 28 10:38 PM

[khaz:]

I have a 2001 F-150 with 185k miles that gets 16 mpg. I drive over 25k miles per year and have the truck to tow a boat 2x per year. I will be using this program at the $4,500 level and let the marina drop the boat in from here on out. I think some of you are underestimating the number of business people who drive trucks and SUVs for minimal real utility and who, by taking advantage of this program, will convert their extensive miles driven from very inefficient to relatively efficient. I know at a handful of consultants in my very small company that fit this profile.

Jun 29 08:40 AM

[optionsgirl:]

You have to get 10 mi an hour more on the new car than the old to use the $4500 electronic coupon. Here's a link to GM's website on the program:

www.gm.com/cash-for-cl...

Jun 29 09:54 AM

[optionsgirl:]

10 mpg, not hours- I'm asleep at the wheel...


On Jun 29 09:54 AM optionsgirl wrote:

> You have to get 10 mi an hour more on the new car than the old to
> use the $4500 electronic coupon. Here's a link to GM's website on
> the program:
>
> www.gm.com/cash-for-cl...

Jun 29 09:56 AM

[islandcreek:]

My son's car is a 1987 Jeep Cherokee.
Ditto.


On Jun 28 09:25 AM yellowhoard wrote:

> I looked into the cash for clunker bill yesterday.
>
> The car must be in operable condition and have been insured for a
> year and titled to one person.
>
> I'm going to trade my son's 1994 Jeep Grand Cherokee in for a new
> Malibu.
>
> $4500 for the Jeep
> $2000 GM card savings
> $1000 GM loyalty because I bought my daughter a GM 2 years ago<br/>$2500
> rebate on all Malibus
>
> That's $10,000 off on the $21,000 Malibu before I even start my negotiations.
>
>
> I'm thinking of offering around $17,000.
>
> It's possible that I can get my son a new car for about $7000.

Jun 29 11:36 AM

[DonFurio:]

This actually reduces amount of a recovery in car sales a year or two from now.

Jun 29 11:48 AM

[Heretic:]

The problem with the program is not that folks may not use it. The bigger problem would be if they did use it. Paying someone to destroy a perfectly serviceable vehicle is the ultimate waste of resources. Sort of like paying someone to break your windows, then paying you to replace them, so that we can put more glass makers and contractors to work. Also may push folks who own older cars outright to owning new cars on credit, while more debt is the last thing we need. We would actually be better off paying people to dig holes and fill them in- at least that way no standing assets are destroyed.

Jun 29 11:55 AM

[Alex Martinez:]

Hey..If you got a crappy car getting more than what its worth is awsome. If you have a car that is worth more than $3,500 dealers will still make deals off a trade in. This bill helps the less fortunate and is similar to the China stimulous package, which has worked very well by the way.

Jun 29 12:12 PM

[Itsonlymoney:]

All this talk about the government wasting a billion dollars on a program to get gross polluters off the road and funnel a little cash towards new car purchases. I imagine that the military in Iraq wastes this much on items that are below notice for accounting purposes. Why not do a little exercise and list what industries get the bulk of government subsidies; Agriculture, energy, transportation, ?

Jun 29 12:18 PM

[LaughingTrader:]

Here's a thought. If this program is really about reducing pollution, (rather than being a bone tossed to the UAW), spend the $1B putting sensors on traffic lights (or fixing the ones we already have) and synchronizing them. I can't tell you how many times I've been driving along only to hit a red light when there is nobody coming from the intersecting road. I stop, sit and idle, wasting gas, and then must re-accelerate, wasting more gas. I would love to know how much gas could be saved by making traffic lights more intelligent. And this pays back for all vehicles, not just the clunkers, and it keeps paying back year after year.

Jun 29 01:24 PM

[Sailorman:]

You can't because the clunker has to be 25 years old. Than means it has to be a 1985 or older car. Sorry! I do not see where this will be of very much use, but it will be good to get those off the road. Also anyone driving a car that old probably cannot afford a new car.


On Jun 28 09:25 AM yellowhoard wrote:

> I looked into the cash for clunker bill yesterday.
>
> The car must be in operable condition and have been insured for a
> year and titled to one person.
>
> I'm going to trade my son's 1994 Jeep Grand Cherokee in for a new
> Malibu.
>
> $4500 for the Jeep
> $2000 GM card savings
> $1000 GM loyalty because I bought my daughter a GM 2 years ago<br/>$2500
> rebate on all Malibus
>
> That's $10,000 off on the $21,000 Malibu before I even start my negotiations.
>
>
> I'm thinking of offering around $17,000.
>
> It's possible that I can get my son a new car for about $7000.

Jun 29 02:34 PM

[khaz:]

Sailorman, the clunker has to be LESS THAN 25 years old.

www.cars.gov/

On Jun 29 02:34 PM Sailorman wrote:

> You can't because the clunker has to be 25 years old. Than means
> it has to be a 1985 or older car. Sorry! I do not see where this
> will be of very much use, but it will be good to get those off the
> road. Also anyone driving a car that old probably cannot afford a
> new car.

Jun 29 03:13 PM

[CoinAphrase:]

My wife has a 10-year-old car that meets the criteria for the program. It has been well-maintained and runs well. I cringe at the thought that it would be scrapped when it still has a lot of useful life in it.
This program has been promoted in terms of getting "clunkers" off the road, but its design is off-target for that. Its value in promoting new car sales is on target, but way too narrow to have a noticeable or net effect there.
It ends up being a bizarre combo program that isn't good at anything in the real world.
Based on my reading of the latest details on the terms, I would get $3500 from the feds to dealer, plus the dealer would still give me the residual scrap value (junkyard parts). Can anyone confirm on this?

Jun 29 05:50 PM

[Tomcat101:]

I'm hoping this will allow me to get rid of my P.O.S. 95 Thunderbird and get a new Camry instead. I'm sure there will be something in the fine print that will prevent me from it though.

Jun 29 06:07 PM

[fed_alchemy:]

Stuck inside the military spending bill WTF..there wont be any rebates or incentives, list price only. Looks like CRA for cheech and chong ,Dont wait reInflate

Jun 29 09:47 PM

[Bob Meighan:]

Bob from TurboTax here. Great speaking with you the other day and glad I was able to provide information on the cash for clunkers program. Although the program does have restrictions, it is a very valuable cash incentive for those who do qualify. At TurboTax, we always want consumers to be aware of all the deductions, credits and money savings tips available. By the way, very good feedback from others on the merits of the clunker program.

Bob Meighan
VP, TurboTax

Jul 01 07:55 AM

[Jan Baker:]

Hey! I resemble these remarks that I have credit issues or scurvy for driving my 1998 ruby red Golf. She goes, she takes the kayak on top, she sits when I tell her to sit because I'm taking the bike today, tra la. My credit's great, you think it's because I don't spend it on cars?

Jul 02 09:41 PM

[Mad Hedge F...:]

Looks like the result are flying in your face. Perhaps it was the newspaper gene in me that made me screech my car to a halt when I saw a near riot in progress at my local total Toyota dealer. The showroom was more jammed than the unemployment office, with eager salesmen recalled from vacations manning card tables set up in every available space. I managed to grab one peripatetic salesman by a lapel, who gushed that they sold 45 cars yesterday, compared to ten for a normal Friday, and that 35 of these were due to the Cash for Clunkers program. Sure I could get a $4,500 credit for my 1995 BMW (17 mpg), and apply it to a new Prius (50 mpg), taking the price down to $19,500 and the monthly payment to $450/month for five years. In fact, the government stimulus program was so successful, that it ran out of money in the first four days, and congress rushed to triple it to $3 billion on Friday. It was like the survivors of a ship torpedoed at sea were swimming frantically for the only piece of wreckage that floated. Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports. I asked to see the cars that were traded in and was told that the lots for the dealer, the used cars, and the detailer were all full, but I could see some if I went to the Target nearby where they were renting extra spaces. There I saw the fleet condemned to clunkerdom, GM Safari’s, Jeep Cherokees, Buick Regals, Dodge Ram pickup trucks and vans, and Chrysler minivans by the dozen, all with “CFC” marked on their windshields, a certain death sentence. These sorry excuses for transportation will never belch blue smoke, nor drip oil on our interstates again. I can’t imagine a sorrier commentary on the management failure of the US car industry for the last 30 years.

Aug 01 04:35 PM

[ericjwi:]

I wish they allowed you to get a used car in the program as long as it got over 24MPG etc. The $4500 barely covers the price drop driving out the door.

Aug 06 10:24 PM