Mixed reviews on the government’s cash for clunkers program

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Many are hopeful that the federal government’s new cash for clunkers program will provide a much-needed boost to the American auto industry at a time when the recession is crushing auto sales. BusinessWeek, however, calls the new program a “lemon.”

The problem with the law is that it is both underfunded and too narrow to generate a spike in showroom traffic. Standard & Poor’s (MHP) says the most it will do is boost sales by 3% for the year; a similar German program pushed sales up 30% a month this year. “This is a waste of taxpayers’ money,” says analyst John Wolkonowicz of Boston research firm IHS Global Insight (IHS). “There won’t be enough people who can take advantage of it.”

First off, the feds have approved only $1 billion for the program. That could help fund the purchase of just 250,000 cars—not much more than a week’s worth at current sales levels—between August, when the program likely will start, and Nov. 1, when it ends.

Plus, the law makes little sense for most passenger-car owners. The government will cut checks of $3,500 to $4,500 to dealers so they can buy old cars that get 18 miles per gallon or less and then sell the owner a more fuel-efficient replacement. But most cars on the road get more than 18 mpg, so they won’t qualify. And many that are thirsty enough to warrant the deal are luxury models worth a lot more than $3,500 to $4,500. If a consumer can sell the old car for more than what the government will pay, there’s no reason to take advantage of the bill, says Wolkonowicz.

Yes, there are plenty of old cars that do qualify. But many are 10 years old or more, says Edmunds.com CEO Jeremy Anwyl. People driving cars that ancient often buy used, and even with a $4,500 discount, they probably won’t want to take on new-car payments during a time of economic hardship.

This is a pretty downbeat view. The article points out that the program should be bigger, but if it’s successful you can be sure that Congress and the Obama administration will push to expand it.

Reuters takes a much more positive view, pointing out that the law is spurring certain buyers to trade in old vehicles.

Having driven the equivalent of six smoke-belching laps of the planet, Tony Metzler figured his ageing Chevrolet Blazer SUV would not make a good trade for a new car. Until now that is.

With a $1 billion (621 million pounds) federal “Cash for Clunkers” program that pays consumers $3,500 or $4,500 in credit to swap ageing gas-guzzlers for new, more fuel efficient models, he made the plunge.

“It ended up being right place, right time for me,” said Metzler, 42, who traded his eight-year-old sport utility vehicle for a new Chevrolet Equinox this week. “It seemed like a good opportunity.”

The program signed into law by President Barack Obama in June offers a trade-in credit of up to $4,500 to owners of cars built since 1984, with fuel economy of 18 miles per gallon or less.

It also applies to SUV, vans and pickup trucks. Participating dealers assess the discount, apply it to the new vehicle, and then obtain reimbursement from the government. Details of eligibility are available at www.cars.gov.

Metzler, a Phoenix-valley insurance executive, had racked up 150,000 miles (240,000 kilometres) in his old SUV that averaged 17 miles per gallon. He got a $3,500-credit towards his new car, which gets a slender 3 mpg improvement.

The program, which backers hope will arrest the auto industry’s slide and sell 250,000 new vehicles this year, runs through November 1 or until funds are exhausted. It has been broadly welcomed by auto dealers across the country.

For more information on the program, check out Cash for Clunkers Facts.

  

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