Ok, another $1 billion government program . This one is intended to to jump-start — or as VP Biden would say “dropkick” –the car industry.
Let’s start with the basics: if the program were to work, fewer than 300, 000 cars would be sold –- about 1 weeks worth of sales. And, not all of those would be be incremental to the ones that might have bought any way. So call it 250,000.
But, not to worry, not much of this money will make its way out of Treasury’s vault.
Why?
Though there are no income limits on voucher recipients, nor restrictions on where the new cars are made — the program has lots of “small print” qualifiers.
According to Business Week:
• Vouchers of either $3,500 or $4,500 will only be given to people who trade in an older vehicle to buy a new one.
• The trade-in, or clunker, must be no older than 25 years, have average gas mileage of less than 18 miles per gallon.
• The clunker must have been owned by the seller for at least a year.
• The new car must cost less than $45,000 and get more than 22 mpg. To get the higher voucher, the new vehicle must also average 10 more miles per gallon than the old one.
• To get the higher voucher, the new vehicle must also average 10 more miles per gallon than the old one.
• For trucks—SUVs, pickups, and minivans, a improvement of at least 2 mpg between the old and new vehicles qualifies for $3,500; 5 mpg or more entitles buyers to $4,500.
Ken’s translation of the rules: good luck.
If a clunker qualifies, there are some obvious questions about whether the folks driving those clunkers are willing and able to step up to brand-new wheels.
Think about it.
The economic impact is less than the face value of the rebates. Why? Because the clunkers probably have some market value that is greater than zero – i.e. the owner can sell it as a step-up model to somebody driving a clunkier (or dead) clunker. An economist would say that only the difference between the rebate and the clunker’s fair market value counts as an incentive.
More important, people usually drive clunkers because they can’t afford any thing else. People driving clunkers often buy used cars – not new ones, and even with a $4,500 discount, they probably won’t want to take on new-car payments during a time of economic hardship.
Maybe an arbitrage market will emerge, with upscale people buying a clunker on the open market for less than its clunker program rebate, and trading it in for fancy new wheels (that they were going to buy anyway) – deducting the the clunker rebate’s full “coupon” value.
What about the rule that somebody has to have owned the car for at least 1 year? Easy: the current clunker owner uses the rebate to buy a new cay, and then immediately turns around and flips the new car to a pre-arranged “partner”. Pretty easy.
Congressional reps really should read these bills before they enact them …
Source article:
Business Week, Cash for Clunkers: What Can $1 Billion Buy?, June 24, 2009
http://www.businessweek.com/magazine/content/09_28/b4139000349712.htm
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The Homa Files 