Saturday, August 1, 2009

The "Success" of Cash-for-Clunkers

Only in Washington can a plan to give away free money over three months, which was delayed, then collapsed after 4 days and was riddled with administrative problems, be deemed a "success."

Welcome to American Government 101.

Administered by the National Highway Traffic Safety Administration (NHTSA), the Cash for Clunkers program is a hair-brained scheme of Congress to pay people $3500-$4500 to trade in their old cars for new, more "fuel-efficient" cars. Hence, "cash for clunkers." Get it? C4C was intended to do two things: (i) help the auto industry recover by stimulating domestic consumption (via consumer subsidy); and (ii) help the environment by getting gas guzzlers off the road (dealers have to destroy the clunkers).

C4C was signed into law on June 24 and was supposed to start one month later on Friday July 24, just in time for the weekend. But for some unknown reason (NHTSA wouldn't say), it was delayed 3 days and began on Monday July 27, right when everyone was going back to work (or starting vacation). Once it began, the program was beset with problems. Dealers and consumers complained of ridiculous paperwork and eligibility confusion (there are 100 pages of rules and registration takes at least 90 minutes). Even the NHTSA website froze up. Adding to that confusion, the EPA (quite brilliantly) changed automobile fuel efficiency standards right before the program started, so some cars that were eligible when the law was enacted were no longer eligible when the program actually began. This forced the Transportation Department to make an ad hoc rule that that people who made clunker deals on or before the date of those EPA revisions would be allowed to go forward, even if their car was no longer eligible. Smooth, huh?

The program was supposed to run until November, but because Americans love free money, it lasted four days. Four. According to numerous reports that the NHTSA and White House would later refute, the program was halted because of a massive influx of paperwork and fears that the $1 billion in subsidy funds had been exhausted. (Only $96 million had actually been doled out, but apparently some estimates showed that $950 million had been accounted for.) At this point, nobody really knows what's going on.

Because of this "success," the House voted yesterday to infuse another $2 billion into the program from Stimulus* funds. And barring the alien abduction of 75% of the US Senate (a boy can dream!), the Senate will approve that funding on Monday. In the meantime, the First Dealer has promised consumers that the FedGov will honor any deals made this weekend. The nation's car dealers are suspicious of that guarantee: the Chairman of the National Automobile Dealers Association (NADA) told his members yesterday "Nonetheless, until further definitive guidance on the availability of funding is provided by the administration, dealers who accept additional 'clunkers' deals may face a risk that they will not be reimbursed."

Based on all of this, President Obama said yesterday:
"I'm happy to report that [C4C] has succeeded well beyond our expectations and all expectations."
Those must be some seriously low expectations.

Success (or lack thereof) aside, we can learn a lot from the C4C story. Here are a few off the top of my head:

1) The law of unintended consequences. While C4C has obviously been a hit with new car buyers and new car dealers, it's reportedly hurting several groups: used car dealers, parts recyclers and the people who frequent such places, namely poor people. The reasons are pretty obvious. First, it removes "clunkers" and their parts from the market (remember, dealers have to destroy the clunker), and second, it creates a hugely tilted playing field in the competition between new and used car dealers (most used car dealers are independently-owned).

2) Government mismanagement and incompetence. The program was supposed to run through October and made it four whole days. It has been plagued with administrative problems, including an overburdened NHTSA, confusing eligibility requirements and huge paperwork backlogs. And to top it all off, there are serious doubts that the program will achieve either of its two primary goals (auto sector recovery and environmental assistance). First, several auto experts have said that the program will do nothing to improve the long-term health of the auto sector because C4C only pushed new car sales forward a few months (e.g., people buy today instead of in January). Second, with pretty low fuel efficiency rules for new cars (thank you, Detroit lobbyists!), C4C's actual environmental impact will be a little more than nothing (analysis here). So we're 0 for 2. Perfect.

3) How easy it is to game a government program. Want to take free government money and turn it into the Hummer of your dreams? Cato's Alan Reynolds tells us how:

First of all, with Chrysler and GM dealerships folding, it should be easy to buy a mediocre Chevy Cobalt or Dodge Caliber for about $10,000 more than the voucher.

What you do next is sell that boring econobox, even if you end up with $1,000 less than you paid — that still leaves you with $3,500 of free money, courtesy of taxpayers.

As this process unfolds, the flood of resold small cars will make it even harder for GM, Chrysler and Ford dealers to get a decent price for small cars, because of added competition from new cars being resold as used.

That’s their problem, not yours.

So, take the $9,000 net from reselling the crummy little car plus the $4,500 from Uncle Sam. Then use that $13,500 to make a big down payment on a used Cadillac Escalade, Toyota Tundra pickup or Corvette.

If only I had a clunker......

So, to summarize: the federal government horribly botched a temporary, $1 billion program to sell cars. In the process, it hurt poor people and small business owners and created a situation ripe for corruption. And not only did it not accomplish its stated goals, it may actually undermine them.

Yet these are the same folks who want to run one-sixth of the US economy through ObamaCare and control our energy supply and consumption through Cap-and-Trade?


With any luck, the biggest "success" of Cash for Clunkers will be providing Americans with a perfect example of why ObamaCare and Cap-and-Trade will be bona fide debacles. At 1/300th the cost.

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