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As Long as We Remember...

August 7, 2009

CARS Programís Unintended Consequences

Joe Charlebois

On the surface the CARS program, better known as “Cash for Clunkers,” looks like a huge success. Traffic into American showrooms, according to reports, is at least double what it was previously. Sales of new vehicles are up substantially and on par with sales number prior to the downturn. So what could be wrong?


What lay beneath the surface are the ripples of unintended consequences.


The sales of today – as we have seen in previous times (the 0% financing battles of four years ago) – are simply capturing the next six months worth of sales in a one month window. When the dealers lowered finance rates to 0% and offered “Friends and Family” discounts they cleared out months worth of inventory with little to no profit.


Yes, it took the financial burden off the owners who were paying thousands of dollars of interest on dust covered Malibus, Mustangs and Montero’s, but it did little for those who earn a living selling those same vehicles. Each sales person saw commissions slashed as the sale price left little if anything for them. Over the next few months one could hear the hollow echoes of footsteps along the empty showroom floors as those who would have naturally purchased their new vehicle in that time frame had come and gone.


Similar trends should be expected here. When this program ends, look for a similar slump in new car sales as the economic conditions show no signs of improvement. The unemployment rate continues to climb and people have not been able to pay off accumulated debt.


The CARS program is for the purchase on new cars only – foreign or domestic. Customers with below average or borderline credit scores, who may be in the greatest need of a new vehicle, will likely not be able to qualify for these new car loans. The CARS program does not help the consumer who is looking for a good quality used car to get to work; it is a program that is designed – at least outwardly – to help the environment by getting Americans out of their older vehicles and into more fuel efficient alternatives.


This will benefit only those who can afford it. For those trading in what would be normally considered a great used car are now taking on an additional $20,000-to-$40,000 in new debts as their trade in is likely paid off. Is this really what we want to do? Do we really want to artificially create a market that puts Americans even further in debt? This week Sen. Harry Reid (D., NV) is pushing to extend this program. How long will it be extended and at what cost?


We can’t forget that these are not tax breaks; this is a government handout to certain individuals to elicit very specific behavior. It does not benefit the low income consumer, who may be looking for an economically conservative vehicle so that he can get to and from a better paying job down the road. It does nothing to help those who are happy with their vehicles. It does nothing for those with vehicles that are in desperate need of repair. It does help the dealer clear his inventory; it does make us feel good. But what good will this do long term?


The CARS program calls for the destruction of all vehicles traded in under the program no matter the condition, no matter the value. In many cases these are perfectly good used cars. The engines of these cars must be destroyed. The rest of the cars must go to a salvage yard where parts from them can be sold for six months before the cars are crushed, according to numerous press reports.


This will cause the greatest unseen and costly ripple yet. Parts stores will be begging for business on a scale that is impossible to fathom. Even before the CARS program required the destruction of these “clunkers,” the domestic automakers looked to cut costs outside of direct manufacture and they started to shutter their parts plants.


As parts availability becomes scarce the effect on the insurance industry is dramatic. Leading insurers are noting the effect that waiting for parts is causing on their bottom line – and eventually on our premiums. The number of days that vehicles are in the repair shop is increasing. This means that costs associated with the length of repairs such as rental and the overall cost of an accident are increasing. Automobile repair facilities and body shops rely heavily on the availability of salvaged vehicles for prompt work at discounted costs. If these parts are being destroyed, availability is decreased and costs increased. If parts cannot be found, it may cause some vehicles to be determined a total loss putting the insured or claimant in the unenviable position of having to purchase another vehicle.


The CARS program will also have the effect of taking lower priced vehicles off the market. Used car dealers rely on trade-ins and other vehicles purchased at auction. As the availability of cars at the lower prices dries up, prices for these vehicles will increase.


As good a program as these seems to be on the surface, the ripples it causes could drown us in different ways.


Cash for Congress anyone?    


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