Cash For Clunkers: Policy or Marketing?

The Cash for Clunkers Program has burst out of the blocks. It was meant to run from July 1, 2009 to November 1, 2009, but ran out of money in less than a week. This may be too successful.

Cash for Clunkers is really just a government funded version of the old standby for spurring auto sales: incentives. Instead of coming from the auto makers, it comes from, well, you, me and all other U.S. taxpayers. Its popularity stems from the fact that car buyers are addicted to incentives offers, and tend to hold off buying until someone waves a big rebate at them. Cash for Clunkers was the waving cape that made this bull charge.

Cash for Clunkers is a bit strange when viewed as government policy. It benefits those who can afford to buy new cars. Granted, the government subsidy is either $3,500 or $4,500. But the average new car costs somewhere around $28,000. So a subsidized purchase is probably going to be in the low to mid-20s, on average. Most of the people who can afford to pay this much for a car will be making $60,000, $70,000 or more per year. They're the folks who have borrowing power or the savings to spend this much on a car. In other words, Cash for Clunkers is likely to be mostly a subsidy for people close to or in the upper middle class. Since they generally would be able to afford a new car anyway, Cash for Clunkers may simply give them some cash, or a nicer (read, probably larger) car than they would have bought without the government largess.

The stated purpose of Cash for Clunkers is to get car sales moving and improve the mileage of cars on the road. By all indications, it is doing that. But it is just a variation, and a highly successful one, of the traditional auto sales incentives programs that have become essential to car sales. Now that the auto makers are struggling financially, will they and their employees henceforth turn regularly to the federal government for more incentive programs? The problem with really successful government handouts is that they are incredibly difficult to eliminate (see agricultural subsidies, which also tend to go to the relatively well off, for further information). And car buyers have learned that it pays to patiently drive the old heap until someone--the car makers, or now perhaps the government--sticks some moola in their hands to make them buy.

The government is boxed into a corner on this issue. With a handful of large financial institutions slobbering at the federal trough for trillions of dollars of subsidies and bailouts, it's hard to deny the auto companies a couple more billions for Cash for Clunkers. And, if late this year or early next year, the economy is still stagnating and the car companies want an additional two or three billion, could they fairly be turned away? After all, federal subsidies have made it possible for banks to pay multiple billions in employee bonuses. Can the government say no to a car incentive program that costs less than Goldman Sachs' bonus pool this year? One thing is for sure: the buyers will be waiting.