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Permalink Reply by Michael Smitka on January 25, 2009 at 10:25pm

1. In contrast to Ruggles, I _like_ cash for clunkers. It pulls up the price of used cars, which may initially have a small impact but certainly does benefit all car owners (except those who buy new and drive until they're beyond clunkers). Done modestly, it's good public policy, period. Would it not be better to pull clunkers off the road and be a little less stringent on new car emissions? -- cheaper all around. But we must include old diesels, or especially include them, Class 8 too. Of course the protections to detect title washing would need to be used. Figuring out what should be a "clunker" isn't obvious - where to draw the line? mpg / CO2 / age?

And unfair? Well, ultimately every car turns into a clinker ... and unlike policies focused on new cars (see below) it is less random and less unfair than ones focused on new sales, which only benefit those looking for a new car (tough luck if you just bought one!) and often not even that.

2. Sales tax rebates -- random (and unfair) impact. No benefits in some states, why should we favor dealers and sales in Manhattan with its 9% over those in states with none? Bad idea.

3. Tax deductibility -- yeh, encourage more borrowers, to be financed by? In any case, this is equivalent to a modest subsidy to interest rates, and when we're bombarded with 0% loans it is irrelevant. Of course this is also of less help to those in the middle of the tax brackets (and none at all for those near the bottom, though they're not in the new car market). Bad idea.

4. Expanded tax rebates for specific vehicles -- they need to be huge at current gas prices, how much for a hybrid SUV? And why favor hybrids? Far better as noted to tax gasoline and use part of the proceeds to lower diesel (and to use the rest towards the various bailouts). But as proposed, a bad idea.

5. Unemployment insurance on loan payments. Moral hazard big-time. Can private insurers figure out a way to price such products? Intriguing, but not I suspect workable. To function as insurance, it would have to be mandatory, or as noted only those fearing job losses would buy it. And the rates would have to be adjusted every 6-9 months in line with the rate of (involuntary) job losses, a number the Bureau of Labor Statistics tracks though at the state level it's either not available monthly, or not statistically valid.

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But for all of 2-5, I fear these are short-term fixes that will hard to turn off. To paraphrase a CNNMoney.com journalist (I'd better not attribute without his permission...), this would be a sugar high (I suggested another white powder). We'd be pulliing sales forward, and not necessarily changing the overall level, and while it's tempting, I'm not sure the "cure" would be effective. I was in Japan in April 1997 when the sales tax hike took place (3% --> 5% nationally, plus the simultaneous unwinding of an income tax rebate). At the end of March dealerships were hopping. Their business then died, hard, with a venegence. If we lower taxes, or otherwise try to put the industry on steroids ... and I don't see any of the policies doing much relative to the magnitude of the sales decline. Better to hand cash, no repayment required, straight to ... we're talking dealers, right? Or OEMs? or ... they all need help.

Instead I think we have to face lower sales levels for the foreseeable future (which in today's climate is about 30 seconds, tomorrow's another day).

If scrappage is about 12.4 million units a year, and we've had a sales overhang, then we will have a period of a year or more (like 2-3?) at or below that level while the vehicle stock adjusts relative to the number of licensed drivers. After that, with 1% population growth and 200 million licensed drivers, we have an implicit net demand of 2 million additional vehicles a year or annual sales of 14.5 million units ... helped a lot in that painful interim if we get a million or two smoke-belching, gas-guzzling clunkers off the road.

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Permalink Reply by Michael Smitka on January 25, 2009 at 10:48pm

Sorry for sloppy prose. I edited it, but apparently passed the 15 minute mark mid-effort and the changes didn't stick. msmitka

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Permalink Reply by David Ruggles on January 25, 2009 at 11:16pm

Mike,

I agree it would be great to get clunkers off the road. But how would a program like this be administrated? Would the clunker money only be given if a person purchased a new vehicle? I believe that is the case in the French example. Would it only apply for new vehicles with a certain CAFE rating? In that case, clunker money could be used to buy a vehicle which could immediately be traded in on something else. Our tax laws make that possible in most states, whereas countries like Japan and France don't give a credit on sales tax for any already taxed vehicle being traded in. So there would have to be a condition based on length of ownership.

What about the people who traded in a clunker the week before the program begins? How does one define a clunker? What happens to clunkers that are traded in? Do they have to be scrapped or can they be resold, in which case they may show up on a Buy Here Pay Here lot. These are things that pop to mind. Given a few days of perusal I'm sure some other caveats will arise.

It's not clear to me how a clunker program on new vehicles would raise pre-owned vehicle values if people who might typically buy a year old CPO from a Detroit 3 dealership instead buy new because of a clunker incentive. We would immediately have serious downward pressure on those late model vehicles values. They now have to be priced cheap enough to make them appealing in the face of trade in subsidies only available on new. A clunker program on new vehicles would actually hurt the Detroit 3 worse than the transplants as the transplants typically don't have a quantity of year old vehicles coming out of rental service.

A clunker program on pre-owned vehicles would bring on a host of administrative headaches. Again, would we go back to the pre-owned vehicles CAFE rating when it was new? Certainly a clunker program wouldn't give an incentive to trade a clunker on another clunker? How about all the pre-owned vehicles that have been modified, like trucks with lift kits, Civics with NOS and lowering kits, etc. etc. In my view a clunker program would wreak havoc in terms of values. I'd want to study the French program at length!

The "devil is in the details" but all my instincts tell me cash for clunkers isn't the best option to jump start auto sales. It seems like an administrative nightmare. Having said that, I'm still working on what might be the "best option", an idea that is fair and effective without undo administration headaches. I haven't come up with it yet.

Regarding unemployment credit insurance: There is no way to price it so it would have to be a risk borne by or "back stopped" by the government. I'm not sure that's a good idea, but it might be the best one so far. I still worry about the degree of adverse selection involved, although that might actually be an advantage. After all, the whole exercise is about "priming the pump" and gaining some momentum. With the TARPING of Chrysler Credit and GMAC, credit seems to be available, BUT they are reluctant to loan as aggressively on pre-owned vehicles as on new. A clunker program that includes pre-owned might run into financing problems.

But this latest round of bank distress and the mortgage securities problem is going to have to be addressed before there can be any hope for turnaround.

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Permalink Reply by Secondarypro on January 25, 2009 at 11:22pm

First of all, don't we give cash for clunkers already? We do, we call it trade in value.

I think the cash for clunkers idea has a few pot holes in it.
1) Most people that drive Clunkers, are driving them because its paid for and they don't have to have full coverage insurance on it. To think that because we give them more money for the car that they will give them up to get into a car payment. It hasn't worked so far.
2) Shame on us for making cars that go 100,000 miles between tune ups, rust slower and are front wheel drive.

They way to stop the gluttony of this market is to simply stop making so many cars for a while.
Remember supply and demand?

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Permalink Reply by Michael Smitka on January 26, 2009 at 8:09am

Thanks to Ruggles for details of the Feinstein-Collins proposal. It's not good ... a 2002 as a clunker? Mandate what type of vehicle to buy? Only give for vehicles originially rated poor MPG, however many years ago that was?

Rather, it should focus on truly old vehicles (including smoke-belching Class 8 trucks), force them to be physically scrapped. Of course those driving clunkers may not be the type to ever purchase new. But if they purchase a more recent vintage used vehicle (10 years old instead of 15 years old), then that should arbitrage across the vehicle fleet. What I had in mind was $1,000 for a drivable vehicle, certainly not a schedule that pays more for newer vehicles, defined (but not too tightly) to keep true junkers / totaled vehicles from being traded in, and of course a valid title. DOT and others can figure out a target price that might (say) pull 1 mil vehicles off the road the first year.

Now around here many clunkers are up on blocks in sight of the street ... and with a modest investment could be made drivable. And $1,000 probably matches what has to be paid to haul them into court to clean their property of eyesores. [But not everyone lives in the mountains of Appalachia. Here we also need a similar clunker law to get people to take down their old-vintage satellite dishes...]

Again, the focus should be getting inefficient, polluting vehicles off the road (and mitigating the current downward swing, where sales must for a while fall well below the longer-run sustainable level in order to bring the total number of vehicles in service down from its artificial bubble peak).

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Permalink Reply by David Ruggles on February 2, 2009 at 11:08am

Following are excerpts from a recent Automotive News article about the Cash-for-Clunkers bill and how it has run into recent roadblocks.


"Automakers and dealers are pushing federal legislation that would pay motorists to trade in old gas-guzzling cars and trucks for more fuel-efficient new vehicles.

But the measure is running into trouble, government and industry sources say, because of disagreements over its details.

As written, the legislation appears to favor companies that build large numbers of hybrids and small cars.

Proponents say the scrappage measure would promote new-vehicle sales, cut fuel consumption and curb air pollution. Ford Motor Co. CEO Alan Mulally told Automotive News that such fleet modernization would help "revitalize the industry."

Sen. Dianne Feinstein, D-Calif., and Rep. Steve Israel, D-N.Y., are sponsoring virtually identical measures. Their legislation would offer vouchers of as much as $5,500 to buyers of highly fuel-efficient vehicles that replace cars and trucks that get less than 18 mpg.

Supporters estimate the program could cause as many as 1 million vehicles a year to be scrapped.

In an interview last week, Mulally said Ford would "be in a good position" to benefit from the measure because of its fuel-efficient offerings. General Motors and Chrysler LLC also support the legislation in principle, industry sources say.

Import brand automakers like the scrappage concept but want to ensure that all manufacturers are treated "equitably," says Kim Custer, spokesman for the Association of International Automobile Manufacturers.

The UAW wants to restrict the vouchers to sales of vehicles made in the United States, says Alan Reuther, the union's legislative director.

But hobbyists and makers of aftermarket parts and accessories say scrappage destroys a valuable resource — vehicles for collectors, restorers and low-income households — while doing little for the environment.

The Specialty Equipment Market Association, which represents aftermarket suppliers, helped keep scrappage provisions out of the economic stimulus bill passed by the House last week, says Brian Duggan, SEMA's director of congressional affairs.

David Regan, vice president of legislative affairs for the National Automobile Dealers Association, says fleet modernization language could be added to the stimulus bill in the Senate this week."

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Permalink Reply by Alex Kwanten on February 2, 2009 at 5:55pm

…And hobbyists would be right. Being a person who’s been involved with old cars since I was a child, I’m generally opposed to cash-for-clunkers programs, and they’re not a new idea.

First and foremost, there’s the question of pollution. Proponents of C-for-C programs often talk about getting dirty, polluting old cars off the road. What they fail to mention is the industrial pollution created by replacing an old car with a new one, and that older cars are used less and make up a relatively small percentage of the fleet.

Yes, a 1975 Chevelle spews exponentially pollutants into the air than a 2009 Prius. No doubt about that. But there are relatively few 1975 Chevelles still on the road and most of them do not see use as daily drivers. Truly old cars, the ones over about 20-25 years old, are usually only driven by enthusiasts or the elderly. This is a constant trend. When I was a kid in the mid-1980’s, sixties cars were still around, and 70’s cars were everywhere. But it was rare to see anybody using a 1950’s car as regular transportation – punctuated more acutely by the fact that 50’s cars were so recognizable. The same is true today – but now it’s 70’s cars that are getting rare.

There is, however, a serious difference between then and now. 70’s cars may be slow and inefficient, but they’re still very useable as regular transportation and many are mechanically simple and durable. 50’s cars were anachronisms by the 80’s, but 70’s cars still work today.

Furthermore, the industrial pollution created by that Chevelle is overwhelmingly in the past. Manufacturing a new Prius, with its volatile chemical batteries and modern materials, creates far more pollution than simply running the Chevelle for a few more years as a light duty car. Think of all the heavy industry needed to create the components of a new car. When you count the pollution equation here, how much are you really saving by taking an old car that gets little use off the road while simultaneously creating a new car and the resultant pollution that creates? It’s true that it’s much harder to track the pollution created by manufacturing a car than it is to track what a car emits – but that doesn’t mean it isn’t there.

I chose 1975 as the example year because that was the first year that GM fitted its domestic cars with Catalytic converters, and finally got serious about emissions (by mandate, not by choice, but GM was the first – some import manufacturers wouldn’t add Cats for another four or five years). I chose the Prius because of its complexity and special materials – the Prius probably creates more industrial pollution in its construction than the average automobile.

A 1975 car, of course, is a classic today – even though I’m sure we all remember when 70’s cars were just regular old used cars and unlikely to appreciate in comparison to their 60’s counterparts. The real “clunkers” we’re talking about today are early 90’s Sentras and Cutlass Cieras - cars few people will miss, although even as I write that I know that there is a devoted group of B13 Sentra SE-R fans who’d be cross with me over saying that. But even so, who is the arbiter of what pieces of our culture are worth saving and which aren’t?

I will say this, however. Today’s cars – the 2002 models that Michael eluded to - are more applicable to the cash for clunkers idea than cars of the past. Many cars today depend on expensive modules and computer components – these will be prohibitively expensive in the future. My mother recently paid $1800 to fix some computer components on her 2002 Jetta. There was nothing mechanically wrong. It was all modules and sensors. I turned down a ’99 Saab 9-5 recently because it needed a new brain for its central locking – a part that cost almost as much as the car was worth, and the car wouldn’t start without it. Few cars of this type are going to be restored. When the overall values fall below the parts prices, they’ll be thrown away – many already are. This is quite unlike earlier cars like that Chevelle, which is mechanically simple and easy to fix no matter what pieces break (total cost of an engine and transmission, brand new from GM and under warranty for a mid-size ‘70’s Chevy - $1900).

Then there’s the silly aspect that some of these programs have taken in the past. In California there was a cash-for-clunkers program in the 90’s, and I can recall one man getting furious after he got a letter suggesting he should junk his “old clunkers” – a 1966 Jaguar E-type and a 1970 Austin America. Would anyone honestly do that? Under vague guidelines things like an unrestored Bugatti could be considered a “clunker.”

On another subject, the idea that France’s clunker program saved that industry’s two big players is also something of a mirage.

First of all, the cash-for-clunkers stuff didn’t really even get off the ground until the early 90’s recession was over, and second, the French makers had a huge renaissance in the 90’s with vehicles like the Renault Clio & Twingo, Peugeot 306 & 406, and the Citroen ZX and Xantia. By the late 90’s, PSA was one of the most profitable automakers in the world and remained so until recently. Renault’s success led first to privatization and then to a merger/takeover of Nissan.

Second, many unwanted cars in France, the low countries, and even Spain were shipped to eager buyers in Eastern Europe in the 90’s – there was a huge demand for cars that were not Trabants and Wartburgs. Many otherwise worthless Talbot Solaras, Fiat 127’s, and Renault R9’s were offloaded this way. The EU’s End-of-Life vehicle program didn’t become law until 2000 and didn’t go into effect in many countries until 2002.

My $.02 for now….

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Permalink Reply by David Ruggles on February 2, 2009 at 6:15pm

Alex,

You are truly a car nut! Where did you get your knowledge of European cars?

As someone who began their auto business career in 1970, I can recall few memorable vehicles from that era. After 1970 we had the Datsun 240 - 280Zs, some Dinos, MB 6.9s, help me out here, but not much else. 1970 was the last real year for high performance cars and Chrysler's 5 year 50000 mile warranty. We had 454 High Compression engines in GM cars, real Hemis, 440s, Boss Mustangs, the Judge, etc. Unleaded gas reared its ugly head in 1971. It was all down hill from there. 1970 also marked the insurance business' crack down on high performance. As you mentioned, 1975 marked the advent of Cat Convertors.

Starting in about 1985 we started to see some serious machinery from Europe here in the U.S. The 2.3 16 valve 190, the 5.6 liter MG engine followed by the AMG Hammer E-Class. Then we got the ZR1 Corvette followed by some 4 cyl turbo 16 valve Japanese products with AWD or mid engine and IRS. I think all of these could qualify under a "clunker" law, but hopefully few people would sacrifice these vehicles for a "clunker" premium.

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