DOT needs to start another ‘cash for clunkers’ program

At the height of the credit crisis, the federal government introduced a program to save the auto industry. The program was called Cash for Clunkers – officially the Car Allowance Rebate System – and, in my opinion, it worked. The U.S. automotive economy needs another such program to provide a boost in sales. Now. Back in 2009, the new car sales market fell around 20%. The current market is in far worse shape. Last month, new light-vehicle sales fell to a SAAR of 8.6 million units. That’s the lowest monthly selling rate in almost 30 years. The April SAAR represents a drop of 47.6% compared to April 2019, with declines across the country. AutoData, which crunches monthly auto sales, says the pace of auto sales in April, at 8.6 million vehicles, was the lowest monthly sales rate since the firm started calculating the data in 1980. There was not a manufacturer spared from the significant declines. For example, Toyota and Honda reported sales last month cut in half compared with April 2019, as dealerships across the country were forced to limit or close, and consumers adhered to stay-at-home orders. Interestingly, some market analysts predict that April will be viewed as the “bottom” of the downturn, even saying it could have been worse. But these months of coronavirus pandemic are lost sales months. Yes, incentives will spur the recouping of some of those lost sales, but the decimation of the U.S. economy means that the projected 16.8 million SAAR is little more than a historical footnote now. The National Automobile Dealers Association has forecast 13.0 million to 13.5 million new car sales this year, around a 20% decline from its original forecast. That original forecast is crucial, because the market calibrates its operational expenses against it. A 20% decline blows up such capex budgeting. A cash-for-clunkers (C4C) program could regenerate some lost car sales in 2020. In 2009, the federal government spent around $3 billion for the program, which offered deep incentives of up to $4,500 for each new car purchase to consumers who traded in “clunkers,” vehicles of more than 10 years of age or those 32% less fuel-efficient than the new vehicle. C4C was promoted as a fuel- efficiency program to get low-mileage vehicles off the road. Whether it worked — economically, at least — or not is up for significant debate. A 2013 study published in the Journal of Environmental Economics and Management concluded that the 680,000 transactions that took place under C4C increased new-vehicle sales by about 370,000 in July and August 2008, "implying that approximately 45% of the spending went to consumers who would have purchased a new vehicle anyway," and that "Our results cannot reject the hypothesis that there is little or no gain in sales beyond 2009." But a Brookings Institute report in 2013 conceded that the program offered “modest short-run stimulus effect — specifically, an increase in vehicle production, GDP and job creation.” I think C4C is worthwhile. A short-term “shot in the arm” of new car sales would do much to help dealerships with immediate finances, not to mention give manufacturers the confidence to reopen production lines. And the promotion will remind Americans that it is OK to buy new cars again — a desperately needed signal of consumer confidence. Just as the federal government Payroll Protection Program, as well as the heightened unemployment benefits, are intended to bolster a collapsed economy, a cash-for-clunkers program can be a boon as the U.S. economy reopens after the coronavirus shelter-in-place order. It's a great way to help rev up the economy.

DOT needs to start another ‘cash for clunkers’ program

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Leveraging Liquidity: Lenders brace for the coronavirus recession [Feature]

Carvana tightens credit as wholesale profits drop 60%

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