Another government gimmick: the $5k auto scrap program

Thursday, April 2, 2009

Here is one of the latest in the U.S. government's quick-fix schemes. From the LA Times:

The road to recovery for U.S. automakers could be jammed with hundreds of thousands of gas-guzzling used cars, which President Obama hopes will be traded in for more fuel-efficient vehicles -- with the lure of government money.
"We think it's an important element to get the customer back," said Jim Farley, Ford Motor Co.'s head of marketing and communications.

He predicted the stimulus could lead to an additional500,000 to 1 million sales a year. Mike DiGiovanni, GM's lead sales analyst, was more optimistic, saying the most conservative versions of the plans under consideration "could be worth at least a million more sales to the U.S. industry." If a more aggressive plan, with larger cash vouchers, were enacted, the sales increase could be as large as 3 million, he said.
RW: Of course Mike thinks that it will have a large impact - he works for GM.
A lot of the excitement is based on the experience of Germany, whose government is spending about $2 billion a year on such a program.

The country's new "scrapping bonus," which provides an incentive of about 10% of the average new car purchase price, helped boost new car registrations in February by 21%, according to German government data. The program is on track to reverse a projected 10% drop in new vehicle sales this year, said Pete Kelly, the senior director in Europe for J.D. Power Automotive Forecasting.

"We're actually seeing a market that is flat or growing, which is completely at odds with a German economy that is in quite deep trouble," he said.

A similar plan in France is projected to boost new vehicle sales there by as much as 8% this year, helping keep the market stable, Kelly said.

Barclays Capital estimated that a U.S. program similar to Germany's could boost sales by 3 million vehicles. But the increased sales would come with a big price tag: Matching that projection would cost the U.S. government $12 billion, Barclays estimated.
RW: This is definitely over the top. First, I am wondering how many people actually drive the 8-year old car that gets just 18 miles/gallon - the auto that would be eligible for the $1,500-$4,500 tax incentive (the Senate bill, not in quote above but listed in the article). Second, with the labor market contracting more each consecutive month and credit conditions tight, how is the driver of an 8-yr old gas guzzler planning to afford a brand new automobile?

Car sales figures are showing signs of hope (although sales are still far from healthy). And the Fed's TALF program hasn't even registered its full impact in the credit markets for auto loans. Getting vehicle sales back on board would definitely do some economic good, but why not wait to see if the programs already in place pull some weight?

Rebecca Wilder


Tim Manni April 2, 2009 at 2:05 PM  

Ah yes, the "Cash for Clunkers" program...this has been kicked around for a while, never making it too far on Capitol Hill.

I've written several posts on cash for clunkers. I don't feel as negative towards the program as you may, but that doesn't mean I think the program is a gem either. I think most of the impact will happen in urban areas where indivs. are more likely to drive older vehicles, or would be entice with a public trans. voucher.

I'm just excited to actually see some car-buying incentives out there. These "voucher" incentives are entirely too few and far between. For all the money GM and Chrysler have gotten, we haven't seen one strong incentive (except for yesterday's "we'll pay your monthly payments" program -- but that was a day late and a dollar short) that will persuade consumers to buy. With $16 billion, the gov. could provide 1.6 million Americans with a $10,000 voucher to purchase either a GM or Chrysler vehicle. Now tell me that wouldn't generate some sales???

I know I've gotten off subject but my point is, despite their flaws, these types of "incentive" programs could really help, and we need to see a lot more of them.

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