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August 8, 2009

Cash For Clunkers, the potential downsides and unintended consequences

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In the flurry to give Cash For Clunkers – sorry, C.A.R.S. – a very quick $2 billion extension last week, some of the more critical voices of the program were drowned out. At the very least, their effort was in vail. It may be too late to stop the bill from becoming law, but it’s worth it to think through some of the possible unintended side effects of paying people to junk their cars.

First up, the damage to the used car market. The August Kelley Blue Book Market Report predicts “a likely bubble in used-car values, which could deflate as the Cash for Clunkers program comes to a close.” This means that with the overall reduction in used car availability, up to 750,000 when all is said and done, Kelley Blue Book expects the price of used cars to go up in a serious way once C.A.R.S. ends later this fall. Ironically, this will then lead to deep discounts, says KBB’s senior analyst of vehicle valuation Alec Gutierrez:

If this bubble comes to pass, dealerships will end up with excess inventory of both new and used vehicles and be forced to offer deep discounts to remove surplus inventory, driving values down. Ultimately, there will be the possibility of a severe contraction in auto sales as soon as the Cash for Clunkers program runs out of funding.

Another negative effect of C.A.R.S. is that the money used to fund C4C is coming from a program in the stimulus bill that was used to guarantee the Department of Energy’s loans. Sam Jaffe, senior research analyst of renewable and distributed energy strategies for Energy Insights, writes over at Green Tech Media that this is exactly “the wrong place to pinch from.” Jaffe says that this program is, “in effect, the single most effective method of stimulating economic activity with the least cost to the government.” Instead of spending $2 billion on C.A.R.S. to get $2 billion of stimulus, leaving the money in the loan guarantee program would result in “at least $20 billion worth of economic activity, all of which will have to take place on U.S. soil,” he says.

More C.A.R.S. skeptics can be found in the Automotive Aftermarket Industry Association (AAIA) which has been fighting Cash For Clunkers for months. The AAIA recently released a statement saying that simple vehicle maintenance “would save consumers $30 billion in gasoline a year vs. spending $3 billion in taxpayer dollars to buy new cars.” Read their full statement after the jump then, for a laugh, check out the skeptics that The Onion found.

[Source: Kelley Blue Book, Green Tech Media, AAIA, The Onion]
Photo by dno1967. Licensed under Creative Commons license 2.0.

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Cash For Clunkers, the potential downsides and unintended consequences originally appeared on Autoblog Green on Sat, 08 Aug 2009 18:39:00 EST. Please see our terms for use of feeds.

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