With the economy beginning to show tentative signs of recovery from a traumatically challenging period of approximately 20 months, there was hope in some quarters that the Car Allowance Rebate System (CARS) authorized a few weeks ago would be the straw that would break the back of the recession. That was probably a bit too much to wish for, but it has brought consumers out in large enough numbers to encourage Congress to triple the program.
The program, commonly referred to as “cash for clunkers” has clearly picked up the pace of sales in the automobile industry and did what the stimulus was supposed to do—stimulated people to spend money!!! It has not, however, been the single economic panacea for which many folks have been searching. That will happen in a thousand different ways, and this program, although popular, is only one of them.
The $3 billion the government has allocated for this endeavor has certainly encouraged thousands of people to trade in their less fuel-efficient automobiles and receive up to a $4,500 bonus to secure more environmentally-friendly ones; some 250,000 vehicles were sold the first four days immediately after the program’s authorization. Still, many US consumers are keeping their fists tight due to job uncertainty and concerns about the direction the overall economy might take in the weeks and months ahead. They are not quite ready to jump in with gusto just yet.
The conditions for receiving up to $4,500, which some see as a tad complex, cumbersome, and complicated, emphasize (among other things) that the trade-in vehicle must get no more than 18 miles per gallon according to new standards which usually drops the estimate on the older car when it was new by a mile or two per gallon due to more recent testing standards. Another requisite for the bonus is that the new vehicle must have a price tag, without options, no higher than $45,000. Many luxury vehicles, in spite of their fuel-efficiency, fail to qualify under this restriction and often are not on the radar of buyers hoping for the influx of government cash. After all, it is a government program.
The original intention of CARS, of course, was to help American automakers. Unfortunately, the “cash for clunkers” endeavor has not turned out exactly as planned on that score. The reason is that many foreign-made vehicles have better gas mileage rates compared to US-made ones. Therefore, a lot of consumers are inclined to consider them instead of American models.
Another unforeseen problem is the amount of time that dealerships have to wait to receive their rebates. Because dealers have to dispense their own monies while waiting for government funds, many are facing unprecedented cash-flow hardships. Some are even storing on rented lots the vehicles that have been traded in as a hedge against the eventual unavailability of federal money. While the process of providing monies to dealers is currently a bureaucratic headache, additional workers have recently been put on the payroll in an attempt to speed up the delivery of the checks. Like I said, it is a government program.
According to the Commerce Department, in spite of the implementation of CARS, retail sales still fell 0.1% in July. In fact, removing automobiles and parts from the statistics, retail sales dipped 0.6% last month, due in large measure to drops in gasoline prices and diminished purchases of building materials. Discretionary spending in July, especially at major department stores, experienced the biggest monthly decline this year. That news was a bit of a damper to markets, but will likely be negated by more positive numbers soon.
The “cash for clunkers” program was inspired in part by similar programs in Europe, particularly in Germany, where it has met with substantial success. The European plan’s future is uncertain, however, as many automobile dealers “across the pond” are fearful about the direction sales will take when government funds run out at the end of this year.
While the European model was helpful to the US government’s implementation of CARS, it is not the first time such an endeavor has been tried in the US. President George H. W. Bush developed a “cash for clunkers” program in 1992 and touted it as a market-based approach to improve the environment. It was patterned after one that had operated in California a couple of years earlier. Neither proved very successful, and both gradually faded from public interest and memory.
Acquisitions of new vehicles through the clunkers program, which is about to expire, will likely boost aggregate retail sales for August. Further stabilization of business investment and the housing industry should also prove beneficial in enhancing the nation’s real gross product growth over the next few months. We are getting there, but recovery will come from multiple sources.