"Cash for Clunkers" Won't Help the U.S. Auto Industry

At first glance, the "cash for clunkers" proposal to retire older cars from America's fleet makes a lot of sense. Motorists get a voucher worth up to $5,000 for scrapping older, polluting autos and buying new, fuel-efficient models. There are two competing plans before Congress, with the main difference being the level of fuel efficiency the new cars must have to qualify. President Obama has endorsed the idea. But it won't save Detroit.
The idea has already taken off in Germany, where a similar scrapping bonus -- the cars must be junked and cannot be resold -- has led to a boom in car sales, which rose 40 percent in March over the previous year. One analyst termed the German program a "shopping frenzy." Similar programs have been started in France, Spain and Italy; even Britain is on the verge of adopting a similar idea.

Such plans, however, aren't necessarily all they're cracked up to be. "The schemes will not increase the competitiveness of the car industry, nor will they benefit the climate, the environment or road safety," Greenpeace said in a statement.

The scrapping bonus has also been a mixed blessing for Germany's auto industry. Most of the small cars being sold are made abroad, not in German factories. And the incentive program has forced down prices on larger cars so they can compete in the rest of the market. "The scrapping bonus has set in motion a downward spiral that is killing the Germany auto industry's profit margins," the business newspaper Handelsblatt wrote.

There are currently two plans being considered in Congress. The first, proposed by Sens. Diane Feinstein, Susan Collins and Charles Schumer would give motorists a voucher for up to $4,000 when they trade in for a car that exceeds the average fuel economy in its class by 25 percent. It would allow the purchase of any car under $45,000 regardless of where it is manufactured.

The other proposal, by Rep. Betty Sutton, would give up to $5,000 for trading in an eight-year-old car for a new auto that gets at least 27 miles per gallon, a much broader set of vehicles than the Senate version. But it has a cap of $35,000 per car and may only apply to vehicles assembled in North America.

While the Sutton plan seems like an improvement on the Senate plan, they both have shortcomings if aid to Ford, GM and Chrysler is the primary aim. For starters, the Obama Administration just rejected turnaround plans from GM and Chrysler because the companies don't currently make enough fuel-efficient cars, so it's hard to see how a cash-for-clunkers plan plays to their strengths.

Attempts to favor North American-made cars could entangle the U.S. in a protectionism case before the World Trade Organization -- one reason President Obama wants to avoid such a restriction. Even if that provision were to make it into law, it could end up directing a significant chunk of largesse to foreign automakers like Toyota and Honda -- both known for fuel-efficient small cars that are largely assembled in North America.

Perversely, even restricting payments to cars made by the Detroit Three -- legally, an almost certain impossibility -- wouldn't benefit American workers as much as you might think. For instance, vouchers for the Ford Fusion, a high-mileage hybrid, would subsidize a vehicle assembled in Hermosillo, Mexico using a powertrain made in Japan. By contrast, of course, subsidizing purchases of domestically made Civics or Camrys would help U.S. auto workers -- just not the ones we normally think about.

It's also far from clear that vouchers would be enough to move consumers into smaller vehicles, particularly since gas prices are much lower in the U.S. (roughly $2 a gallon) than in Europe (about $6 a gallon). Used-car dealers and their representatives also fret that a scrapping program will reduce the supply of cheaper cars for low-income Americans and waste vehicles with plenty of life remaining.

The strongest argument against the proposals, however, may be that the rebates would actually pull potential 2010 sales into this year. Customers who have a financial incentive to buy a car in 2009 won't be buyers in 2010, so that just postpones the pain facing Detroit without its underlying problems.
In the end, Congress may have to choose between giving incentives to buy fuel-efficient smaller cars to help the environment or aiding the ailing U.S. auto industry. It really can't do both.

Image via Flickr user freeparking, CC 2.0