Dealers Bail Out Cash for Clunkers

09/03/2009 03:53 pm ET | Updated May 25, 2011

Two recent pieces of domestic legislation have done more to convince the American public that big government is big trouble and that the private sector, occasionally as greedy and stupid as the federal behemoth, serves Americans in a way that Washington never has, does, or will. The first, of course, is health care. Americans have gotten a whiff of the legislative tang cooking in the kitchen of governance and, looking at the polls and watching clips of senators subjected to a good old political haranguing, it seems that the kitchen is too stinky for the people and so the people are getting out.

The other legislation that reaffirmed the value of lean, hands-off government is Cash for Clunkers. In this case, Congress managed to do what it has never done: create a bill that worked too well. As we all now know, the bill itself was a huge success but the people who wrote it failed to do their math correctly and so the program ran out of money after four days.

In the case of Cash for Clunkers, the private sector is stepping in with a program called the Automotive Stimulus Plan, which goes live August 4th. The plan offers car buyers a trade-in incentive if they choose to buy another car -- new or used -- with improved fuel efficiency. Buying a car with an improvement of 2 mpg over their old car entitles customers to an additional 10% above the Bluebook fair trade value of their trade-in. If they choose a car that gets a fuel efficiency improvement of 5 mpg over their old car, customers get 20% more trade-in credit than the Bluebook value of their car.

So, if you go to a participating dealer with a car valued at $10,000, for example, the dealer will give you $11,000 trade-in credit for that car if the vehicle you purchase (used or new, foreign or domestic) is 2 mpg more efficient. If the car you buy is 5 mpg more efficient than your current car the dealer will give you $12,000 of trade-in credit for your $10,000 car. (Take a look at the and their Cash for Clunkers calculator to see if you qualify for the government program and for how much. Also, it´s worth checking out to use their calculator to calculate your savings under the dealer funded stimulus.)

Environmentalists will surely start to squawk and howl about the lower fuel efficiency gains required by the Automotive Stimulus Plan. But think of it this way: without the new plan, there are no gains at all. And then think of it this way: a 2 mpg gain over a car that gets 16 mpg (which is probably high for most American clunkers) represents a 12% efficiency gain -- serious by even Kyoto standards.

In previous articles I wrote about Cash for Clunkers, the crunchier varietal of environmentalists complained that the government program creates a layer of waste since it requires the old clunkers be destroyed. Many said the old cars still run and that we don't need to cut down more rain forest in order to harvest steel -- or whatever. Well, someone was listening: the private sector plan doesn't call for the old cars to be destroyed. In fact, with the government program sucking out nearly a quarter million used cars from the market there is, maybe for the first time in American history, a relative dearth of quality used vehicles. Since the Automotive Stimulus Plan traded-ins will be resold, presumably after undergoing emissions checks and tune-ups that improve fuel efficiency, the private plan works toward the end goal of fleet replacement but also doesn´t cause good cars to go to waste.

The Auto Stimulus Plan, which will exist in addition to the Cash for Clunkers cash rebate if that plan receives additional congressional funding, was initially conceived as a way to complement Cash for Clunkers (while it was still running) since a surprising number of people wanted to make use of the program but couldn't, either because their cars narrowly missed the eligibility requirements or because the cost threshold of a new car was too high. It was partly for this reason that the Automotive Stimulus Plan was designed to include used as well as new cars -- so that people from a wider array of financial backgrounds could also receive incentives to trade in their car for something more fuel efficient.

The dealers were obviously also hoping to widen the financial margins created by Cash for Clunkers and deepen the economic toe-hold the bill created for the slipping automotive industry. A slew of recent reports confirmed that they were aiming in the right direction: July was the first time this year that auto sales rose above the 10 million mark and large American automakers like GM, which had its highest retail sales in 10 months, and Ford, which enjoyed the first rise in sales of any auto maker since 2007, are benefiting heavily.

There are also reports on the environmental impact, twin to the bill's economic intention. Ford reported the average fuel efficiency improvement on cars it sold under the program was 9 mpg. Many balked at the government's requirements but, again, a 9 mpg increase on a car getting 15 to 20 mpg fuel economy translates into a gain of 50 to 60% (!) over their previous car´s fuel efficiency. Further, as reported, 80% of the Cash For Clunker trade-ins were SUVs, trucks and vans, and that among the program´s total pool of trade-ins the average efficiency improvement was an incredible 69%.

But even the most glowingly positive statistics are drowned out by the enormous public clamor for the program, which literally bankrupted it. Hopefully, the bill will receive additional funding from Congress and will continue to be renewed and refined over the coming years. For now, though, there is a private sector option for the sea of consumers wanting to improve their finances and the environment with a single purchase. The auto industry (at least the retail end of it) is finally taking responsibility for itself in a way that benefits the public it serves. Perhaps Congress will follow suit.

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