Why Cash for Clunkers Will Hurt Low-Income Drivers

by Fred Siegmund

Congress continues to discuss a “cash for clunkers” bill.

The proposals so far would pay up to $4,500 a car to dealers if a new car is priced at $45,000 or less and gets 10 miles per gallon better fuel mileage. The old car has to be registered for at least a year and have a gas mileage rating of less than 18 miles per gallon.

Advocates say it would replace older vehicles with safer and more fuel efficient cars that pollute less, while giving a boost to the auto industry.

The car buyer can insist they get a trade in discount up to $4,500, but that does not mean they save $4,500. Since the car dealer does the pricing, they can manipulate the price upward before the sale. The car buyer will need to be a tough negotiator, as always, to assure a lower price.

The use of the word “clunker” looks like a deliberate deception since one-year-old cars qualify, which includes recent model SUVs and not old cars. Many older cars, even 10 and 20 years old, have combined city-highway mileage ratings above 18 miles per gallon that would not qualify under current proposals.

Are the Right People Eligible for the Program?

People who drive cars that are nearly worthless have the most incentive to participate in the program, but we suspect the least ability. People who drive more valuable cars probably have the most ability to participate, but the least financial incentive.

Given that the ability to participate goes up as the incentive to participate goes down and vice versa, there is reason to wonder how many people would participate.

Regardless of that, the value of the subsidy is paid to the auto companies, and the expense will be paid by taxpayers.

Cutting Off Supply of Used Cars Inflates Prices

The worst part of the plans so far calls for the trade in car to be recycled (actually destroyed), which will cut the supply of used cars, raising their price. Cars are sold in markets segmented by income. That means those who have the incomes to buy new cars usually trade-in their old ones long before they are worn out.

They buy a new one and the old one enters a used car market at a substantially reduced price.

As cars age and mileage goes up, value goes down. Cars sold and resold get progressively more affordable for people of modest means. Any plan to disrupt the flow of used cars cuts off transportation opportunities to people of modest means who cannot afford new cars.

Congress is full of people who claim they are for free enterprise. For once, maybe they could practice what they preach and leave used cars to the market place. Instead they want to help the well-to-do to buy new cars and have the rest of us walk.

Fred Siegmund covers America’s jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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