We've heard a lot about the positives of the Cash-for-Clunkers program in recent days. It gets gas-guzzling vehicles off the road in favor of more fuel-efficient, potentially safer ones, and has brought business back to blighted dealerships and auto malls.
In an immediate sense, it looks good, right?
But many sour sides might be starting to emerge, just as the program—officially known as the Car Allowance Rebate System (CARS)—was today given a second wind in the form of a $2 billion extension. We've seen several reports in recent days, including this one from the Reno Gazette-Journal, that the program is hurting the business of both used-car dealerships and auto-repair shops, with the latter reporting a rise in the number of canceled jobs.
That's a sharp turnaround from a trend that continued until recently this year, when the auto-repair business was booming—especially for independent mechanics—and many owners opted to make repairs instead of purchasing a new car. Now many customers are questioning repairs when they have the potential to effectively get a new car at a deep discount.
Meanwhile, some estimates project that the program could inject up to $18 billion into the economy, when including finance, insurance, industry suppliers, and related vendors.
That's an impressive figure, but it starts to look quite small when you consider the potential long-term impact to mechanics and the aftermarket. According to the Wall Street Journal, there are about 164,000 independent shops across the country.
A small two-person repair shop in Reno reported losing about $1,400 in repair work just over a few days. If this is happening across the country, that's a significant economic impact that also needs to be taken into account. So it's likely the long-term economic impact to mechanics could easily be in the billions.
The WSJ also reports that the automotive aftermarket as a whole could prove one of the biggest losers; it's a $250 billion industry that employs $4.6 million people, including those independent mechanics.
The Automotive Service Association (ASA) had lobbied Congress unsuccessfully to add a repair option—like those currently provided by Texas and California—to the bill.
Used car salesman
Calculating the economic affects of the Clunkers program is going to be very complex. For instance, salvage yards and parts resellers are slated to profit from the process initially, although it might lead to lower prices on used parts for some popular Clunker trade-ins. According to a Spokane Spokesman-Review report, citing a local parts recycler, it should lead to the "cheapest parts in decades."
There's also concern that the 750,000 jalopies that are projected to be taken off the road could reduce the nation's overall supply of used cars by nearly five percent, according to Kelley Blue Book, and pinch supply, driving up values for used cars—temporarily, in a scenario that might end up hurting used-car dealerships and low-income families even more in the end.
Even from an environmental standpoint, there's no clear answer yet. The environmental cost of building that many additional vehicles is significant, and replacing older vehicles with new ones instead of simply scrapping them might actually slightly increase vehicle miles traveled (VMT), not leading to the supposed cut in gasoline consumption.
The CARS extension allows enough funds for about half a million additional trade-ins, and it could already be used up in a matter of just a few days. By all means, if you were thinking of getting a new car in the near future, now's probably the time.
And economically, maybe a few months after that we'll know whether this was a good idea or not.