Tuesday, August 04, 2009

Morningstar: Will Cash for Clunkers keep the auto industry rolling?

The US enacted a program informally known as Cash for Clunkers, where the government sponsors rebates of $3,500 to $4,500 for consumers to trade in old vehicles to new, more fuel efficient ones. The old vehicle must have had an EPA-rated fuel economy of less than 18 mpg, and the new one must have over 22 mpg. The standard, in other words is quite lax. Nonetheless, it seems that most people who are taking advantage of the program are trading in heavy vehicles for smaller ones. This is good.

I'm not sure that the bill is good from an environmental standpoint. The government requires that the traded in vehicles be disabled by destroying their engines. The remains would presumably be scrapped. This too incurs environmental costs.

Here, Morningstar argues that the auto industry has long-term issues that they will have to resolve independent of this program, although it is definitely a short-term boost and does provide some stimulus to the economy. To revive the industry, all players (even the Japanese manufacturers) have overcapacity that they need to reduce.

My view is that there are probably better places to put the US government's money. The House passed an extension, and the Senate is likely to vote yes - my inclination would be to vote no if I were a Senator, but there are (sadly) political factors here. In any case, the program would probably get only $1-2 billion more - there are bigger battles to fight.

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