More Money for Cash for Clunkers? Not So Fast

More Money for Cash for Clunkers? Not So Fast

This week it seems the cacophony around Cash for Clunkers (C4C) has risen ever higher with various parties competing to find superlatives for the program.

As the Senate this week contemplates additional funding that the House already passed Friday for the officially named Car Allowance Rebate System (CARS), it is a good time to step back and apply some logic to the question of the day: Is it wise to find more money to extend the program?

To be sure, Internet shopping activity is up, showroom traffic is up and so are sales. So for an industry that has been starving for customers all year, the answer would seem to be a resounding "yes."

We love a good sales surge as much as anyone, but to us the answer is not so simple, says Edmunds.com CEO Jeremy Anwyl.

As we noted earlier in July, over 100,000 buyers had put their purchase on hold waiting for the Cash for Clunkers to launch. Is it any wonder that showrooms filled and the government servers crashed when this backlog of buyers rushed to finalize their purchase?

Secondly, last week we published an analysis showing that in any given month 60,000 to 70,000 "clunkerlike" deals happen with no government program in place. In other words, the 200,000-plus deals the government was originally prepared to fund were barely above the "natural" clunker trade-in rate.

So, the program was destined to sell out quickly. As word of this spread around the Internet, any consumer with any interest at all, rushed into their local dealership so as to not be left out.

Clearly, the sales frenzy of last week was inevitable. In fact, students of economic theory will quickly recognize the dynamics of a classic shortage. We have taken three to four months of normal activity and caused them to occur over a few days, as consumers rushed to not miss out.

What everyone fails to realize is that once this backlog is met, interest in the program will quickly fade.

As is the case, there is also an ironic unintended consequence. Car companies have reduced production levels as one response to this downturn. Shortages are developing -- particularly around clunker-favored fuel-efficient models. As these prices rise, non-clunker buyers will inevitably shift to less-efficient models, crushing one of the touted environmental benefits of C4C.

Despite the weight of these arguments, Congress -- never one to let the facts get in the way of a popular piece of legislation -- will undeniably approve additional funding next week. This will ease the funding "shortage" the original bill created and interest in C4C will probably fade as quickly as it started.

But there is a silver lining to this cloud. Car sales will be up this summer, with or without C4C. Why? Consumers today are still feeling economically vulnerable. Even those buying a new vehicle want to make a decision that is as prudent as possible. Add to that, collective wisdom has it that the best deals available all year are in August/September when cars go on sale prior to the next year's models arriving late in September. So buyers have been putting off purchase and demand has been building all year. Some of which will be met through the next couple months.

This raises an obvious question mark around October. The new models will be arriving; prices will be up. How will consumers react?

But for now, though, we can look forward to a nice sales bounce through the summer.

There is another lesson from the past few weeks. Much as with zero percent financing in 2001 and more recently employee pricing, Cash for Clunkers has united the industry around a common "buy now" message. The aggregate weight of this message -- in fact almost any message -- can easily energize the market.

So should additional funds be found to extend C4C? We realize that in this era of proliferate spending $2 billion to $3 billion is hardly significant. But C4C is not a cure-all for auto sales -- only consumer confidence will trigger the fundamental sales increases the industry desperately needs. And as a stimulus, C4C would have been more defensible late last year. 

So on balance, our answer is no. But we fully expect approval anyway.

Jeremy Anwyl is CEO of Edmunds.com.

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.