The government's "cash for clunkers" program is raising car prices and punishing consumers. It's time to hit the brakes on this clunker of a law. Instead, Congress is putting the pedal to the metal.
After the initial $1 billion for the Car Allowance Rebate System was exhausted in a week, lawmakers quickly allocated another $2 billion for the program that subsidizes some new car purchases up to $4,500 if the buyer has a qualifying trade-in that gets slightly worse gas mileage. Used car buyers will pay a hefty price for Washington's largesse.
In a bad economy, many shoppers are buying used instead of new to save money. Clunker trade-ins have to be destroyed. This hit on supply, coupled with greater demand, means increased prices for used cars. Because of declining business, rental car companies are purchasing fewer new cars, which means they are putting smaller used fleets up for sale. This further decreases the used car supply nationwide.
The "Cars for Clunkers" program is estimated to take 750,000 cars off the road which could have been on the secondary market. Used vehicle prices increased in July for the seventh straight month and are already about 5 percent higher on average than last year, according to data from the automotive auction firm Manheim.
According to the National Automobile Dealers Association, the average purchase price of a new car is $28,400. Even with a federal subsidy to encourage new car sales, a new automobile is out of the reach of many Americans.
Those who can afford a new car but don't have a qualifying trade-in are also getting a raw deal. Prices for the top five cars sold under the clunkers program have increased since the government subsidy was enacted last month, according to data from Edmunds.com. Edmunds CEO Jeremy Anwyl warned consumers should expect to pay higher prices because the program was started at the "worst possible time of the year" when automakers had cut production because of lessened consumer demand.
As Congress meddles in car markets, Ford Motor Co. and Toyota Motor Corp. are both increasing vehicle production to meet demand. Ford's July sales were up 2.4 percent compared to last year, and the Michigan automaker plans to boost its fourth quarter output by 33 percent compared to last year.
The Obama administration is now loosening guidelines to allow rebates on cars in production, so those who trade in clunkers aren't even limited to purchasing vehicles on hand. Models that are popular enough to be in short supply don't need a government boost to help sales. But now those new cars will come at the price of removing their trade-ins from the used market, which has a short supply, thus raising used prices further. The government doubled down to give a break to a few but delivered a clunker of a deal for everyone else.