THE ISSUE: Cash for Clunkers

OUR OPINION: Program is popular but is no more than a short-term boost

Ronald Reagan often quipped that government programs rarely achieve their lofty goals but never go away despite failures. In this case, the government program is working as planned, but it will have to go away.

The so-called “Cash for Clunkers” has afforded people the chance to actually see a government program work quickly to make a difference in their lives. So successful has it been that the $1 billion allocated to provide incentive for people to trade in older vehicles on more efficient new ones was gone in a matter of days.

It’s not hard to understand consumer enthusiasm. The government providing up to $4,500 in cash if a person trades in an older vehicle is strong incentive to buy, particularly when car dealers hungry for business are sweetening the deals. The initial phase of the program produced nearly a quarter-million trade-ins.

The question now becomes will the Senate go along with House-passed legislation to extend the program with another $2 billion. The Obama administration and leading Democrats say it’s a winning situation all the way around: Consumers get new vehicles that get better gas mileage and are better for the environment, and the auto industry gets a needed sales boost.

The lobbying for more money is intense, with groups such as the American International Auto Dealers contending Cash for Clunkers is one stimulus program that is making a visible difference.

Even economists such as Bob Rinear, founder of Invest Yourself and publisher of the Financial Intelligence Report, acknowledges the program is a good idea. But he warns of a downside.

“To generate sales in 2005, the car companies pushed very hard for zero down and no interest for 60 months. This was a death knell for the industry because it drew forward sales from upcoming years. In other words, anyone who was even thinking about buying a car someday jumped on the deal, stealing sales from the next years.”

Bankruptcy filings by major automakers are testimony to the problems, particularly in the past decade. Boosting sales now via government subsidies could give a false impression of the fiscal health of the companies. They must find a way to sustain sales without taxpayer financing.

There also is the matter of people who cannot afford to take advantage of the program.

“What about all of those people who have never had the ability to buy new? What is the market for used cars going to look like to the lower-income class if the feds keep removing the cheaper vehicles from the market?” Rinear asks.

“When you remove and scrap the older ‘clunkers,’ what does that leave the lower-income people to buy? Did anyone consider the long-term effect of this?”

Ironically, “Cash for Clunkers” is a program similar to what was suggested previously as a way to help automakers. Give the money to consumers, not to the automakers. Now we’ve done both — and can’t really afford to do so.

Yes, the program has the short-term benefit of boosting consumer spending at a time when the economy needs the boost. But it is not sustainable. For public relations purposes, the Senate is likely to go along with an extension by adding the new dollars, but that money won’t last long if the program goes as it has to date.

If you plan to take advantage of “Cash for Clunkers,” you’d better do so in short order if the new funding comes through. Unlike the government programs that Reagan so decried, this one will and must end.

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