Cash for Clunkers

The government program affectionately known as Cash for Clunkers has been exceptionally popular among Americans. In just 4 days last week, the entire $1 billion allotted to it had been used up!

This is one form of financial stimulus, albeit a small one at only $1 billion, that worked very quickly, and perhaps effectively.

Here in a nutshell is how the program works (click on image if you wish to enlarge):


In general, your used vehicle must be less than 25 years old and get less than 18 mpg (there are exceptions).

The program requires the scrapping of your eligible trade-in vehicle.


Since Americans jumped at the opportunity to get a new car under these terms, Congress allotted another $2 billion.

Some are concerned that the "buy American" provision was not included in this program. However, when one considers what "American" means anymore in a car (or many other products for that matter), we see that cars are really the composite of goods & services from many countries--all combined into the vehicle that we may call "Chrysler" and find that it has less American content than the vehicle that we call "Toyota."


Foreign-owned plants located here in the US are the foundation of the new U.S. auto industry. In 2008, 3.1 million cars of the total 8.7 million sold, or just over a third, were produced by foreign-owned companies making their products here.

Last year, plants for foreign-owned auto companies purchased $53 billion in parts from U.S. suppliers.

Anytime a program is devised, it always has some unintended consequences. That's pretty much an economic fact of life.

For example, with all those used cars being scrapped, poor people who can’t afford new cars, or expensive used cars, will be hurt. If you can only afford $1,000 for a car, you’ll find many of these vehicles are now unavailable.

Also, many people had previously planned to take their car to the local mechanic to help squeeze some more miles out of it. Not now--that they have a shinny new car. But of course, that means your local garage is going to sit by idly.

And yes, it’s quite possible that government rebates today will steal car sales from next year.

But in the meantime, we have some consumer money being spent. Car lots are being cleared of new vehicles. Plants will need to get to work to build more cars. That means workers will have jobs. They spend money--and that further stimulates the cities they hail from--and ultimately benefit the entire nation.

Economists see this program boosting 3rd quarter growth. Several firms, including Goldman Sachs, have recently raised their GDP forecasts. Goldman now sees third-quarter growth at a 3% annualized rate, up from its earlier forecast for just 1%, in part because the clunkers program has helped revive auto manufacturing.