Post Mortem Ensues on Cash for Clunkers

MSNBC reports that the cash for clunkers program may have provided a short term boost, but at the cost of lower sales for the fourth quarter and next year.

While Cash for Clunkers may have proved there are still car buyers out there, it is unlikely the heavy demand will last. In fact, the big rush to car lots this month may have had the unintended effect of stealing sales from this fall and next year.

"I am really worried about this winter," said J.P. Bishop, president of a dealership chain in central Maryland. "If you didn't buy now, the only reason you are going to buy over the next three or four months is because your car died."

Cash for Clunkers, which offered drivers as much as $4,500 off the price of a new, more fuel-efficient car, proved far more popular than anyone imagined. Through Monday, dealers reported selling 625,000 vehicles in just a month with the rebates.

The program was set to come to an end Monday night. The government had set the deadline on estimates that most of the $3 billion set aside for rebates would be used up by then. Analysts initially figured the cash would last as long as November.

Cash for Clunkers had its complications: Congress had to race to approve $2 billion more for the program after the first $1 billion quickly ran out. Dealers complained the government was slow to reimburse them for deals they made on new sales.

Hours before the Monday night deadline for Cash for Clunkers sales, the government gave dealers an extension, until noon Tuesday, to file the paperwork to get repaid. The deadline for closing sales was not affected.

The Transportation Department granted the extension after the Web site set up to handle the claims was temporarily shut down from overload.

The dealer reimbursement website was a problem from the outset, the Department of Transportation still couldn't get the site to remain operable at the end. They had to extend the filing deadline to attempt to accommodate filings because it would repeatedly crash in the middle of processing applications.

However, the more important takeaway from this episode is something I'd been warning about from the outset - that this program was simply stealing sales from the fourth quarter and next year. It was shifting sales rather than generating new sales that would boost the automakers at a time when they desperately need it.

Now, those automakers are hoping that the immediate boost translates into higher sales overall, and I think they're barking up the wrong tree, particularly because unemployment rates continue to rise, foreclosures are continuing at high levels, and spending is down. Even car rental companies aren't going to be buying cars for their fleets in the numbers they were doing just a year ago because demand for vehicles is down, and the car rental companies are regulating their fleets tighter so as to keep their rental rates as high as possible.