Junk Cash for Clunkers

Washington is about to spend another $2 billion on cash for clunkers. I wish, instead, lawmakers would declare the program’s first $1 billion a roaring success, take a deep bow, and move on.

In fact, the first $1 billion was not a total failure. It did get help bring auto inventories down, especially for small cars, and, as intended, it took some gas guzzlers off the road.

But The Wall Street Journal reports inventories for high-mileage cars are now well within acceptable levels and some dealers are even reporting shortages. So what will another round of federal subsidies mean? For one thing, the inexorable law of supply and demand may be creating a very different set of winners than the public expects. The Clunkers program is so popular because it is seen as a huge windfall for hard-pressed consumers. But in Clunkers 2.0, much of the benefit may go to dealers, not buyers. Here are a few likely outcomes:

Higher dealer fees: There is already anecdotal evidence that dealers are adding hundreds of dollars in junk fees to the cost of the new cars they sell as part of the clunker program. One angry customer told me that a dealer tried to charge him more than $1,000 in extra fees for a Toyota Camry--$400 for “processing” , $250 in “prep” and $500 for “delivery.”

Upselling: Customer wants the base model, which he could buy for, say, $12,000 after the $4,500 clunker subsidy. The salesman, instead, talks him into buying the fancy--and more profitable--version: You know, the one with the GPS, heated seats, and moon roof. The poor buyer ends up spending the same $16,500 he would have spent without the federal give-away. And as recent history shows, he may well spend more than he really can afford—setting him up for a visit from the repo man. Even in the best case, the buyer gets a fancier car and the dealer makes some extra bucks. But is that worth another taxpayer subsidy?

Higher manufacturer prices: With inventories of the most popular cars getting lean, it won’t be long before manufacturers start raising their prices. Don’t be surprised to see fewer rebates and other incentives. Good for Detroit shareholders. Oh, wait, that’s us (at least when it comes to GM and Chrysler). We've already spent an awful lot of taxpayer dollars bailing out automakers. Do we need to spend still more?

Now, automakers and dealers deserve huge credit for the little drama they’ve put on over the past couple of weeks. The rumor that the clunker program was out of money (it turns out, by the way, that $300 million of the first $1 billion has yet to be spent), has generated priceless free publicity. Not only do they appear to be railroading Congress into spending billions it does not have to keep the program going, but they have created every salesman’s dream pitch: “You must buy now before the special deal ends.” These guys sure know how to sell.

But, in the end, much of this money will do little more than manipulate the timing of auto purchases. Some buyers held off while waiting to see if their junker would qualify—thus artificially depressing sales for the first part of the year. Now, many who would have bought anyway over the next year or so are scrambling to purchase. Thus, I wouldn’t be a bit surprised to see sales slump once the federal subsidy finally ends.

Times are still tough. But in just about every other business, sellers bring in new buyers with market discounts. That was beginning to happen with cars, even before Clunkers. Supply and demand works pretty well that way. I’m not sure I understand why auto dealers, rather than, say, furntiure stores, should benefit from taxpayer-funded sales incentives.