Cash For Clunkers Scheme Set To Continue, But Is It Undermining The Auto Industry?

The “cash for clunkers” scheme, and its rather more prosaically-titled UK equivalent, the car scrappage scheme, are ideas that were scorned for their short-termism, potentially distorting effect on the marketplace and dubious green credentials. Nevertheless, they haven’t been rubbished out of existence just yet – the US Senate is on the verge of allocating another wodge of funds for the scheme.

Senate Majority Leader Harry Reid said there were enough votes to pass the motion, and that it would be done and dusted by the time the Senate breaks up for the holidays. Even if it wasn’t passed, the scheme is likely to still be over its $1bn budget – while $664,000-worth of cash has been called in by car dealers, it’s thought that lots of dealers haven’t got round to doing their paperwork yet, and that there’s a massive backlog. The scheme was designed to run until November, but it’s burned through its budget in just one month; it’s so popular that some manufacturers are struggling to keep supplies going to dealers, potentially inhibiting the stimulus element of the program.

The US scheme is rather different to the schemes run in the UK and elsewhere. Its focus is on clearing out old fuel-inefficient motors and replacing them with greener cars (the Prius is happily sitting fourth in the list of most popular new buys through the scheme). The old gas-guzzlers are then killed off by having a sodium-silicate solution poured into their engines and run round their workings, which clogs it up and makes it redundant.

While the increased sales of new cars act as a stimulus to the famously crocked Big Three, the new cars don’t have to be US-built, just as cars in the UK scheme don’t all have to be from the UK. It’s less a direct stimulus for certain domestic companies than it is a more general Keynesian fillip to the economy, getting everyone spending to kickstart everything in the automotive chain – dealerships, scrapyards, manufacturers, credit agencies and so on. The worry is that the value isn’t being passed onto the customer – manufacturers are being accused of raising their prices to soften the blow of having to contribute to the scheme.

Applause for the admirably blunt and crude approach to getting inefficient cars off the road, and image of the gas-guzzler becoming asphyxiated with silicate is compelling. (There’s no such provision in the UK scheme, but then again it’s a much more serious problem in the US). But isn’t this propping up a dangerously unsustainable level of car manufacture?

This piece in the Economist is right to point out that the scheme keeps consumers from getting too attached to avoiding consumption – as well as acting as a direct stimulus for automotive spending, it also has the hazy, indirect effect of creating a quietly infectious sense of spending money being a good and achievable thing to do. The offers screaming from the forecourts remind you that even though there’s a recession on, you can probably afford a car, so you can probably afford a lot of things, so you’ll spend money. Which is all good news for a society running on consumption.

Trouble is that this isn’t encouraging the kind of ruthless downsizing that the bloated auto industry needs. We saw Pontiac disappear earlier this year, but what about Buick? What about Saturn? What about Seat? What about the chassis that’s used across two or more manufacturers and sold as a different car each time? The trouble is, as we’ve seen before, is that ever-growing demand over the last half-century, has led to a vast and powerfully unionised workforce that need placating. As the demand slows, thanks to higher petrol prices and a decreasing customer base, the companies’ inefficiencies become more and more apparent; consumers are also generally still wary during the recession. And for America, the growth in Asian markets isn’t going to translate into sales of the cars the US currently manufactures. This boost may prove a fillip to American cars and American spending habits in the short term, but it dangerously encourages the ever-expansionist tendencies of the auto industry, and is just setting itself up for a bigger fall when the Treasury stops propping it up.

Posted by Ben Beaumont-Thomas in Green Rush | August 5, 2009 12:49PM |