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Why Cash for Clunkers Won't Save the Economy

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Until now, most of the money used to bail out ailing businesses has gone directly to companies themselves. Now, though, a few select car owners will be able to take advantage of a new program designed to encourage them to trade in their old clunkers for brand new vehicles.

The administration's Car Allowance Rebate System, known more popularly as Cash for Clunkers, rolled out earlier this month. Under the program, those who qualify will be eligible to receive between $3,500 and $4,500 from the government to buy a new car, truck, or SUV. Two industries may benefit directly:

  • Although the move comes too late to keep Chrysler and GM out of bankruptcy, you can imagine that automakers like Ford (NYSE: F  ) , Toyota (NYSE: TM  ) , and Honda (NYSE: HMC  ) are hoping for an uptick in demand.
  • Also, car dealers such as AutoNation (NYSE: AN  ) and CarMax (NYSE: KMX  ) will try to cash in on higher shopping traffic.

Devil in the details
Yet while the program sounds like a great deal, the number of people who'll actually benefit from it is likely far lower than you'd think. That's because the rules of the program narrow down the transactions that are eligible for the program. To get an idea of this, take a look at the rules of the program:

  • The vehicle being traded in must be in drivable condition, be no more than 25 years old, and get no more than 18 miles per gallon (mpg).
  • The same person must have owned and had the car insured for at least one year before trading it in.
  • You must buy a new vehicle. Used vehicle purchases aren't eligible for the program. Moreover, the vehicle can't cost more than $45,000.
  • If you buy a new passenger car, it must get at least 22 mpg. If it gets 4-9 mpg more than the car you traded in, then you'll get a $3,500 rebate. If the new car is better by 10 mpg or more, then you get a $4,500 rebate.
  • If you buy a new truck or SUV, the rules are different. "Category 1" trucks, which include most SUVs, pickups, and vans, must get 18 mpg. Those that get 2-4 mpg more than the traded-in vehicle earn the $3,500 rebate, while a 5-mpg difference or greater earns $4,500. Category 2 trucks, which include larger trucks and vans, must get 15 mpg, and their breakpoints are 1 mpg and 2 mpg or greater.
  • The program is scheduled to run from July 1 to Nov. 1. But once the program runs out of money, you'll no longer be eligible for the credit, even if you would otherwise qualify.
  • Traded-in vehicles must be destroyed and sold for scrap rather than resold by the car dealer. Therefore, you won't receive full trade-in value for your vehicle; you'll get the lower scrap value instead.

As you can see, that's a lot of rules to deal with. The credit definitely isn't aimed at the consumer who buys new cars frequently, since the scrap requirement will usually make it more cost-effective simply to trade in a late-model used car. Meanwhile, the ownership requirement prevents a burgeoning market in clunker cars to take advantage of the program.

On the other hand, many of those who tend to run their cars into the ground would typically replace old cars with late-model used cars rather than new ones. And during these tough times, stretching to buy a new car even with a good-sized rebate may not be at the top of budget-conscious consumers' lists of things to do.

Much ado about nothing
In the end, given all the restrictions and conditions of the program, I think the Cash for Clunkers program will have little impact on car-buying behavior and the businesses that hope to benefit from it. Until a clearer trend toward economic recovery comes, investors will do better with companies like parts sellers AutoZone (NYSE: AZO  ) and O'Reilly Automotive (Nasdaq: ORLY  ) that cater to consumers trying to extend the lives of their vehicles as long as possible.

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Fool contributor Dan Caplinger has never owned a car that got bad enough gas mileage to be eligible for government rebates. He doesn't own shares of the companies mentioned in this article. CarMax is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't stall out on you.


Read/Post Comments (9) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 29, 2009, at 3:51 PM, bluffguy wrote:

    The olny reason it won't make a difference is because it is very limited in time and total dollar amount. People are lined up at dealerships to take advantage of the program. True, many do not understand the limitations of age, ownership and mileage diference from trade to new vehicle, and many think they will get full value for their trade in plus the $4500, but there are still plenty of people signing up for the deal and giving auto sales a big boost. By September there will be little inventory left on dealers lots that qualifies for the program, and sales will taper off.

  • Report this Comment On July 29, 2009, at 8:16 PM, perryslo wrote:

    Hmm, let's see? There are rules certainly, but the billion dollars allocated will be quickly used up. The program may certainly be too small, but it can hardly be said to be too restrictive.

    You claim that "Cash for Clunkers" won't save the economy. Can you please cite any source that has ever claimed it would?

  • Report this Comment On July 29, 2009, at 8:18 PM, perryslo wrote:

    PS. The fact that there are many restrictions also creates a market that was not originally there. Have you ever seen a teaser ad or drove into a store and bought something anyways even though you did not qualify for the advertised rebate? Hellooooo!

  • Report this Comment On July 30, 2009, at 2:13 PM, Origin97 wrote:

    At least we can get some dirty cars and trucks off the street.

  • Report this Comment On August 01, 2009, at 7:11 AM, foolshand wrote:

    my comments from an artical on topstocks website,,, wowww,, lets all have a party! this is a whole lot of bull shiiz.

    i've watched this cash for clunkers on the t.v. news and i've listened about it on the radio and i have read about it on the internet and now i've read about it on this site.

    well, i've had it and sorry that your wedsite is the site that i need to blow the potato out of the tail pipe, since you too haven't really spoke the truth either..

    it's in your brain and you thought about it, but you've decided to roll up your window and not say anything, just like every other person in america has done.

    let me back up some, because i just read your story again and i am going to take back my ' sorry" from you. you do not deserve it.

    anyway back to what i was saying and i was just going to make a brief statement about it, lets hope i still do.

    everyone one needs to stand up, get mad and fire all the big bonus car ceo's, and make any car dealer pay back the cash that they paid for the clunkers that came right out of the junk yard.

    i would like to see one of our crooked politician stand up and warn every dealer that they will go to jail for abusing this program.

    i would like for atleast one of our nations news reporter stand up and say, " i am a real news reporter and i well report the whole truth of the story ".

    i would like for atleast one of our U.S,A news channels stand up and say, " i am a real news station and we report the whole truth of the story no matter who's paying us " .

    i would like to see atleast one stock reporter website stand up and say, " i am a real stock web reporter and i like to push a stock now and then, but i will report the whole truth too ".

    ah f... it, my comments falls on lazy people ears.. OUR TAX DOLLARS ARE NOT FOR CAR DEALERS AND CAR MAKERS TO GET RICH ON!

    WHERE IN THE HELL ARE MY FREE DOLLARS THAT WILL UPGRADE ME TO A HIGHER LEVEL IN LIFE! ( not tax breaks ).

    haven't you lazy americans paid enough from your taxes, in your livelihood, not able to give as much to a your favorite charity as you did before?

    every american should ask bill clinton where is your 100,000 of dollars that he gave out back in his day to any foreigner who came over here that wanted to start a business.

    look around, who owns your neighbor hood convenience store, betcha it's someone shipping their money back to their country. and don't forget about the 5 year no taxes that came with the deal.

    if you can't afford to travel around the U.S.A or you just don't trave and has never left the state that you live in, let me give you some heads up on what is out there..

    i travel 4 times a year, we go to a different part of the country everytime, why? because my wife wants to see everything and every state. no matter where we go a foreigner owns every mom and pop convenience store. now don't get me wrong i have no problem anyone foreinger or not making a living here in this great nation with have.

    is this what bill clinton had in his mine? he must had, for one thing what kind of business can you start with 100k. he surely wasn't thinking of luring big corporations here with a pi ss azz 100k? hmm, maybe it was the polititicians that made money from OUR TAX DOLLARS AGIAN by creating it?

    like i said before where is my 100,000??? i too would like to start a business, that would upgrade my life, it would also upgrade me to a higher tax bracket to PAY MORE FRIGGING TAXES THAN NOT AT ALL!, unlike the 100k gift deal with no taxes for 5 years.

    ohh,, whats this about a gift??? don't you remember when bill clinton pass this back in his day that the 100,000 dollars to any foreigner who wanted to come here to start a business and pay no taxes for five years and was money that they didn't have to pay back either, a gift? sorry thought you knew that.

    well, you must have known that after 5 years that they can sell their store to a relative and they too would not pay taxes for 5 years too and so on and so on and so on..

    this brings me back to the cash for clunkers.. a lot of these cars are right out of the junk yards and back yards. cars that were not on the road anyway. lots of cars were not putting anything in the air, most of them have already contaminated the ground water with all the oil that had leak out of them a long time ago. most was an eye sore and not a threat to the ozone..

    obama bill wasn't pass for cleaning up people back yards, it wasn't pass like this editor has reported and it damn sure wasn't pass to make the CAR DEALERS AND CAR MAKER TO PAY THIER CEO'S THIER TOTALLY UNREAL AMOUNTS OF BONUSES!

    well the editor, DB MOENNING did tell half the story, like most will, but they didn't tell the whole story, like most won't or told not too to tell..

    yes DB, obama bill was to help the economy, but it was also design to help reduce the greenhouse affect, to cut our spending on oil too.. it was made to eliminate the gas guzzling that people were actually driving not cleaning up the yard.

    but these thiefing az holes car dealers and car maker are ripping the american tax paying people , and they know it, off again by getting OUR TAX PAYING DOLLARS FOR CARS THAT POEPLE ARE DIGGING UP FROM THEIR BACK YARDS AND WERE NEVER ON ANY STREET.

    frigging greed that's all. not one thought in their tiny little brains of their great grand children,

    not a one thought of breaking this country with higher taxes to pay for these programs,

    not one thought of the polar ice caps disappearing and we are living long enough to see it.

    not one thought of rising coastal waters that are displacing people all over the world. not one thought of the lost of land for rice that they enjoy eating.

    not one thought of the extinction of animals that thier children will never see.

    not one thought not one thought in their nutshells of a brain of making a gal of milk cost 6 bucks as our oil prices go up,

    not one thought that their greed is tearing the country down where we have to rely on another country so much that their grand children might be ruled by another nation.

    not one thought of where they would live with all the nuclear fallout in the air, ground and water after the oil nations decides to cut us off after they really start to think how we became and what the U.S.A did to become this great nation of today of some 200 years ago.

    and last to say, to the politicians, the car dealers, car makers, and even you sales poeple when your putting that down payment in your pocket for a clunker thats you know the only road its tires have touch is the little bit of road getting there don't come crying because your water bill is 500.00 a month and you can not afford send your child to college or that you can't take your children fishing, because youv'e killed all the fish from your greed.

    AND DAMN SURE DON'T COME CRYING WHEN HAVE TO TELL YOUR GRAND CHILDREN THAT THEY MUST FOLLOW THIS OTHER NATION RULES BECAUSE WE LOST OUR FREEDOM, while your trying to suck some good air out of your gas mask fromall the nucler fallout..

    so editor DB MOENNING, when there is a story to tell and a important one like this too, please tell the whole truthful story..

    i really wanted to write just a few words, but i knew my writtings would get longer and longer.. sorry.

  • Report this Comment On August 01, 2009, at 1:59 PM, internetjunkie69 wrote:

    very good comments. I think this is just another bonus to the auto dealers and auto makers that ran up the cost of an average auto to over 25K. I think the new cars will sell for full price now. they will discount the price to make you feel good about the sales taxes and license you didn't pay but the bottom line is the tax payers paid it.

  • Report this Comment On August 03, 2009, at 8:52 AM, mscollison wrote:

    It would be nice if people knew what they were talking about before spouting off. Cash for Clunkers does not apply for vehicles that have been "dug up from back yards". The vehicle has to be driven to the dealer first of all, and it has to have been licensed and insured for the past year. Where I come from, people don't license and insure and keep driveable vehicles that are buried in their yards. Vehicles that are licensed and insured are usually being driven. As far as I'm concerned, this has been the most stimulative billion spent to date.

  • Report this Comment On August 06, 2009, at 1:41 PM, jamf92 wrote:

    So much for the CARS program being a failure. 6 days into August and it was so successful and popular the public overwhelmed the system and ate up nearly all the $1Billion in stimulus funds. Pretty good return if you ask me on $1Billion in stimulus. That's a ton of money that just got injected into the market. Can't say the same for the $150+ Billion that went to AIG now can we? Unless you are the guy that got another big bonues for the tax payers.

  • Report this Comment On August 06, 2009, at 1:53 PM, clanza875 wrote:

    This is the only successful program we have had yet. Getting these inefficient cars off the road leads to less money spent on fuel and also lowers the demand for fuel. That leads to less terrorist money sent to the middle east. Sounds like a great program.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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