Clunker Mania and its Aftermath

Stubbornness sometimes pays off. For years I had resisted getting rid of our 1992 Chrysler Town & Country minivan. It served as our (and occasionally our friends') spare car, and my father's car whenever my parents came visiting. It was also good for hauling five plus passengers or bulky home supplies when needed.

Then this Cash for Clunkers (CARS) program was launched last month. Anita and I happily traded in our minivan for a fuel efficient SUV, getting a $4,500 rebate from Uncle Sam in the process.

Nationally in the US, this $3 billion taxpayer funded program has benefited automakers, dealers and about 700,000 buyers like us. The implementation by the government could have been a lot better, especially in avoiding internet outages and speed of processing claims. But overall this was a huge success and has boosted the recession-hit auto industry. This clunker mania also drew in many shoppers to dealerships who did not qualify for rebates, but were enticed to buy cars anyway.

What now? Consider three factors. First, some pundits have predicted that with the ending of this program the sales of autos will slump. Second, a lot of owners of old sedans are feeling left out. That's because only the old cars and light trucks with a rated gas consumption of 18 mpg or less qualified for the rebate, and this excluded most sedans. Third, some eligible clunker owners couldn't buy a new car because of shortages of popular fuel efficient models due to the enthusiastic response to the program.

The following steps by the Obama administration and Congress can address all these issues:

• A new version of the program raises the mileage ceiling for clunkers so it includes many more sedans. Say, the EPA mileage ceiling for clunkers can be raised from 18 mpg to 21 mpg. This will create a second wave of new car buyers, as well as help those who were eligible but couldn't complete their transactions under the just ended program.
• At the same time the rebate per vehicle can be slightly reduced so that the same public funds cover more cars. For example, the rebate can be $3,000 for the new car's fuel economy improvement of 6 mpg or more (4 mpg for new SUVs), and $2,000 for 4 - 6 mpg (2 - 4 mpg for new SUVs.)
• The implementation should be considerably improved this time around. With even halfway decent capacity planning there was no reason to have website crashes or overloads. Just 700,000 claims with each file of a few MBs size were being uploaded over a period of several weeks. Any decent data vendor could have made many times such capacity available even at short notice. The same applies to human claims processors using back of the envelope calculations, especially now, with the benefit of hindsight.

Another aspect bothers me, though I've no solid solution. Some experts have decried the requirement that the engines of the old traded vehicles be disabled to take them permanently off the road. This in a macro sense is a destruction of value since some of these vehicles may have many years of useful life left. It is worse if the vehicle in question now happens to be a car with somewhat better fuel efficiency than the existing 18 mpg threshold.

Can we spare such cars, and only require them to be converted so they can use compressed natural gas (CNG) that is much cheaper and less polluting than gasoline? This conversion is very popular in India and costs $1,500 - $2,000. Can such converted used cars be allowed to be exported to countries like India, so that the US owner bringing them in gets a much higher trade in value, in addition to the government rebate? That can draw more owners of less old cars to avail of the CARS program and buy new vehicles. But I haven't thought this through and it needs more study.