Cash For Clunkers Extended

Cash For Clunkers is back. After burning through its initial $1 billion in a week, the Car Allowance Rebate System (CARS) aka ‘Cash For Clunkers,’ received another round of funding from Washington. Last Thursday, the Senate voted to extend the popular car buying program before their Summer break. President Obama signed it into law on Friday.

This program offers government rebates to customers who purchase new cars if they trade in their vehicles with mileage below 18 mpg. The rebate checks of $3,500 or $4,500 have two purposes. For one, the plan is supposed to remove nearly 500,000 older-model vehicles from American roadways, resulting in better gas mileage across the country in the long-term.  The second, more immediate benefit is the economic stimulus for the U.S. economy.

“This will be a great weekend to go out and buy an American-made auto,” Sen. Debbie Stabenow, D-Michigan said after voting for the measure. Unfortunately, Senator Stabenow is not coming clean about the details. Exactly how much of the assistance is going towards American-made vehicles? The Christian Science Monitor reports half of the cars bought on the first round of Clunkers were foreign brands. Should we expect the 2^nd round to be much different? Probably not. Why they did not require American-made vehicles for the Clunkers program is still a mystery.

Still, the consumers who made this government giveaway successful are buying at least some American vehicles. The market evidently thinks Ford (F) will benefit. Ford stock has risen 500% since late February.

Is it time to start buying U.S. automakers again? As we discussed on Friday, automakers are paying for more labor hours. Yet, any government program will at best deliver a short-term boost to quarterly results. We can’t expect the government to subsidize auto sales indefinitely. The answer for sustained growth in auto manufacturers can be found in your ECON 101 class – consistently meet the demand of the market at a profit.

So if you’re not buying stock, should you buy a new car? Maybe. If you can afford it and you don’t mind paying the new-car premium, go for it. Trade in the gas guzzler and get a newer, lower-mileage vehicle. It’s not every day that the Feds offer to pay down your car note. The first round of Cash for Clunkers lasted a week – the second round may not last much longer.