Poor economic mileage from auto clunkers plan

WASHINGTON Tue Jul 14, 2009 5:14pm EDT

A vintage Dodge pickup truck sits on display at the Walter P. Chrysler museum in Auburn Hills, Michigan June 19, 2009. REUTERS/Molly Riley

A vintage Dodge pickup truck sits on display at the Walter P. Chrysler museum in Auburn Hills, Michigan June 19, 2009.

Credit: Reuters/Molly Riley

WASHINGTON (Reuters) - Politicians, automakers and car dealers are banking on American consumers to trade in older gasoline guzzlers for new lean, green machines, lured by payments of up to $4,500 from the government.

But economists say the "cash for clunkers" program is unlikely to contribute much beyond a brief boost to economic growth in the current quarter. They cite the program's short duration and various eligibility rules among its shortcomings as a source of economic stimulus.

"It's a very small number of people that this plan will end up helping," Wachovia senior economist Mark Vitner said.

The Car Allowance Rebate System, signed into law on June 24, provides about $1 billion to be distributed as incentives for owners of gas-thirsty, older cars and trucks to buy more fuel-efficient new vehicles.

On the surface, the program would seem to have a triple benefit: the consumer saves a chunk of money, the suffering auto industry gets a boost in sales, and the environment can breathe just a little bit easier.

But there are restrictions. The vehicle being turned in must have been made after 1984 and have a fuel economy rating of less than 18 miles per gallon. Vehicles traded in will be scrapped, so the owner cannot get any money from a trade-in or sale on top of the government payment.

The vehicle must also have been insured continuously by the same owner for at least a year and the size of the payment is linked to the relative mileage improvement of the new vehicle. The program ends on November 1.

Still, Vitner is one of many U.S. economists who has penciled in a somewhat stronger economic growth rate for the third quarter, thanks in part to increased auto production to meet demand from the new program.

FACTORY RESTARTS

Auto output has fallen dramatically this year as recession-hit consumers shied away from big-ticket purchases and the financial crisis dried up financing, with production at levels that economists consider unsustainably low, even in a time of poor demand.

That means the auto sector will probably contribute to economic growth this quarter.

Chrysler Group LLC, which had shut down all of its production while it was in a government-financed bankruptcy reorganization, has reopened several factories over the last 30 days.

According to the latest Blue Chip survey of leading economists, released last Friday, the consensus forecast is for third-quarter growth in gross domestic product of 1 percent. That is up from 0.6 percent in last month's survey; only some of the forecast increase comes from auto production.

The industry itself is very upbeat about the program's prospects, particularly what it could mean for truck sales.

"Pick-up trucks potentially could be a huge beneficiary," said Mark LaNeve, head of North American sales for General Motors. GM estimates that 20 percent of the full-size pickups, 11 percent of mid-size pick-ups, and 23 percent of mid-size SUVs on the road could be eligible.

And consumers have shown considerable interest in the program. "Our call centers are already buzzing," Ford sales chief Jim Farley said.

LASTING IMPACT?

However, "cash for clunkers" may simply bring demand forward from later quarters as people who may otherwise have waited longer to buy take advantage of the program.

And economists say even the near-term impact may disappoint because the plan may not make much financial sense for many consumers.

"When you look at the qualifications, your vehicle has to be worth less then $4,500 for it to make economic sense," said Rebecca Lindland, director of the autos group at IHS Global Insight.

People with cars valued in that range typically own them free and clear and are not likely to be able to afford anything newer, Lindland said. A new car would mean new debt, and such purchasers probably would buy a used car.

"There are not a lot of people adding debt right now," she said. "Our forecasts haven't changed because we don't think this program is going to be successful."

Some environmentalists also caution that the program may do little to alter American consumer's carbon-belching behavior.

An owner trading in for a light truck, SUV, or minivan could buy a new vehicle with improved fuel economy of as little as two miles per gallon. Both new cars and trucks qualifying under the program could have fuel economy below the average national level.

"The reality is the economists are right that it doesn't make economic sense; the environmentalists are right that it doesn't make environmental sense," said Dan Becker, director of the Safe Climate Campaign. "The conclusion has to be that it really doesn't make any sense."

(Additional reporting by Kevin Krolicki in Detroit; Editing by Leslie Adler)

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