by Christopher Padgett

Created on: September 24, 2009   Last Updated: September 25, 2009

The declining auto industry has been playing a big part in the economic recession happening in the US; therefore, the government passed the Cash for Clunkers bill in hopes of stimulating the American auto industry. This bill gave the American public an incentive to purchase new vehicles at discount prices, thus theoretically boosting revenue for the struggling American auto industry; however, this bill did not have the impact that our government desired.

The first flaw of this bill is the most obvious. The bill is intended to benefit the American auto industry, but who actually benefits from this bill? This bill had more of an impact on stimulating the revenues of foreign automakers. Four out of the top five cars purchased using the Cash for Clunkers program are manufactured by foreign automakers. That leaves only one vehicle in the top five vehicles purchased that is manufactured by an American automaker. The American automaker that benefited the most from Cash for Clunkers was Ford, which is the most financially stable of the American automakers.

Another problem with this bill is the cost. The initial design of the bill allocated one billion dollars to this program; however, before the end of the program that budget had tripled. The final cost of this bill reached close to three billion dollars. This is a small amount in comparison to some other government programs; however, three billion dollars does not seem so miniscule when it is missing. This program was intended to increase revenue for automakers, so in turn these automakers gave steep discounts on vehicles providing more incentive to visit the car lot. They were not told however that they would have to front the money to the government, and the government would pass them an "I owe you." How exactly is depleting cash reserves a good way of stimulating a business?

One of the clauses of the Cash for Clunkers program required all vehicles traded in to be destroyed by the dealer. This sounds like a good idea, at first. However, upon further thought, this might be detrimental to our economy. A large by product of the auto industry is the used car industry. This bill has taken hundreds of thousands of vehicles off this market, thus creating a shortage of cheap used cars. Granted, these vehicles were called clunkers for a reason, sometimes a clunker is all that someone can afford. By thinking in terms of simple economics, reducing the supply of used vehicles on the market, the government has used this bill to increase the price of used vehicles.

Now the rest of the criticisms of this bill can be overlooked, but my biggest point of contention with the Cash for Clunkers bill is that it did not consider the entire economic situation of the American public. The bill did allow the American public to purchase cars that were steeply discounted and also allowed people, who normally could not afford a new vehicle to purchase one. However, looking at the cause of the US economic slowdown, two of the main causes were an increase in home foreclosures, and an increase in vehicle repossessions. The majority of car buyers do not take into account the true cost of ownership of the vehicle they are purchasing, thus causing financial hardship in some cases. I don't understand how encouraging people to purchase new cars during an economic recession, which was partially caused by car repossessions, is a smart economic decision.

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