August 26 2009|03.43 PM UTC

Stan Reybern

U.S. Vs Europe: Cash For Clunkers

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Recessions throughout history have led to government action intended to help. A primary example from today’s slowdown are “clunkers” programs, which amount to government subsidies for buying new, more fuel efficient cars from troubled auto makers. Since clunkers programs have been in effect for a while now, we thought it was time to rank the American and European programs – and declare a winner.

Five important criteria have been used for the ranking process below. Let us know what you think in the comments.

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Auto sales

USA

News during the first several weeks of President Barack Obama’s CARS program raved about the early sales numbers — as many as 250,000 the first week. While some reports had sales slipping after the phenomenal first week, Newsweek clocks the final tally at 625,000 applications submitted for $2.58 billion in rebates, good for $18.2 billion in retail sales. An economist quoted for the story said that the average new car bought in the US this year cost $29,106 and that the program “…also spurred a lot of secondary economic activity–taxes paid, dealership advertising, overtime wages for dealership employees.” Rebates of $3,500-$4,500 were offered to participating buyers, with the amount paid dependent on how old and fuel-inefficient the vehicle being traded in was.

Europe

Unlike the US, who has one clunkers program for the entire nation, European variants are taken on by specific countries with their own restrictions and details. According to the New York Times, however, the typical rebate offered to consumers was 1,500-2,500 Euros, contingent on the purchase of a smaller and more fuel efficient car than the one being recycled. The Times declared European programs to be a smashing success and raved about the early results of Europe’s clunkers program, stating that car sales had risen to thirteen million, up from projections of only eleven million.

The Wall Street Journal reported a positive showing in France, stating that:

Registrations of new cars in France rose 3.1% in July from a year earlier to 188,635, as a scrapping incentive introduced at the end of last year benefited makers of small cars such as Renault SA and PSA Peugeot-Citroën SA. French registrations of imported cars fell 5.6%.

Italian car sales received a similar boost:

“In Italy, new car registrations rose 6.2% in July from a year earlier to 204,905 vehicles, also thanks to scrapping incentives introduced earlier this year, according to government figures released Monday. The rise was nevertheless half of what was recorded in June, when registrations climbed 12.4%. For the first seven months of the year, they fell 8.3% to 1.33 million vehicles.”

Winner: Europe. As the pioneer of the program, the continent as a whole has benefited more from the sheer volume of car purchases as compared to the US. Their programs also inspired the US to start one of its own.

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Public response

USA

Response to the CARS program has been mixed among the public at large. Generally speaking, democrats and supporters of President Obama praise the program as an innovative way to stimulate a beleaguered industry. This support begins from the top down with the architect of the program, Obama himself. Of course, consumers have had little reason to complain, as free money has never been a very difficult sell. Unlike much of Europe, however, there is a sizable wing of the US public and political spectrum that opposes giveaway programs on principle. Conservative columnist Charles Krauthammer, for instance, likened the program to, “…paying half the country to dig holes and the other half to fill them back up.” The main thrust of their argument is that simply paying people to buy new cars does not address the crisis in any fundamental way. The verdict is still out on which side is correct.

Europe

While undeniably popular among European consumers (who receive the rebates), the programs have drawn a surprising amount of criticism from European political leaders, long percieved to be supportive of welfare state programs and giveaways. For example, CBS News reports that:

“In July, Czech President Vaclav Klaus, vetoed parts of a stimulus package, including a local version of the cash for clunkers. His office said the measure favored “short-term interests of several strong players from the auto industry at the expense of other sectors and firms.”

German criticism has been even more scathing, comparing it to enabling addicted drug addicts:

“The auto industry is waiting on the bonus like a drug addict waits for the next shot,” Steffen Kampeter, a senior lawmaker in Chancellor Angela Merkel’s Christian Democrats, was quoted as telling the Financial Times Deutschland newspaper.”

Winner: USA. Among the buying public, Cash For Clunkers is arguably the most popular government program in decades.

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Dealer response

USA

Dealer response has (somewhat predictably) been positive for the program that has given them an immediate sales boost. US News interviewed National Automobiles Dealer Association chairman John McEleney, who had the following to say:

“Our response has been, I think, much like the national response. It’s been very positive. We’ve had more souls, more traffic, more phone calls, more Internet leads, more interest, than we’ve seen in a year. People recognize it as a real value.”

However, as of late, some dealers have complained about bureaucratic hassles like excessive paperwork and wait times for being reimbursed. A recent episode of Mike Huckabee’s show on FOX News featured two dealers owed a collective $500,000 by the CARS program who did not expect to be paid for, “a very long time.” A New York Times piece came to similar conclusions after talking to a number of dealers:

“Dealers have complained about delays in being reimbursed, and on Aug. 20 General Motors said that it would begin advancing dealers the money they are owed from the program. Some dealers have pulled out of the program, saying it was costing them too much time and causing cash-flow problems. A dealers’ group in metropolitan New York said about half of its 425 members had stopped participating.”

Europe

Fewer European dealers have complained than Americans. In the process of researching their story on Europe’s various clunkers programs, CBS News noted that:

Sylvie Cariou, the director of a Citroen dealership just outside of Paris, said that as soon as France implemented its own program, the impact was noticeable.

“Right away the effect that we saw was more traffic” in her dealership she said. “For people who didn’t think they could afford a car, it motivated them to buy.”

Winner: USA. While having received its fair share of criticism, the program has been undeniably more popular in the US than it has in European countries.

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Money spent

USA

Thus far, the money spent paying people to recycle their old cars (figure and citation here) has slightly surpassed the amount taken in by dealers on new car purchases. $1 billion in funding was earmarked for the program from the start, according to the official Cash For Clunkers website.

The program was kept alive by overwhelming support in the House of Representatives and the Senate, according to the New York Times. In total, an additional $2 billion in funding was approved to keep the program running through the end of August, no doubt driven by the perceived success of the program as noted earlier. Indeed, some dealerships have reported running out of popular models as a result of CARS-driven surges in demand.

In reporting on the net result of taxpayer spending on the Cash for Clunkers program, Newsweek stated:

“If we use Taylor’s estimate, about 250,000 extra cars were purchased (40 percent of 625,000). And if each cost $29,000, those sales generated about $7.3 billion in revenue in the space of a few weeks. That’s a pretty good return on $2.6 billion in government spending.”

Europe

As noted earlier, Europe did not run a comprehensive, continent-wide program the way the United States did. Because of this, exact figures for how much was paid out to consumers in rebates are not readily available. A blog covering the programs makes reference only to “the billions of euros” handed out to car-buying consumers.

Winner: USA. At present, it appears that more revenue has been generated by the program than was spent in taxes to administer it. In lieu of exact comparable figures for Europe’s programs, the United States must (at least temporarily) be declared the winner in this category.

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Types of cars bought

USA

It might come as somewhat of a surprise to CARS supporters that many of the new cars purchased were trucks. According to a CNN Money article entitled “Reality Check: Trucks Win in Cash for Clunkers Game”, the only reason certain reports list small cars like the Ford Focus as the top seller is because those reports do not count sales by make and model, but by arcane criteria like engine specifications. When make and model was used to calculate the top cars purchased through the program, CNN found that:

“The Ford Escape crossover SUV, instead of being the seventh-most popular vehicle under the program, as the government ranked it, was actually the best seller, according to Edmunds.com. The government pegged the Ford Focus as the top seller.”

The Jeep Patriot, Dodge Caliber, Ford F-150 and Chevrolet Silverado also placed among the top ten Cash for Clunkers-driven purchases when the more comprehensive measurements were were used, according to CNN.

Supporters can take solace in te fact that these trucks get at least 10MPG better than the cars traded in (a program requirement), but it does have interesting implications for the notion that Americans “really” wanted smaller cars all along.

Europe

Europe’s notoriously high gasoline taxes no doubt played a role in making small, fuel-friendly models the top purchases under Europe’s clunkers initiative. No doubt this explains the New York Times‘ conclusion that:

“Continental drivers already favor small cars, and the program plays to a segment of the market where European giants like Volkswagen, Fiat, Renault and Peugeot are dominant.”

The Times also notes that in Germany, specifically, sales of GM’s Opel Corsa, “…have tripled in Germany, leading workers in Germany and Spain to return to full production schedules.”

Winner: Europe. If the goal was getting people into smaller, more fuel efficient cars, Europe must be seen as the winner, though we must note again that this is due likely to Europe’s pre-existing preference for small cars.

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{ 10 comments… read them below or add one }

Brian August 27, 2009 at 9:49 am

You neglected to mention that, unlike the US program, the European programs have generally not required that the old cars be disabled/destroyed. This has resulted in having the old cars being salvaged and sent onto the third world or even ‘smuggled’ back into their original countries.

Therefore the US program has had a true benefit to the environment by ensuring that the old vehicles never get a chance to pollute again.

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Shane August 27, 2009 at 10:07 am

The problem with the whole thing is two fold:

1) I have old cars that are more fuel efficient than the new cars, so I couldn’t get a discounted new car, even though I really am in need of one right now – pretty sure that’s a problem for others as well.

2) The cost of used cars has gone up to account for their new scarcity thanks to the government taking all these vehicles off the road, so I can’t buy a used car right now either.

In my opinion this makes the whole program a huge failure.

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Pablo August 27, 2009 at 10:57 am

Interesting article but there are some important differences between Europe and the US when it comes to cars.

Europeans prefer smaller cars because the streets are smaller. The European countries were largely built around the dimensions of a horse and cart so the centres of large cities are filled with narrow, winding roads. It’s just impossible to get a typical US truck to negotiate these roads safely.

In the UK, all cars over 3 years old have to pass a road worthiness test every year. Therefore, clunkers are naturally eliminated as it’s simply illegal to drive a car with poor brakes or cracked windshields. We don’t just test emissions, we make sure the cars are safe. Therefore, rather than pay for expensive repairs we just scrap them.

So in Europe we have less clunkers to begin with and we’re already driving around in fuel efficient cars, with engines typically less than 2 litres.

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Alexander August 27, 2009 at 11:52 am

The EU is not a nation. It’s an union. Thats a big difference. So you can’t just compare one country with an union. But you could do it with Germany, who invented it.

If you would do that, Germany would win also the money spent part. 5 Billion Euro is a lot for that “small” nation.

I dunno about the responses of both, the dealers and public. But you have to admit that the US society differs from the German one. So you really can’t compare it. The dealer response is ok, but public is arguable.

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Anonymous August 27, 2009 at 1:07 pm

I don’t see how anyone “won”. My tax dollars were used to help buy someone else’s car. The tax dollars are not repaid by the extra sales.

$3 BILLION was spent to put more trucks on the road.
You tell me, who won…?

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Ryan August 27, 2009 at 6:33 pm

Here’s why I don’t like what happened:

I own a farm. On that farm I have 2 pickup trucks – neither of which have been registered for very long. See, if they’re registered you’ve got to pay insurance on them AND they have to pass inspection (here in New York State) – so I register them for the seasons I need them and take them off the road when I’m not going to be using them. Anyhow, the better of the trucks gets maybe 14mpg. I’d love to find a decent truck that gets 15-16-17mpg to replace it with, but they’re all on their way to the scrapyard. Wouldn’t it have made sense for me to be able to trade my real clunker in for a “CFC truck” before anything was destroyed? And if I traded in a 14mpg truck, someone else should have had the option to trade up to that if they got lower mpgs… Essentially the program should have taken the worst vehicles out of service rather than just the worst that met the criteria.

Also to Pablo, not sure about every state in the US but my state requires all cars to pass an extensive inspection every year. Brakes, tires, suspension, glass, lights, exhaust, emissions, frame, windshield wipers, etc are all checked. Vehicles older than 1996? are exempt from the emissions tests, but all vehicles must pass every other “test” in order to be legal on the road. It’s been common for cars that cannot pass the tests to be traded in and sent to other states or countries – but I don’t know enough to really comment on that.

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omnimoeish August 29, 2009 at 9:56 am

I know a lot of mechanics aren’t happy about 700,000 old vehicles being taken off the road. Also there are a lot of parts revenues being lost, especially by domestic auto makers who were building all of the SUVs and clunkers.

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Locke August 31, 2009 at 8:18 am

Brian said, “Therefore the US program has had a true benefit to the environment by ensuring that the old vehicles never get a chance to pollute again.”

Except that manufacturing vehicles uses a tremendous amount of money and natural resources. Cars already made have have a huge environmental impact already done. The bottom line is that CFC increases consumption. From a strictly conservationist viewpoint, the program is bad. Better to drive the old cars as long as they’re safe. When they’re not don’t destroy them, recycle & re-use as much as possible. And replace it with a more efficient used car. Even if you do buy new – each year new vehicles are getting more fuel efficient/less polluting and the manufacturing process is becoming better – well less bad – for the environment.

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Kevin September 9, 2009 at 9:03 am

“My tax dollars were used to help buy someone else’s car.” – since when are YOUR tax dollars ONLY used for YOUR needs? If you don’t like paying taxes and having the money used to make the country stronger or better – move to China or defect to Alaska when it secedes. I don’t mean to offend but I’m sick of people whining about taxes then their house catches fire or they want part of their kid’s college paid for – THEN its ok for taxes to start helping people out. Pay your taxes – apply for ALL the programs you’re eligible for and enjoy your life – it really is too short not to!

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desing September 23, 2009 at 7:47 am

I think the US would get more bang for its buck if the fixed the government number of rebates and raffled off chances for a subsidy each day. People actually enjoy the lotto aspect of these sort of things and the program could be stretched out over the year, and not run out of cash in a few weeks. Have a quick pick screen in the dealer showroom. Dealers would draw in crowds and show off new cars in the process.

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