Reasons for the Failure of Cash for Clunkers Program - Term Paper Example

Reasons for the Failure of Cash for Clunkers Program Introduction The $3 billion “Cash for Clunkers” plan is being hailed in Washington as a great success because so many Americans sought to get a $3,500 to $4,500 check financed by other taxpayers in return for trading in their old car (The Wall Street Journal). But the latest reports show that the Obama program to boost the automotive industrial sector is going to be dead, not due to less popularity, but because of the huge popularity and lack of funds. In November, 2008, U.S. sales for the Toyota, Lexus and Scion brands combined fell 33.9 percent; year-to-date sales were down 13.4 percent in the United States, to about 2.1 million, according to Auto Data Corp. (Henry) Inside the 789 Chrysler showrooms to be cast aside, fear is starting to set in as dealers try to figure out what to do with expensive inventories that werent selling well (MSNBC.com) Automotive industry is one of the worse affected industries in America because of the current global economic crisis. The problems in automotive industry cannot be neglected by the administration because of the huge dependence of American economy to the automotive industry. Millions of Americans are working in the automotive sector and the problems in automotive sector will result in loss of jobs for many Americans which forced Obama to concentrate heavily on the automotive sector as part of his economic reformation programs. Joined by an uncommon alliance of auto executives, union leaders and environmental activists, President Barack Obama announced a national program to cut new vehicle carbon emissions and raise mileage by 30 percent, while also reducing oil needs and changing the kinds of cars Americans buy. Administration officials said consumers were going to pay an extra $700, anyway, for mileage standards that had already been approved. The Obama plan adds another $600 to the price of a vehicle, a senior administration official said, bringing the total cost to $1,300 by 2016. (Obama unveils mpg rule, gets broad support) President Obama’s plan to introduce new policies will definitely increase the price of the vehicles though it may be helpful in increasing the mileage of the vehicle and reducing the environmental problems. In order to make his plan more attractive to the public “Cash for Clunkers” plan has been proposed. Car owners may not throw away their vehicles only because of the low mileage and environmental problems. They are not in a position to go for a new vehicle at present because of the weaker economy and Obama realized the above fact and put forward the “Cash for Clunkers” plan. But the plan seems to be a failure because of so many factors which are briefly discussed in this paper below. The Failure of Cash for Clunkers plan The major reason for the failure of the plan is the failure of the forecasters to analyze the plan properly. “The program was originally funded with $1 billion of taxpayer money to cover rebates of $3,500-$4,500 on cars traded in for more fuel-efficient models, and the money was expected to last for about six months. It lasted for one week” (Stelzer). The popularity of the program was more than anticipated by the bureaucracy. The forecasters never thought that such a huge demand for the plan. In fact the plan came as a blessing to those who already taken a decision to purchase a new car even without such a rebate. The statistics collected by the experts were not correct and their calculations or anticipations went totally wrong. Even though further $ 2 billion added to keep the program alive, that also lasted for less than month. If the forecasters were successful in analyzing the demand, the plan could have been revised before its implementation by reducing the amount of rebate or putting more clauses to avoid exploitation of the plan. Another reason for the failure of the plan was the delay in getting the cash rebates. “Hundreds of auto dealers in the New York area have withdrawn from the governments Cash for Clunkers program, citing delays in getting reimbursed by the government” (STRUMPF). The dealers forced to pay the rebates from their pockets and wait for the allotment of money from the authorities. Moreover, administrative problems and lengthy paper works have been created a mess as far as cash for clunkers package is concerned. The second reason for the failure was the improper implementation of the package. “The 135 pages of rules setting out what dealers had to do to recapture the refund money they laid out, were constantly changed, the web site they were to use to apply to get their money back frequently crashed, and some had to drop out of the program because they had run out of cash” (Stelzer). The authorities forced to change the rules because of the huge popularity band lack of funds. Public who suffered a lot because of the current economic decline utilized or exploited the offer put forward by the government. The periodical changing of rules has resulted in many people complaining about the discrimination. Some people got the rebate without many difficulties whereas some others struggled to get it due to changing rules. The changing of rules regularly has created suspicion in the minds of the public about the plan. ‘The plan started on July 1. Then they put it off until July 23. Dealer registration cannot begin until July 24. Required forms are not on the system yet. The rules have changed 3 times and aren’t set in stone yet, 4 days from the start date’ (Topix) The public has realized that the plan was formulated with lack of vision and moreover the taxpayer’s money was not distributed evenly. “Many dealers have said they are worried they wont get repaid at all, while others have waited so long to get reimbursed they dont have the cash to fund any more rebates. The program is a great program in the sense that its creating a lot of floor traffic that a lot of dealers havent seen in a long time. But its in the hands of this enormous bureaucracy and regulatory agency. If they dont get out of their own way, this program is going to be a huge failure" (STRUMPF) Considering the huge money needed to give as rebate for replacing the old cars with the more fuel efficient new cars, the returns are negligible. “On the best of assumptions about the fuel saved by replacing inefficient Clunkers with cars that get perhaps 10 mpg more than the Clunkers they replace, the reduction in gasoline consumption will cut our oil consumption by 0.2 percent per year, or less than a single days gasoline use” (Stelzer). In other words, the fuel efficient cars are not efficient enough to give a considerable saving of oil so that in the long run it might be beneficial to the American economy. Technology has not developed much to give us a revolutionary change as far as fuel economy is concerned. Moreover, even the reduction of carbon or toxic gases emission is also not significant enough when we compare the cost we have to bear to use such high tech cars. Global warming is a controversial subject. Many experts believe that it is a scam and have cited various other reasons like the solar variations for the increased atmospheric temperature. Since we are not sure about the impacts of toxic gas emission on atmospheric temperature rise, it is not wise to spend such a huge volume of public money for the protection of environment. Cash for clunkers plan is actually intended to save General Motors and Chrysler or the members of the United Auto Workers. But it is doubtful whether the benefits will reach the American companies or not. ‘In all probabilities, the buyers of the almost 700,000 cars, 41% may go for Japanese cars whereas only 39 percent will go for the (once) Big Three’ (Stelzer). It is difficult to yield the desired result using the Cash for clunkers plan as majority of the benefit might go to the Japanese car manufacturers. The cash for clunkers program was aimed at boosting the economy through rejuvenating the automotive sector, which plays a major role in shaping the American economy. But instead of yielding the desired result - the rejuvenation of American companies, it provided a big help top the foreign car manufacturers. The destruction or removal of the 700000 cars from the used car market may increase the prices of the cars which the lower-income consumers tend to buy. On the other hand such lowly priced cars might not be obeying the standards prescribed by the Congress and hence the buyers might not get the benefit from the cash for clunkers package. In short, only the higher class who are able to purchase the expensive cars would be able to get the cash rebate whereas the poor people may not get much benefit from this package. The bill works pretty simply, but looks pretty easy to take advantage of too. The trade-in must have mileage numbers (mpg) at 18mpg or less (combined city/highway) and the new car being purchased must have at least four miles better than that to get a $3,500 voucher.  If the new car gets at least 10mpg higher than the trade-in, the voucher will be for $4,500.Trucks are figured differently, with the replacement vehicle required to have at least 18mpg combined.  That’s not actually hard to achieve today, with the average pickup truck (in medium and heavy duty classes) getting closer to 20mpg.  The new vehicle only has to get 2mpg better than its trade-in counterpart, however.  A big concession to Detroit, it appears (Turpen)    Conclusions The cash for clunkers program was proposed by Obama and Congress with good intentions. But the forecasters failed to anticipate the volume of responses from the public. They have underestimated the public response to the package and the funds allocated for months have been finished within weeks. The rules and regulations for obtaining the cash rebate have changed many times because of the huge public response towards the program. The real intention of the package was to assist the American automobile manufacturers especially the Big Three. But the Japanese car manufacturers got more benefits than their American counterparts from the cash for clunkers package. Poor people were unable to get any cash incentives from the plan and they were severely affected because of the removal of a big quantity of used cars from the market. The cash for clunkers program was aimed at stimulating the American economy through the reforms in the automotive sector which was severely affected by the economic recess. But the plan failed to fulfill the objective because of the failure in implementation of it. In short, Cash for Clunkers plan was a right step wrongly executed. Works Cited 1. Henry, J.2008. “Toyota Loss Helps Validate Detroit Big Three”. bnet.com. 27 October 2009.< http://industry.bnet.com/auto/1000478/toyota-loss-helps-validate-detroit-big-three/ > 2. MSNBC.com.2009. “Chrysler Dealers Shift into ‘Everything Must Go’. 27 October 2009.< http://www.msnbc.msn.com/id/30794379// > 3. “Obama Unveils mpg Rule, Gets Broad Support. 2009. MSNBC.com. 27 October 2009. < http://www.msnbc.msn.com/id/30810514// > 4. Stelzer, Irwin M. 2009. “Irwin Stelzer: Seven lessons of Cash-for-Clunkers failure”. The Examiner, 27 October 2009. 5. STRUMPF, DAN. 2009. “NY Dealers Pull Out of Clunkers Program”. 6. The Wall Street Journal. August 23. 2009. “All Clunkered Out The Dealers May, or May Not, Get Their Money”. 27 October 2009. 7. Topix. 2009. “Cash for Clunkers Program destined for failure”. 27 October 2009. 8. Turpen, Aaron. 2009. “The Pending Cash for Clunkers Program: Failure From the Get-Go?”. 27 October 2009.     Read More