Fisher Investments Editorial Staff
US Economy

Trifling Transformers

By, 06/26/2009

Story Highlights:

  • Washington's recently approved "cash for clunkers" program plans to stimulate new car purchases and curb carbon emissions.
  •  The program will offer qualified participants $3,500 to $4,500 to trade in their old gas guzzlers for new, more fuel efficient models.
  • Likely, the environmental impact will be other than expected and fewer folks than anticipated will show interest.   




The summer's biggest Hollywood blockbuster (so far), Transformers: Revenge of the Fallen, hit box offices Wednesday, bringing in a staggering $60.6 million at its debut. The movie pits cars morphing into "Autobots" against invading alien robot "Decepticons." Sound ridiculous? Not to worry. You're not alone. Such overhyped offerings are typically panned by savvy critics—not unlike Washington's recent attempt to simultaneously "transform" the auto industry and stimulate blockbuster car sales.


President Obama signed off on funding for the much-hyped "cash for clunkers" program Wednesday. Officially called the Consumer Assistance to Recycle and Save Program (a stretch to achieve the CARS acronym), the plan attempts to stimulate new car purchases and curb carbon emissions by providing vouchers to drivers willing to trade in old gas guzzlers for shiny new vehicles. Qualified cars must get less than 18 miles per gallon, be no older than 25 years, drivable, and insured and registered to the same owner for the previous year. Those meeting the requirements may apply for a $3,500 to $4,500 voucher for a new, more fuel efficient car—used cars not allowed. The trade-ins will be scrapped.


The feds estimate "cash for clunkers" will lure some 600,000 to 1,000,000 car owners. Sounds like a lot right? If the program performs as billed, it would be worth about 5%-10% of total expected 2009 sales. Not bad perhaps. But will it really draw such crowds? And will it benefit the environment as advertised? Call us cynical, but we imagine the environmental impact will be other than expected, and fewer folks than anticipated will show interest.


First off, to make sense economically, a car's market value mustn't exceed $3,500 to $4,500. Otherwise, car owners would just sell their "clunker" on the open market. That axes a hefty chunk of all gas guzzlers right off the bat. Second, of those in the ‘economically sensible' range, how many will be willing to shell out the dough for a new car even with the incentive? Our guess? Probably not many. If you're driving a cheap car already, chances are you can't afford something newer, prefer mobilizing your resources in other ways, or would rather buy used anyway (maybe because you're an environmentalist and consider the alternative wasteful—the irony!). All things considered, the estimated 600,000 to 1,000,000 participants seems wildly optimistic. So much for meaningful car sales stimulus.  


Even if sales don't get much of a boost, at least the environment will benefit, right? Maybe. But who's done the environmental math here? How do we know the emissions of so-called "gas guzzlers," whose use and weekly miles driven surely vary wildly, outweigh the emissions from building new cars and scrapping old ones? If this program really wants to encourage recycling and saving, why make participants spend their credit on a new car? Aren't there plenty of fuel efficient used cars on the market? (Oh right, stimulating car sales. Maybe those two goals don't mesh too well.) Not to mention the fact some light-duty trucks (think SUVs) need only be one MPG more efficient than the trade-in to qualify for a $3,500 voucher.


The chance the program achieves either of its objectives seems slim. It's the unintended consequences such forced "transformation" entails that'll determine the ultimate impact. Unfortunately—unlike summer blockbusters that make up for low quality with high revenues—we doubt "cash for clunkers" will amount to much more than an all around box office flop.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.