Car Rebates: Populist Stimulus or Clunker?

WASHINGTON -- The populist "cash-for-clunkers" program has quickly become the poster child of the economic recovery, bringing out shoppers in droves to help the struggling auto industry and provide a vital boost in consumer spending.

But is it everything it's cracked up to be?

As the Senate prepares to add $2 billion to continue the rebates through Labor Day, conservatives question the government's role in picking "winners and losers" and contend the program will simply drive up the deficit instead of stimulating the economy.

Environmentalists have doubts of their own. They say the fuel efficiency gains achieved through the trade-ins are unimpressive and simply reward those who drove gas guzzlers.

Others offer this simple explanation for the program's popularity: Who would turn down a rebate of $4,500 for a new car?

"People want to know what's going to be next. Cash for shoes? Cash for groceries?" said Sen. Richard Shelby, R-Ala.

Officially called the Car Allowance Rebate System (CARS), the program is designed to help struggling car dealers, boost consumer spending and send old, polluting vehicles to the scrap yard. The initial $1 billion in government funds is expected to subsidize the sale of 250,000 new vehicles. An additional $2 billion would fund up to 500,000 more rebates.

TV viewers have been blitzed with "cash-for-clunker" ads featuring images of old Chevy Astros and Ford Broncos being flattened like pancakes. Ford has been advertising its snappy slogan, "Let Ford Recycle Your Ride." Dealerships have been swamped with customers hoping to take advantage of rebates of $3,500 or $4,500.

Drumming up support for continuing the rebates, the Obama administration has pointed to data collected since the program began July 24:

-- Through early Tuesday, the clunkers program had recorded 157,000 transactions worth $664 million.

-- Eighty-three percent of the vehicles traded in were trucks or SUVs.

-- The new vehicles purchased on average get 9.6 more miles per gallon than the trade-ins, a fuel efficiency improvement of 61 percent.

"I think it would be hard to tell ... the thousands of people who have just traded in gas guzzlers for more efficient cars that this is having no impact," said Vice President Joe Biden, who called the program "an unqualified success."

Conservatives question pulling $2 billion from the $787 billion stimulus program to fund more rebates, calling it another example of the administration borrowing from future generations to spend its way out of the recession.

"This is borrowed money we're going to charge to our children," Sen. Jim DeMint, R-S.C., told CNN.

Liberal Democrats with environmentalist leanings dislike paying for the additional rebates with money that had been set aside for subsidizing renewable energy sources such as windmills and solar panels.

Automakers have struggled through the worst sales slump in more than a quarter-century, with sales down 35 percent during the first half of the year. The rebates boosted sales in July and analysts said they expect a similar impact in August.

But they also raised the prospect that some of those sales might also have occurred without the rebates.

Jeremy Anwyl, CEO of Edmunds.com, an automotive Web site, noted that August is typically a hot month for auto sales because bargain hunters search for deals on outgoing model year vehicles as car dealers clear out their lots to make room for the new models.

The frenzy created by the program could simply lead to car shoppers concentrating their efforts in the summer and staying home when the new vehicles hit the showrooms in the fall.

"With clunkers, you've taken about four to five months of business and you've pushed it into a matter of days," Anwyl said. "I think we could see a real drop in sales activity after mid-September moving into October."

The environmental benefits are also being questioned. The new vehicles purchased with rebates get an average 25.4 mpg, according to the government's data.

But Dan Becker of the Center for Auto Safety suggested that taxpayers will end up spending $3 billion for less-than-stellar fuel economy gains.

"If it doesn't make economic sense and it doesn't make environmental sense, maybe it doesn't make any sense?" Becker said.