Wednesday, August 5, 2009

Clunkers will end with a clunk

The Cash for Clunkers program has been so successful, it ran out of cash in less than a month. We've all heard about this, and the Congress' scramble to re-fund the program. The prospect of the sudden loss of the government-backed incentive has, for me, brought to mind the biggest downside. When the program's done, there'll be a massive drop in sales. The Auto Extremist wrote an excellent column to this effect. In fact, it's likely that the program is just pulling forward sales that would've been delayed until later in the year, a phenomenon I've seen many times in my career as an analyst of the industry.

In my mind, what's needed is a soft landing. While you'll never completely get rid of the aforementioned effects, it may be possible to mitigate the boom and bust that seems inevitable at this point. For this, we'd need a gradual phaseout. Towards the end of the program, decrease the maximum cash from $4,500 to $3,500, then a thousand less each successive month.

While there will still be a significant dropoff right after each decrease, it will allow the manufacturers--and consumers--to gradually ween themselves off the support, and hopefully back to a dynamic in which people are looking past "the deal" toward the product, as Peter mentioned.

Otherwise, the carmakers will have another round of panic from returning monthly sales drops, and it will add to the gloomy economic outlook. Let's get off this cycle, and back to buying cars we really desire.

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