Is Cash for Clunkers a Waste of Money?

White House Sees Other Benefits: 'It's Good for Our Energy Security and Our Environment'

The White House Monday released an analysis of Cash for Clunkers applications showing that the transactions were generating a 61 percent increase in fuel economy. Vehicles purchased through the program get an average of 25.4 miles per gallon; the average fuel economy for trade-ins was 15.8 miles per gallon. In gas alone, that's going to save a typical customer $700 to $1,000, said White House spokesman Robert Gibbs.

"It's good for consumers, it's good for dealers and auto manufacturers. You've see Ford talk about their sales being up as a result of this program," Gibbs said. "It's good for our energy security and our environment."

The Cash for Clunkers program was designed to help the struggling auto industry by giving owners of old cars money toward the purchase of a new, more fuel-efficient vehicle. Owners of old cars and trucks can get $3,500 or $4,500 toward a new, more fuel-efficient vehicle in exchange for scrapping their old vehicle.

Economics Professor: Most Cars Sold Are Ones Detroit Has No Trouble Selling

Originally, Cash for Clunkers was supposed to continue through Nov. 1, or until the money ran out. But there were so many dealers participating that if each one just completed a dozen Cash for Clunkers sales, the $1 billion initially allocated by Congress in July would be gone in days.

Last week, the program's first week, some dealers had already initiated more like 250 sales through the program -- 20 times what the government was expecting. Later during the week, the White House announced it might have to suspend the program because of its shocking popularity. The House promptly allocated another $2 billion. The program's fate hangs on whether the Senate will vote to extend more funds this week.

Peter Morici, an economics professor at the University of Maryland, doesn't believe this is the best way for the government to spend its money.

"Cash for Clunkers does not affect the overall economy as much as folks think," Morici said. "It's helping Detroit clear out the lots, however most of the cars that are getting sold are the ones that Detroit has no trouble selling."

The automakers have too many trucks and SUVs, vehicles that can't be sold through the program, he added, warning that imported cars might benefit the most. In that case, there won't be much of a ripple effect through the economy.

The other problem: If there is a surge in car buying today, consumers are less likely to buy a new car six months down the road.

Case Study: China's Stimulus Package Boosted Domestic Production, Economy

"China did a masterful job of using its stimulus package to promote domestic production. The Obama stimulus package merely promoted the expansion of the federal bureaucracy," Morici said. "The China stimulus package helps the economy; the Obama stimulus package does not."

But not everyone is so skeptical.

"I think it's a big plus for the economy," said Mark Zandi, chief economist at Moody's Economy.com. "It goes a long way to clearing out inventory and getting the automakers to ramp up production. It will be a key factor driving the economy from recession to recovery."

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