Aug. 4, 2009— -- The government's Cash for Clunkers program has been a big hit with consumers who have jumped at the ability to get up to $4,500 of a new-car purchase, helping to clear cars off deal lots.
But as the Senate now considers adding another $2 billion to the initial $1 billion for the program, some are questioning the benefits of this program for the larger economy.
"This proves one thing: If you hand out money on the street corner, people will take it," said James L. Gattuso, a senior fellow in regulatory policy at the Heritage Foundation, a conservative think tank.
The top 10 selling cars so far through the program, according to the Department of Transportation, are: the Ford Focus FWD, Toyota Corolla, Honda Civic, Toyota Prius, Toyota Camry, Ford Escape FWD, Hyundai Elantra, Dodge Caliber, Honda Fit and last the Chevrolet Cobalt.
Gattuso warned that while people might be buying cars the gains from their purchases won't overcome the lost economic activity from using the government dollars for more productive programs.
"The money has to be taxed or borrowed. It doesn't come from thin air," Gattuso said. "You aren't going to fix the economy by the government being the consumer and paying for consumption directly.
"Is the government going to be the consumer of last report?" Gattuso added. "I don't think that's a viable economic plan."
Supporters, however, say the program is just the jump-start the economy needs and that the purchase of a car ripples throughout the economy, helping many sectors from part suppliers to steelmakers.
Ford Monday reported its first U.S. sales increase in nearly two years, largely thanks to the Cash for Clunkers program, officially known as Car Allowance Rebate System, or CARS.
On 'Good Morning America" today financial correspondent, Bianna Golodryga said she contacted four dealers; one in Los Angeles, Houston, Ohio and New Jersey, and that each said sales had increased 10 percent to 15 percent since January.
"They attribute one-third of that to the Cash for Clunkers program. it does seem to be working," Golodryga said.
Automobile Makers Profit From 'Clunkers'
July sales of Ford, Lincoln and Mercury light vehicles rose 1.6 percent from the same month last year. It was the first year-over-year rise since November 2007. Ford sold 158,354 vehicles, a 2.2 percent increase over June's figures, showing that the worst U.S. auto sales slump in a quarter-century may be easing.
Things were not as upbeat at Chrysler, where sales fell 9.4 percent compared with last year. But even that was still good news because the drop was not as steep as prior months' declines. General Motors reported a sales drop 19 percent from a year ago, and Honda was down 17.3 percent.
Subaru saw its U.S. sales leap a whopping 34 percent in July, and Hyundai said its sales jumped 12 percent. Toyota, which has struggled through the recession, saw an 11 percent drop, but that too was slower than past declines.
"As long as the government can keep pushing this Cash for Clunkers, the autos are going to just keep acting great," said Patrick Casey, a trader with WJ Blum and Sons.
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."
Zandi thinks that Congress should add the $2 billion to the program but stop there. Hopefully, he said, this will be enough to jump-start spending. Zandi acknowledges that selling more cars now will cause sales to slump in a few months.
"I think there will a lull in sales because of this early next year, but hopefully by then the broader economy will have found its footing," Zandi said. He did note that "this is a boost to the economy when it needs it most, and hopefully it's a catalyst for a more-sustainable economic expansion."
Car Sales Will Have Ripple Effect on Economy
Zandi said the auto industry is the "largest multiplier of any other industry in the economy" and that this program will create jobs in America compared to pushing other consumer products which are mostly built overseas.
"This is a very a logical thing to do to provide a quick boost to economy," he said.
Darrell M. West, director of Governance Studies at the Brookings Institution, put it this way: "What's good for Ford and General Motors is good for the country.
"Anything that gets people buying automobiles is going to have a ripple effect across the entire economy," he said. "Cars are essential to the American economy, so if we can get the automobile industry going again it will have a huge multiplier effect."
West also noted that the government has lent billions of dollars to the auto industry, so taxpayers have a vested interest in seeing the companies thrive.
He also said though that there is only so much the government can do to prop up the economy.
"The recession is supposed to end in the second half of this year so there shouldn't be much more need for programs like this," West said. "Eventually consumers are going take over and spend on their own behalf."
With reports from ABC News' Erin Keohane, Charles Herman, Sunlen Miller and The Associated Press.