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Taxpayers give $3 billion for Cash-for-Clunkers, but will the program have lasting benefits?


AP: Cash-for-clunkers winners and losers. 

The Cash-for-Clunkers program, funded by $3 billion of taxpayer money, was intended to help auto manufacturers by increasing auto sales. The program ended on August 24, but the government announced today that $500,000 more would be added to the program. The program offers buyers up to $4,500 toward new fuel-efficient vehicles, and car buyers have been happy to take the money.

Car sales increased by 690,114, giving the car industry a much-needed lift. The gain in new car sales was the largest increase since October 2005.

The winners
The sales at Ford, Toyota, and Honda all increased during the program. Sales of the Ford Focus and the Ford Escape rose 56% and 49%, respectively. Japanese auto makers Toyota and Honda increased their sales by 6.4% and 9.9%, respectively. These three auto makers all benefitted from being able to sell enough fuel-efficient vehicles to meet consumer demand.
The environment is also a beneficiary of the program, since gas-guzzling cars were exchanged for more fuel-efficient cars.

The losers
Sales at GM and Chrysler actually fell during the program. GM sales fell 20%, and Chrysler sales fell 15%. This decline in sales despite the cash incentives indicates that consumers still prefer cars made by someone other than GM or Chrysler. The auto makers were unable to provide enough fuel-efficient vehicles to consumers, which was the main reason they did not benefit more from the cash-for-clunkers program. The inability to meet consumer demand has been an issue for these automakers for quite some time. The auto makers' bankruptcy status might also have scared buyers away.

Short-term versus long-term benefits
The auto industry overall benefitted from the program because they were able to move inventory off their lots. However, the boost in sales was a short-term fix for the struggling auto industry. Now that the program has ended, consumers are expected to stay out of dealerships throughout the rest of 2009. Sales are expected to slide back down to pre-cash-for-clunker levels.

Government hand-outs will not promote lasting improvements. If GM and Chrysler want to be competitive in the long-term, they have to produce vehicles that consumers want to buy and charge a price that they are willing to pay. Ford, Honda, and Toyota seem to have figured this out, and now maybe GM and Chrysler will follow suit.

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