“Cash For Clunkers” An Artificial Program Shields Auto Industry

Ford (F) makes better cars than it did last year, or at least there is better demand for them. The “cash for clunkers” program put together by the US government helped sell cars, a fact that Ford admitted.

The “clunkers” stimulus which allowed consumers to trade in old, fuel-inefficient cars for new fuel-efficient ones, lasted about a week. The government withdrew the package, either because it ran through its $1 billion of funding or because it was too complex for dealers to manage. Media accounts cite both reasons.

The program may have been a limited success but it had, at least briefly, the affect of masking whether Detroit is making better cars, at least from a customer standpoint. “Cash For Clunkers” is one of the few stimulus packages that worked quickly and was an unqualified success. That means Congress is likely to push to expand it. That should happen before the 2010 new car season begins, if politicians have any sense.

An extension of the program would continue to hide whether Detroit’s latest vehicles can stand on their own. The government has already given GM and Chrysler $70 billion. The “clunkers” plan is simply an extension of that bailout. It may help revenue for The Big Three while it is in effect, but it will become an addiction for the firms and one that delays the day that sales are based on product quality and not incentives.

Car and light truck sales have been fueled by incentives from the manufacturers for years. That has helped erode the margins on most vehicles and masked the extend to which consumers will buy Detroit models at full price. The government is simply putting off the day when the question of real demand is answered.

Douglas A. McIntyre