Cash for Clunkers: Sweet Deal for the Industry, but What Happens Next?

When all is said and done, will the "Cash for Clunkers" program lead the automotive industry out of the wilderness of no/slow sales and into the land of sales and money? The answer right now is that no one really knows what will happen Oct. 31 when the money is supposed to run out.

Originally conceived as a stopgap measure to move existing inventory from dealer lots, the "Cash for Clunkers" program has turned into a terrific shot in the arm for the car industry, at just the right time.

With dealerships across the country facing bankruptcy or ruin, the administration couldn't let it happen. There's a very simple reason for this: even at this stage of the economy with imports chipping away at the domestic industry left and right, the auto industry still provides roughly 16.5 percent of the employment across the nation.

Putting this another way, one in six workers is in some way tied to the auto industry. Whether that person is involved in car-hauling, manufacture, sales, mechanical repairs, parts, or in secondary sales between dealers or to dealers or is involved in selling services to dealers and manufacturers, it is still a very large portion of the economy that is impacted by any car sales slump.

Imagine, if you will, that the Administration opted for the traditional conservative lament that "big government" is bad and that the "free market" should be used to determine winners and losers. Now, maybe in the world of John Maynard Keynes or Adam Smith those models might work. Don't forget, too, that Smith died about 200 years ago and Keynes died about half-a-century ago so their work lives on in the realm of theory, not reality.

Let's look idea with another example. In the world of broadcasting, the way you lay out the signal pattern of a radio station is very simple. You take what is called a "Smith Chart," plunk an antenna in the center of it and then fire up a transmitter and take various readings at various points to fill in the signal map. For the sake of argument, the antenna that sits in the center of the "Smith Chart" is an "isotropic" antenna or one that radiates equally in all directions so that if the signal on a hill 120 miles away to the south is 200 watts, the same signal should be read on a hill 120 miles to the north.

Unfortunately, the real world is different. There are obstacles to these theoretical models. Mountains can block a signal; valleys can disrupt a signal; even a lake and a mountain side by side can cause some interesting signal patterning. In other words, this is all just theory.

It's like the idea that the auto industry should have been left alone to let "market forces" work things out - conservatives love that one - and that "big government" should be discouraged - the "Cash for Clunkers" program.

The encouraging news about "Cash for Clunkers" is that it is having its intended effect. It is getting gas-guzzling, older vehicles off the road, at between $3,500 and $4,500 a pop. This is money that is coming out of the federal government. It is, in a way, a grand welfare plan for the auto industry. Yet, given the industry's key position in the economy it's something that had to be done. It could not have gone along much longer without some action.

Here are some true examples. Until this program, there were still dealers out there with brand-new 2005 and 2006 vehicles on their lots. They may have been ordered weirdly with strange colors, but they were still brand new, never licensed or registered. They were what is called in the industry still on a "CO" - certificate of ownership. At other dealers, there were still 2007s and 2008s available - this is certainly no joke. It is deadly serious because each of these vehicles eats up capital that could have been used to purchase new, more efficient inventory and it takes up valuable space on dealer lots.

Further, with an industry that makes up about 16.5 percent of the economy seeing its sales fall from 15 million two years ago, to 12 million a year ago and which was heading for about a 9 million vehicle year this year, the car industry was headed for disaster.

The Obama Administration has done the right things. It has forced some of the automakers to make arrangements with other carmakers to keep the domestic manufacturing segment in business. For instance, Chrysler was forced into bankruptcy and saved by a deal with Fiat. GM avoided bankruptcy but not without a huge federal bailout and not without heavy federal oversight. Only Ford is still going it alone, although you have to qualify that "alone" when you realize that Ford of Europe is still one of the most profitable carmakers on the planet and that Ford also owns Volvo, which is still on sold ground and it also owns Mazda, certainly another contender that is not hurting. Ford did shed its luxury Jaguar division, so Ford can afford to "go it alone." Lincoln/Mercury, by the way, is still a strong contender and Ford has been closing small nonprofitable sites left and right to cut its losses.

Doing this set the industry in the right direction, but something more was needed - customers. What good is restucturing the industry without providing customers and thus the "Cash for Clunkers" program was born.

This was a hotly contested program when funding was first debated. Democrats envisioned up to a $4 billion fund for 1 million car sales while Republicans envisioned a much more modest $1 billion program for 250,000 sales. They believed it would take months to use up the first $1 billion. That funding, however, was gone in about a week.

The Democrats rushed another $2 billion through the House and Senate and that should last until about Labor Day and shortly after Labor Day the final installment should be passed that might carry the program through its October end date.

Dealers love this program. One dealer that was interviewed briefly yesterday is quite happy he was buying cars when others were selling them. He was happy to take their stock off their hands. Now he is sitting with plenty of inventory and customers in his showroom. He put himself into a very good position with some very smart moves. His preowned side had a record month in July, as their state's sales tax was about to jump and people wanted to beat the increase.

And, dealers across the country are reporting exactly what the President and his Administration had hoped for. Inventories are dropping rapidly and dealers are running out of cars. Now, instead of complaining they have too many cars, they are complaining of having too few and those that they do have aren't the "right" colors. Still, as others have pointed out, if buyers want to take advantage of the "Guzzler" program they will now have to take what they can get.

There are still two troubling aspects to this successful program that only the future will answer. The first is whether the public will come to expect this vouchering system as their right and expect it every year because it will easily cause deficits to balloon and it is not good for the base physical health of the economy as a whole. And, second, will the auto industry come to depend on the government as its "court of last resort" and every time there's a slowdown will it turn to the feds for a bailout. Again, only time will tell.

Certain things are clear about this program. It is moving iron off dealer lots and it is helping to put decent paychecks back into the pockets of many salespeople. It is hurting a small segment of the economy - the non-profit segment, but this is also something that may help in the long run as those really dangerous "clunkers" that should never even be fixed and reused - the ones that needy folks need and which nonprofits use to help fund their programs - will be replaced by newer, safer, more efficient vehicles and that can only help.

All in all, after nearly 40 years of watching the auto industry, it can be said with some authority that this is the right program at the right time. It can also be said that it has to be a short-term solution, not one that people expect to continue as a "right."