No deal

Local auto dealers feeling used by ‘cash for clunkers’ program

Car salesman Mike Macaulay says the federal Car Allowance Rebate System, a.k.a. CARS, was a real clunker.

Car salesman Mike Macaulay says the federal Car Allowance Rebate System, a.k.a. CARS, was a real clunker.

Photo By lilly fuentes-joy

Mike Macaulay has been in the automobile industry for 42 years. As a used-car dealer, he has a unique perspective on the economy, its volatility and its effect on his customers.

“I break people’s hearts every day, unfortunately,” said Macaulay, owner of Car Systems in Roseville, specializing in trucks and sport utility vehicles. He’s referring, of course, to the economy, and the fact that so many would-be car buyers have seen their credit take a nose dive. That makes them ineligible for cars that don’t involve “sub-prime” financing, which Macaulay doesn’t offer because of the risk.

“The demand is higher than ever, with our economy, and with people’s credit issues—foreclosures, credit-card defaults. People need these cars. It’s the only kind of car they qualify for, but now those cars are not available,” Macaulay told SN&R.

Macaulay and other independent dealers say matters are made worse by the dearth of affordable used cars in the market, and the widely touted “cash for clunkers” program.

The clunkers program was a piece of federal stimulus that allowed consumers to trade in their older-model vehicles for rebates toward more fuel-efficient new cars between July 1 and November 1, 2009.

Administered by the National Highway Traffic Safety Administration through the Department of Transportation, the clunker program, officially called the Car Allowance Rebate System, or CARS, worked like this:

Trade-in vehicles must have been manufactured less than 25 years before the date of the trade-in and have a “new” combined city/highway fuel economy of 18 miles per gallon or less. Clunkers also must have been in drivable condition and been continuously insured by the same owner for 12 months prior to the trade-in. In return, dealers would give customers up to $4,500 in rebates toward the purchase of a new car.

The program required dealers to destroy all trade-ins and prohibited them from selling even usable parts from the vehicles. The idea was to get “gas guzzlers” off the road, and that’s what happened—nearly 700,000 vehicles were destroyed.

“I think it helped the new car industry get out the ’09 models they needed to get rid of,” said John Brasher, owner of Brasher’s Sacramento Auto Auction. “But it took [700,000] cars off the street prematurely—and hurt families who could not afford to buy new cars by taking the older cars off the market, who can only afford a cheap car—and pushed prices higher by driving demand higher, because supply was already short.”

Brasher was born into the family business—his family has owned and operated the auto auction since 1958. Two or three years ago, prior to the CARS program, Brasher auctioned 1,200-1,300 cars per week. Since CARS, it’s dropped to about 1,000 per week, he said.

The lack of supply was made worse by CARS, he said, but actually began a couple of years earlier, and continues today, along with the continued decline in new-car sales.

“Fewer new cars being sold means fewer used cars on the market,” Brasher explained. “I buy a new car today, it becomes a used car tomorrow. There are 50 million cars on the road in the [United States]. Every year, 10 million get scrapped and taken off the road. In a normal year, you’ll sell 10 million—but then you drop to 6 million new cars sold. You’re still scrapping 10 million cars, but only selling 6 million new cars.

“And you have that happen three, four years in a row—and then add CARS on top of that—and you get the situation we’re in now,” he said, meaning lower inventory and higher prices.

Macaulay is a harsher critic of the CARS program, calling it a “do-nothing, feel-good, window-dressing” government program that failed on many levels.

“I’ve raised my prices twice in the last six months. My $5,000 car is now a $7,000 car. I just had to. And the $3,000, $4,000, $5,000 car I’d like to stock is no longer there—so the CARS program has affected me, too.”

SN&R asked officials at the Department of Transportation about the CARS program and its effect on the used-car industry and on credit-poor consumers. But the agency sent a boilerplate from Secretary Ray LaHood.

“Cash for Clunkers was wildly successful,” according to LaHood. “In a matter of weeks, Americans traded in nearly 700,000 gas-guzzlers for more fuel-efficient cars, improving the environment and providing a lifeline to the auto industry. Our program was a win for everyone, and most importantly it gave the economy a shot in the arm at a time when we desperately needed it.”

While it’s true that the program gave new car dealers some $2.8 billion in trade-in money, Macaulay said even that wasn’t the boon to the economy it was made out to be.

“New car dealers were greedy,” he explained. “They were taking cars in trade-in that still had six, 10 years of life left in them. So instead of consumers waiting for, say, another three years to buy a new car, they bought early, before they needed to. The significance of that is that new car dealers got the money now—but they still have the same overhead, the same number of employees to maintain … so they really did themselves a disservice by cutting out future car buyers down the road by getting them now. Essentially, they prostituted their market by taking the quick buck.

“I’ve seen plenty of new car dealers who gave consumers the $4,500 for a car that was actually worth $7,500. So it hurt the consumer in two ways, giving them less than what it was actually worth, and [encouraging] them to buy a new car when they didn’t need one yet. And it hurt the new-car industry in the long term, because it took a potential buyer out of the market two, three years down the road.”

And the damage to consumers continued, Macaulay said, as many went into debt to buy new cars, even with the rebate, at a time when they really didn’t need a new car.

“Before the CARS program, there were cars for them. This program hurt the new car industry for the next three years, hurt the independents, hurt consumers.”