Cash for Clunkers is popular, but is it truly a US stimulus?

With an additional $2 billion in funding, the "Cash for Clunkers" program has a new lease on life until Labor Day. But it’s not clear if Clunkers, the sequel, will show the same robust results that the program did in its first week, quickly running through the $1 billion that was supposed to last until November.

The biggest wild card is whether US automakers will step up production to meet new demand, as the White House and congressional Democrats say they expect. So far, none of the Big Three – General Motors, Ford, or Chrysler – has committed to ratcheting up production levels or new hiring.

“Businesses across the country – from small auto dealerships and suppliers to large auto manufacturers – are putting people back to work as a result of this program,” asserted President Obama in a statement Thursday, after the Senate approved more funding for Cash for Clunkers.

While the program is popular with dealers and, certainly, Americans who've tapped it, questions remain about its true stimulative effect on the economy.

“This has been a relatively successful program in pushing some auto sales. But it’s not clear this is real stimulus, especially if people have been delaying their sales in anticipation of this bill,” says Lena Pons, a policy analyst for Public Citizen’s Congress Watch division.[Editor's note: The original version misspelled Pons's name.]

The Consumer Assistance to Recycle and Save (CARS) program, the official name for Cash for Clunkers, offers consumers up to $4,500 to trade in gas guzzlers for new cars or trucks with better efficiency. Originally slated to end in November, the program ran out funds in its first week.

CARS vouchers in Week 1 helped consumers buy 184,304 new vehicles, more than half of which were foreign makes, mainly Toyota, Honda, Nissan, and Hyundai, according to the US Department of Transportation.

Of those foreign cars and trucks, more than half are made in the US. Best sellers include the Toyota Corolla, the Ford Focus, the Honda Civic, and Toyota's Prius and Camry.

In the end, Cash for Clunkers was too popular to let die. The Senate, after rejecting amendments that would have required the House to revote the bill, voted 60 to 37 to extend the program.

Republican senators put up some resistance, citing this year’s projected $1 trillion federal deficit, but a final vote to pass legislation identical to that already passed in the House was never in doubt. Seven Republicans voted with Democrats to pass the bill.

The Obama administration credits the initial transactions in the program with generating $700 to $1,000 in annual savings for each new-car buyer in reduced gasoline costs alone. “They are getting the oldest, dirtiest, and most air-polluting trucks and SUVs off the road for good,” the president said in a statement after the vote.

Democrats say they will pay for the program by reprogramming funding from the renewable energy loan guarantee program, launched in the 2005 Energy Policy Act. But last week, House Democratic leaders said they would replenish those funds when Congress returns in the fall.

“We’re going to borrow twice to do this program, and both times we’re borrowing from our kids,” said Sen. Judd Gregg (R) of New Hampshire.

Some public-interest groups also caution that the program will need more provisions to protect consumers.

“There should be a lot more to protect consumers and taxpayers in this process,” says Rosemary Shahan, president of Consumers for Auto Reliability and Safety in Sacramento, Calif. “Some dealers are putting into the contract that if a deal is not
approved under Cash for Clunkers, then the consumer must make up the difference. That’s a lot for a consumer.”

On the plus side: “A lot of parents are turning in cars that their teenagers were riding in," she says. "Now, these are new cars with state-of-the-art safety systems, and that’s huge for young at-risk drivers.”