Cash for Clunkers Could Use an Upgrade

Just before dashing off for their August break, Congress today tripled the total investment in the Cash for Clunkers program, adding $2 billion to the existing $1 billion that’s already been allocated and spent.  Cash for Clunkers is the program under which car owners can trade in a qualifying vehicle — one that gets 18 miles per gallon or less — for another, more efficient vehicle.  Improve the mileage by at least 4 mpg and you get $3,500 toward your new vehicle; raise it by 10, you get $4,500.

^{Credit: Flickr/mazdamiata/ / CC BY-NC-ND 2.0}

The program has apparently been a boon to car dealers, who’ve otherwise had a rough year.  Since buying used cars with better gas mileage also counts under the program, it’s a bit more inclusive than efforts to otherwise prop up the car sales industry, as the profits aren’t exclusively being seen by company dealerships.  The benefits seem obvious.  What could be the downside?

The downside so far is that the program isn’t well-organized, and so we may be pouring good money into creating nationwide headaches for dealerships.  There’s another way to look at this, though: what if we think about Cash for Clunkers as a pilot program, instead of a discrete single-time slush fund? 

Cash for Clunkers has been wildly popular so far, and it seems like a program that could benefit quite a wide swath of the population if it continues.  People can get more fuel efficient cars, which is better for the environment and better for the country, as we start needing less fuel from overseas.  The car dealerships make some sales, which means the people at the dealerships get to keep their jobs — and get to spend their paychecks in the community.  The auto industry gets the picture, that Americans are (slowly, yes, and perhaps not permanently) getting tired of driving gas hogs, and they continue (and perhaps accelerate) their race toward greener technology.

I’m a little afraid that, in the great governmental tradition, Cash for Clunkers will become either a a permanent program, unchanged except, probably, by increasing bureaucracy and internal inefficiency, or, worse, that it will become a one-off, one-time feel-good solution to a series of much larger problems.  Congress gives Cash for Clunkers more funding and congratulates itself for helping business and the environment; consumers buy a (sometimes only slightly) better car, and feel better about their own investment; and everybody quickly forgets that this is a start, not an end.

Why not consider Cash for Clunkers a pilot program in a larger package of government involvement in improving America’s motorpool?  For instance, what of the cars — as shown and noted extensively at No Cash for Clunkers — that are, by condition if not by model, no longer as efficient as they could be?  What if instead of $3,500 a person to buy a new vehicle, the government offered 30 or 40 percent vouchers toward repairs that make a vehicle more fuel efficient (pending government inspection)?  What if they offered a flat $3,500 for turning in a car and replacing it with a bicycle?  What if they handed out bus passes for free in the city, contingent upon the tickets being used for a certain number of trips every week? 

Cash for Clunkers got quick Congressional support because it’s being billed as an auto industry rescue plan as much as (and sometimes more than) an environmental program.  Every program above, however, could be billed the same way.  In this economy, job creation and retention are the magic bullets of legislation.  Democrats and Republicans voted for C4C today.  Maybe the same coalition could be swayed to make more major steps toward environmental protection in this, well, environment, if only the White House would work on framing the issue as one of long term economic protection instead of short-term economic intervention.

Fiat’s Chrysler Buy: Just the Ideas, Ma’am

Here’s the question that matters this week: If you had $14,000, would you buy this car?

It’s the Fiat 500, and the concept most likely to be coming soon to a Chrysler plant near you, should the Fiat/Chrysler merger come together.  Sergio Marchionne, Fiat’s CEO, has been saying since last year that he’d like to bring the 500 to the American market.  And Chrysler’s been encouraged by the government to produce smaller, more fuel-efficient cars pronto.  The 500, which would fit in my car’s trunk, gets 46 miles to the gallon on its base model (a more eco-friendly version gets 67 mpg, with carbon emissions nearly equal to a Smart car).  Did I mention it currently goes for 10,500 euro ($14,000)?

The 500 and its Fiat brethren (The Fiat Panda seems a likely companion, but only for people who never listen to Top Gear’s Jeremy Clarkson) are the future of Chrysler.  They are, in fact, what Fiat is “buying” into Chrysler with — the company is offering no money at all to take a 20 percent stake in the company.  Instead, they’re offering concepts and techonology — $10 billion worth.

It’s probably a good deal.  The government viability report [.pdf] on Chrysler mentioned again and again that the company was, basically, out of ideas.  It spent everything it had to keep pace with its larger competitors, putting everything it had into production, so that it had cut back sadly and deeply on research and development.  The merger will offer Chrysler a way back into the new-car market, putting its plants to work on constructing cars based on Fiat-researched models.  What we’ll get won’t be the 500 — Ford took that name already — but a twist on it, a Fiat with the familiar Chrysler wings on front.  Sounds like a happy ending, right?

Except what we’ve come to is that an Italian company is going to buy an American car-maker not on the strength of its money, but on the value of its ideas.  In that respect, it’s hard to think of Fiat as the savior of the American manufacturing industry.  If innovation is the problem, well, it’s hard to think of a way to save the industry at all.

GM Defaults?

The Wall Street Journal is reporting that G.M.’s Cheif Financial Officer said  today that the company won’t be making its June 1 $1 billion debt payment.  The statement is unclear as to whether G.M. isn’t going to make the payment because it believes there will already be an alternative arrangement — either a debt-for-equity swap or bankruptcy, the latter of which CFO Young calls “probable” — in place, or whether they are simply saying that, yes, they’re going to default because they can’t pay.  It’s so unclear, in fact, that the WSJ headline is “GM Plans to Skip $1 Billion Debt Payment,” and, skipping being the recognized economic term that it is, the article is getting some pretty amusing responses in the comments.

So I contacted G.M., and here’s their statement:

A successful bond exchange is an essential element of our out of court restructuring efforts, and we are working aggressively to launch an exchange.  That exchange could still be in process on June 1.  In which case, we would not expect to make the June 1st Series D bond payment.  Should we be required to finish our restructuring within the court process, the June 1 bond payment would be unlikely as well.

It sounds like G.M. is trying to acknowledge both reality — they’re not going to make this payment — and fiction — but they could if they wanted to.  The benefit of the former is that a G.M. default has been talked about for a long time, so acknowledging the inevitable isn’t a bad strategy.  The benefit of the latter is that it sort of makes it look like G.M. is getting pushed into default by the government or its creditors — which might play to some (though not perhaps the best and brightest) as this being Not G.M.’s Fault.

But it is.  Maybe the default will scare some sense into its large bondholders, and the debt-for-equity swap will happen.  Really, though, this makes bankruptcy seem very, very likely.