A new Cash for Clunkers could be on the way

JunkyardWikimedia CommonsSend low-tech cars to the junkyard?

“Cash for clunkers” was a $3-billion program authorised and financed by Congress in 2009 that pulled the US auto industry out of a death spiral.

Consumers had a cash incentive to get rid of an older, gas-guzzling vehicle and buy or lease a new, more fuel-efficient car.

The pace of sales after the financial crisis has dipped to an alarming 10 million on an annual basis, so cash for clunkers (the official name was the Car Allowance Rebate System, or CARS) got auto sales moving again.

Fast forward to late 2016 and the US auto market could be on the verge of setting another record for sales, bettering 2015’s total of 17.5 million vehicles.

Is another cash for clunkers justified? Not to boost sales, but perhaps for another reason, according the Morgan Stanley’s lead auto analyst Adam Jonas.

“[W]e believe a step-change vehicle safety brought about by ADAS/automatic emergency braking (AEB) could, according to a growing amount of data from suppliers and national insurance institutes, potentially reduce the chances of a vehicle causing a vehicle-to-vehicle or vehicle-to-pedestrian crash in cities and on highways by as much as 50% or more,” he wrote in a research survey the state of the auto investment sector.

US Auto Sales SkitchFRED/Business InsiderCash for clunkers caused a temporary spike in auto sales.

“We expect these technologies will be standard equipment on nearly all new cars on sale in the US within 4 years at a cost of less than 1% of the price of a vehicle (e.g. $4 per month additional on a monthly payment),” he added.

“While this may be very good for new car demand, it would create an income inequality problem for consumers who cannot get access to credit to purchase new and far safer vehicles. [Our emphasis]

In Jonas’s thinking, the “income inequality problem is threefold”:

  1. Lower income consumers left in more dangerous used cars
  2. These consumers face rising auto … insurance premiums
  3. Consumers will confront greater negative equity from a degradation in the residual value of their car

The solution is a new cash-for-clunker program, designed to replace less-safe vehicles with more safe ones. It wouldn’t makes sense to take the fuel-economy approach with a CARS-like effort in 2016-2017 because now the most popular and most profitable vehicles aren’t optimally fuel-efficient: they’re SUVs and pickup trucks, with sales driven by relatively cheap gas.

The technology available in cars and trucks today does make them safer, so Jonas and his team are wise to suggest a new cash for clunkers as a good move to alleviate a critical problem for an evolving auto space: people who have less means can’t obtain the safer technologies that wealthier buyers can.

This is obviously bad. If a new cash for clunkers could fix it, then it’s a program that’s worth seriously considering.

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