Does Cash for Clunkers Kill Teen Car Dreams?

In a comment on my post yesterday about Chrysler curtailing some of its cash-for-clunkers-related sales incentives, “Americangirl” pointed out that C4C—or CARS, as it’s officially known in government circles—is going to doom the traditional and time-honored American teen dream of buying a car within months of obtaining that coveted driver’s license:

Cash for Clunkers is a train wreck waiting to happen. It can only spell more economic disaster. My teen who will soon be driving will never find that $1500 first car. Who will sell him a car for that price when the Gov. will give them $4000. All those teens can kiss their First car dreams goodbye, as well as anyone else who can only afford a cheap car.

This is, in fact, sort of true. C4C will be taking something like 750,000 beaters off the road—and out of the hands of U.S. teens, as well as lower-income buyers—if it’s funded by Congress at the level of an additional $2 billion. (The initial $1 billion would have sent approximately 250,000 clunkers to the crusher.) Of course, there will still be plenty of clunkers coming into the “system,” so to speak. It’s a big country, full of wheezing beaters that for whatever reason didn’t get scrapped this time around. There will definitely be fewer $1,500 first cars around, though.

But it’s worth noting that C4C isn’t necessarily going to doom the used-car market—because there isn’t just one used-car market, there are several. At the top of the pile, there are “certified pre-owned” vehicles, mainly off-lease cars that dealers put through an inspection process and then sell for healthy profits. Generally speaking, these cars stay in the dealer family: Pre-owned Lexuses started out being leased at the same Lexus dealership that sells them used.

Then there are trade-ins on new cars that can’t be certified pre-owned but that can be sold for profit—and, more importantly, financed. This is also where dealerships compete with each other in the auction market. Eventually, you get to a point where the profits are marginal for most name-brand dealerships, at which point the cars go to used-car dealers or big auctions. This is clunkers territory, where the vehicles are worth $4,500 and below. And finally, you hit the scrappage market, where used cars are worthless except for parts.

So, in fact, many clunkers being sent to the crusher now are high-mileage, low-value cars, attractive to people looking for some kind of transportation that will get them through a few years before maintenance costs outweigh the vehicle’s value. These cars need to be taken off the road so that the new-car market can function normally. Heavily depreciated assets need to be replaced by assets that can begin the depreciation process anew. A problem since late last year is that values in the used-car market have been unnaturally elevated because consumers have been unable to purchase or finance new cars.

But sure, the teens are losing out. But C4C can’t last forever, and eventually beaters will be for sale again.