White House Defends Cash for Clunkers

Why is there no gray area when it comes to Cash for Clunkers? Last week, Edmunds.com, a consumer car site that also provides auto-industry research and analysis, put out the results of a study indicating that Cash for Clunkers had a negligible impact on the overall 2009 car market. The White House—yes, the White House—promptly jumped into the fray, producing a blog post refuting Edmunds’ argument. The gist is that 1600 Pennsylvania Ave. thinks that C4C did contribute to nonclunker sales, and that, more importantly, C4C led automakers to expand fourth-quarter production, which in turn will lead to 70,000 jobs. (Disclosure: I’ve contributed to Edmunds.com in the past.)

The Q4 numbers and the jobs data will be tough to parse until after the fact, but it is true that carmakers are adding production to deal with depleted inventories and increased demand. Did C4C do this? Partly, yes. C4C did move metal, but it had other, arguably more critical impacts that neither Edmunds nor the White House is addressing. And, of course, when looking at these analyses, we have to remember that the U.S. auto market was unnaturally depressed in 2009. The return of demand, as well as the need to replace older cars in the national fleet, should eventually increase the annual market from its currently anemic, around 10-million-per-year level to something closer to 12 million-14 million over the next few years.

However, the truly critical factor missing from both the Edmunds and White House positions is the role of consumer credit in Cash for Clunkers. If the average vehicle sale was around $27,000, a $3,500-$4,500 C4C voucher wasn’t going to excuse a buyer from taking out an auto loan. In fact, it may have provided an incentive for buyers with less-than-perfect credit to submit to the loan-approval process. More than a year after the whole financial system nearly collapsed, money still isn’t moving in much of the banking system, but Cash for Clunkers did grease the wheels in auto lending, and even provided lending opportunities for people with credit scores that weren’t in the 700s.

Obviously, we’ll have to wait and see if those borrowers can make their payments. But for me, a larger question is why this expansion of consumer credit at a time when the credit markets for normal people were moribund hasn’t been celebrated. Could it be that the White House doesn’t want to draw more attention to the dismal state of credit situation at the big banks? Is Edmunds less interested in people buying cars than in gauging the overall size of the U.S. market? It’s unfortunate that in this dustup, a piece of genuine good news is getting lost.