"Cash For Clunkers" Gets a Reprieve

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By Jason Simpkins
Managing Editor
Money Morning

U.S. lawmakers today (Thursday) are expected to approve $2 billion in extra funding for the Car Allowance Rebate System (CARS), popularly known as "Cash for Clunkers." The money should be enough to keep the program running through September.

"We'll pass Cash for Clunkers before we leave here" for summer recess, vowed Senate Majority Leader Harry Reid, D-NV.

"There's a significant majority that wants to move forward with this legislation," he added. "That being said, there's some people who still don't like the program."

The program, formally dubbed Car Allowance Rebate System (CARS), began on July 1 and was expected to last until November. To qualify for CARS, the "clunker" must be 25 years old or less and have a combined fuel economy of 18 miles per gallon or less. The new car purchased must have a combined fuel economy of 22 mpg. Those who do qualify can receive $3,500 to $4,500 from the U.S. government for their older, less fuel-efficient cars.

However, a strong response from consumers exhausted almost all of the $1 billion in funds allotted to the program, with an estimated 250,000 cars being sold last month.

"It has been a big success, there is no question," Christina Romer, a top White House economist, told reporters. "We knew people would respond, but, boy, did they really respond."

Ford Motor Co. (NYSE: F), the only U.S. automaker to refuse bailout money, saw a 2% year-over-year gain in its July sales, citing customer demand for fuel-efficient vehicles and CARS as the principal. This was the first increase from any U.S.-based automaker since November 2007.

"Customer demand for Ford's fuel-efficient vehicles coupled with the U.S. government's Car Allowance Rebate System ("Cash for Clunkers") enabled Ford to post the first sales increase of any major manufacturer in 2009," the company said.

Ford's most fuel-efficient, non-hybrid car, the Focus, was the top seller among CARS participants.

Still, the program has its critics. Republicans the deal as an unnecessary subsidy that will only add to the federal budget deficit.

"Here we are incentivizing the purchase of cars, [and] we're taking money from our grandkids by adding to the national debt," said U.S. Sen. Tom Coburn, R-OK. "Why not incentivize demand for boats? Or how about RVs?"
 
Regardless of objections, however, Senate Republicans don't have enough votes to block the extension. 

"I don't get a sense anyone will block it," said Sen. Judd Gregg, R-N.H., the top Republican on the Senate Budget Committee.

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