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Why cash for clunkers is a good deal for America

By Bill Ford, chairman, Ford Motor
April 22, 2009: 11:58 AM ET

(Fortune Magazine) -- You don't need a degree in economics to know how the economy is doing. Just walk into your local auto dealer and ask if they are selling cars. What you will hear is that showroom traffic is slow, and sales slower yet.

With sales on track to be nearly 50% lower than the previous year, President Obama recognizes the urgent need to give reluctant consumers the confidence to return to the marketplace. He's working to address shrinking auto sales with two ideas that have strong bipartisan support.

First, the administration is taking swift action to modernize the U.S. government's fleet with fuel-efficient vehicles. This step will help move more than 17,000 cars and trucks. Swapping out these less efficient federal vehicles for new hybrid and fuel-efficient ones will reduce gasoline consumption by 1.3 million gallons per year and prevent nearly 12,000 metric tons of CO2 from entering the atmosphere. Second, because this fleet-modernization drive affects only a small fraction of the 240 million vehicles on the road today, the President has asked Congress to extend the concept to consumers across the country, a move that will provide bigger economic and environmental benefits.

The good news is that lawmakers in Washington have pledged to pass a bill based on programs that have already proved effective around the world. The idea is simple: Trade in your old car. Get a voucher for a discount toward a new, more fuel-efficient vehicle. The old one gets scrapped, recycled, and permanently removed from the road.

Germany provides the most compelling example of how this can work. In January the German government offered consumers $3,200 to scrap automobiles that are at least nine years old and buy new, more environmentally advanced vehicles. By March sales of new vehicles jumped 40% over the same month a year before.

Such a program could work in the U.S. too. Goldman Sachs estimates that the various proposals already being considered by Congress could boost vehicle demand by 500,000 to 1.5 million - as much as a 15% increase - over the course of the year. A boost of that magnitude would help preserve jobs across the industry, from the workers making cars and parts to those in local dealerships. This proposal would help our country get greener faster by retiring a portion of its clunkers and replacing them with high-mileage vehicles. The Energy Department estimates a family could save $780 a year by switching to a vehicle with 30 mpg from one with 18 mpg.

Taxpayers are rightly concerned about the federal deficit, given the significant resources already spent on stimulus measures. And that's why at Ford (F, Fortune 500) we agree with the President that the cost of this initiative should be paid for with a small portion of the stimulus funds already approved by Congress.

Improved auto sales will be one of the key indicators that America is on the road to economic recovery. We urge lawmakers to quickly implement this market-based incentive. It constitutes a clear win for the consumer, the economy, and the environment.

Bill Ford is chairman of Ford Motor.

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