A curious requirement about the cash for clunkers legislation

June 25, 2009

There is a minor but curious requirement in the newly enacted cash for clunkers legislation. In order for a lease on a new vehicle to qualify, it must be for at least 60 months. One may wonder why the government is limiting this important incentive to leases that are only long-term. Does leasing a vehicle for 60 months really make sense? Is this the behavior that the government should encourage?

Well, the answer reveals much about how the legislative process works. As is the case with many laws, the final outcome is not necessarily what makes sense, but rather reflects a give and take that ultimately allows all parties to agree. In this case constituents representing American car manufacturers were concerned that their short-term residuals are lower than that of their import rivals. This would give the imports a competitive advantage on short-term leases. It wasn’t until the lease term was extended to 60 months that the residuals were relatively equal and less consequential so as to level the playing field.

Now stop and think about it. This compromise apparently got the parties to agree but effectively eliminated leasing as an intelligent means of taking advantage of an important incentive program. For the few that opt for the 60 month lease, take a picture of them because you won’t be seeing them back in the market any time soon. Hats off to the American legislative process.

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