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"Cash for Clunkers" Won't Stimulate Rural Minnesota Economy

August 03, 2009 By Lee Egerstrom, Economic Development Fellow
The fact that the new federal "Cash for Clunkers" program already ran out of money is probably a good sign prospective buyers are getting off the fence and back at car lots shopping for new or newer, more fuel-efficient vehicles.

If it works that way, it will be a stimulus boost to the struggling auto industry. But it will not revive the auto industry, as we knew it, and it won't help the retail auto industry recover in rural Minnesota.

A stimulus to the industry will merely stop the hemorrhaging of a Minnesota industry that has already lost 54 dealerships and workplaces and about 3,000 jobs. A disproportionate number of these dealerships are in rural communities even though problems at Twin Cities metro area companies have garnered most of the public attention. 

Scott Lambert, executive director of the Minnesota Automobile Dealers Association, said the "Cash for Clunkers" program that went into effect on July 24 will be a great help if it helps move cars. But there are problems with the program, he said, negating the objectives and making the program difficult for dealers.

Here's the program: Dealers are allowed to pass along either $3,500 or $4,500 to buyers who trade in junkers, providing the replacement passenger cars, light trucks, certain vans and pickups, and certain "work" trucks meet new fuel mileage criteria.

On one hand, the program is a stimulus for the auto and truck industry. On the other hand, it is also a "green" program by encouraging better fuel efficiency. But qualifying for the cash program comes under supervision of federal administrators bent on preventing fraud.

All but the most cold-hearted of Americans would say these are three splendid objectives. The problem is that accessing the administrators to register these sales is proving difficult, Lambert said. As a result, dealers are carrying the $4,500 credit on their books without knowing if they will be reimbursed under the $1 billion federal program before it expires on Nov. 1.

"There's a lot of risk in that," he said.

Meanwhile, Lambert and his trade association members are feeling frustrated with the whole shakeout of the auto industry and the use of Chapter 11 bankruptcy protection by automakers to break contracts with dealers.   

On June 9, for instance, Chrysler announced it was closing franchise ties with 17 Minnesota dealerships. Three were in the Twin Cities metro area; one was in Duluth. The rest were scattered around rural Minnesota in such communities as West Concord, Le Center, Spring Valley, Two Harbors, Orr, Crookston, Worthington and Tracy.

Earlier, General Motors announced it was closing 34 dealerships in Minnesota but more could go by the wayside as GM discontinues some auto lines, imposes restrictions on multiple-brand dealerships, and is leaving the medium duty truck business that would close three more Minnesota stores.
"This hurts everyone, and the rural towns will really hurt," said Rich Strom, executive vice president of the Owatonna-based Minnesota-South Dakota Equipment Dealers Association. "From our experience, we know those dealerships won't be coming back."

Minnesota lost a quarter of its farm equipment dealerships in the 1980s farm financial crisis era. It then continued to lose dealerships after the agricultural economy recovered as equipment manufacturers went out of business and consolidated into fewer companies. That consolidation led to even more closed dealerships; for the most part, dealers in major center cities took over sales of the merged brands and product lines.

Looking back at farm equipment records, Strom found that Minnesota and South Dakota had 879 farm equipment dealerships in 1980 at the front end of what was a national recession of 1981 and 1982 and became a farm financial crisis that went until late 1987. By 1985, dealerships declined to 756 in the two collaborating states, and fell to 633 by 1990.

Here's what auto retailers and local civic leaders should remember about farm implement dealer experiences, he said. The consolidation of retail sites continued after 1990 and the farm recovery, abandoning small towns and cities hurt by the 1980s crisis. There are now only 267 dealerships operating in the two states.

Strom said the auto industry should expect the same fallout even through Chrysler and General Motors are emerging from bankruptcy and new owners will take over some brand lines.

He recalls the 1970s when he was one of five farm implement dealers in Worthington. There were four more dealerships in small towns around his southwestern Minnesota city. Now, he said, the four surrounding dealers are gone and only three remain in Worthington.

History repeats, although industries under stress change. Job losses are real no matter the workplace. Local, state and federal officials must keep in mind that stimulus programs are bond to fail unless they are tied to job retention and growth.

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