AssetPreserver News

Cash for clunkers, officially known as car allowance rebate system (CARS) is the hot topic these days. It is time AP weighs in.

Philosophically, I am against government meddling in most things in our lives as it ends up falling far short of expectations. The engineer in me decided to take a look at the cash for clunkers program, touted as a success or failure, depending on your news source. I read too many articles and hundreds of interesting comments on the subject.

The CARS program

CARS officially started on July 24, 2009 with 1 billion dollars allocated to the program. It runs until Nov 1, 2009 or until the money runs out. On July 31, 2009 an additional 2 billions dollars was approved by the House.

Goal of the CARS program

Cost to the taxpayers

1 billion dollars allocated originally which is borrowed money (meaning interest payments of $50 million/year assuming financing occurred through 30 year Treasury bonds). An additional 2 billion dollars ($100 million interest/year) is being allocated as we speak. As with all government borrowed money these days, the principal (federal debt) is never paid back. Tax money is used to service the interest only.

The trade-in rebate is $4500 or $3500, flat rate, regardless of how much the clunker is worth.

Should taxpayers pay $4500 for a clunker worth $100?

Synopsis of a poignant Edmunds.com press release

Edmunds.com’s research shows that typically 200,000 vehicles worth less than $4,500 are traded in for new vehicles every three months. These are the cars that qualify for clunkers.

According to Edmunds.com, about 200,000 old low mileage (mpg) cars would normally be traded in, every 3 months, in exchange for more efficient higher mileage (mpg) cars, without this program.

if all buyers have qualified for the higher $4,500 rebate, the “cash for clunkers” program will mean a marginal increase in car sales of 22,000 this quarter. $1 billion divided by 22,000 means a net cost to the government of $45,354 per car.

If all buyers only qualify for the $3,500 rebate, it means a marginal increase in sales of about 86,000, or a net cost to the taxpayers of $11,628 per vehicle. In all likelihood, however, there will probably be a mix of vehicles qualifying for various rebates between $3,500 and $4,500. Based upon that assumption, Edmunds.com estimates that the average cost to the taxpayer will be about $20,000 per vehicle. Even most of the marginally extra sales really represent people who were going to buy a new car eventually anyway. They are just buying a bit sooner than they expected. Old clunkers don’t last forever, and they are almost all eventually replaced. The government is shifting tomorrow’s demand to today, stealing from tomorrow to pay for today, but at great cost to the taxpayer.

Rebuttal

If 200,000 cars are “normally” sold with trade-ins during a quarter, you would most likely not have had that number “normally” this time. Many of the automakers’s sales figures have been running 25%-50% below last year. Applying this number to the 200,000 “normal” amount of trade-ins, you would get 140,000 if you used a conservative factor of -30%. If an average of $4000 were used per trade-in, this equals $880M for 220,000 cars. The incremental number of cars would be 80,000 (roughly). This would equate to about $11,000 per incremental sale. This is hardly the 10-fold number a lot of people have been quoting.

On top of that, the cash for clunkers program is generating a lot of interest in buying cars. There were (and will be) likely incremental sales beyond just the increased trade-in sales. When you factor all of this in, you may have likely brought the subsidy cost per incremental car sale down to near the $5000/car range. You should also take into account that the extra people manufacturing, servicing, and selling those extra cars will then be able to pay more taxes. They will also be spending more money in other areas of the economy.

Another suggestion was to make the rebates as tax credits so only people that pay taxes (i.e. fund the program) get the benefit.

Oil savings

Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports.

In 2007 there was 136 million cars, 110 million trucks, about 1 million buses for a total of 247 million registered vehicles. (U.S. DOT)

Resources

Link to Edmunds press release

Results (as of Aug, 2009)

The government refuses to release any information about the success of the program.

The program ran out of money shortly after starting.

60% of new cars bought were foreign.

The effect on lowering dependence on foreign oil is less than negligible.

Many dealers raised their prices just before the program started.

Our local news reported that filling out paperwork for the program took around 5 hours. They also reported problems with the government web site.

The EPA changed their fuel economy ratings in the middle of the CARS program, disqualifying thousands who already made a deal, although many cars that did not qualify before, do now.

Most comments I read were people that are furious at subsidizing their neighbor’s new car.

Many dealer showrooms had a lot of people traffic.

If you trade in your car, sign the papers, and CARS runs out of money, you are on the hook to make up the $3500/$4500 rebate.

Is CARS worth it?

Has this been a good use of taxpayer money?

We vote no.