A few weeks ago I said that Cash for Clunkers is a wreck. Now that the program has ended, let’s see the results.
The people responsible for Cash for Clunkers are hailing its success. I’m still having trouble understanding what the goals of the program were beyond a “feel good” measure designed to make people think they’re getting something for nothing from the Obama administration. By that metric, the program was certainly a success: people will remember that Uncle Sam helped them buy a car. Although they might be a little less enthusiastic when they realize that the $4,500 rebate is taxable.
Transportation Secretary Ray LaHood said that U.S. consumers and workers were “the clear winners” under the program:
Manufacturing plants have added shifts and recalled workers. Moribund showrooms were brought back to life and consumers bought fuel-efficient cars that will save them money and improve the environment.
Let’s take a look at those three “successes”:
“Manufacturing plants have added shifts and recalled workers.” Surprisingly true. But with car sales almost certainly going back to below pre-handout levels, I can’t imagine that those workers will be fully employed for very long. Manufacturers will rebuild their inventories, find that people still aren’t buying cars, and then lay off the workers again.
“Moribund showrooms were brought back to life.” Well, yeah. But with no more giveaways, those showrooms are going to be empty of customers yet again.
“…consumers bought fuel-efficient cars that will save them money and improve the environment.” This one is full of specious reasoning. According to press reports, the most popular new vehicle purchased under the program was the Toyota Corolla. So let’s use it for a little thought experiment. But first, let’s construct our “average” purchaser under the program.
We’ll assume that the “average” person drives 40 miles to work and back each day, plus cruising around here and there. Give him 300 miles per week. Also assume that his clunker was paid off and it got 10 miles per gallon. So he’s burning 30 gallons of gas a week. At $2.50 a gallon (current price in the Austin area), that’s $75 per week in gas.
A new 2010 Toyota Corolla lists for between $15,350 and $20,000. I’m going to assume that the cars were bought from dealers’ inventories and that there was a relatively even mix of feature packages, so the average price for a car was $17,500. With the $4,500 rebate, the price of the car is $13,000. I’m going to ignore other incentives and tax, title, and license, figuring that they’d likely cancel each other out. And since the car will be destroyed, there is no trade in value. By the time everything’s said and done, the buyer owes the dealer $13,000 for the car.
The new Corolla gets an estimated 35 MPG on the highway and 27 MPG in the city. Let’s be generous and assume that the guy will average 30 MPG in all of his driving. So at 300 miles per week, he’s burning 10 gallons of gas a week at a cost of $25. Quite a savings over the $75 per week he was burning in the other car. So his monthly outlay for gas is now $100 rather than $300. Such a deal!
Except we forgot to pay for the car. If he pays that $13,000 balance in cash, it’ll take him 65 months (almost five and a half years) to make up the difference with his $200 per month savings in gas. If he gets a loan for that $13,000 (figure 5 years at 5.25%), his monthly payment is $250. So he’s saving $200 per month but it’s costing him $250. That new car that was supposed to save him money is costing him $50 per month. Oh, and don’t forget the $1,000 that rebate is going to cost on next year’s tax return. That’s another five months of “savings”.
Granted, there’s some savings for maintenance because the new car is under warranty. But that savings will be easily offset by the increased cost of insurance on the new car. I’ll call it a wash.
I purposely was very generous with the numbers here in an attempt to make it look like a good deal. I just couldn’t make it work out. In general, you will not come out ahead by buying a new car in the hope that it will “pay for itself” by saving on gas. Unless you drive a lot more than 500 miles per week.
The claim that the new cars will “improve the environment” is wishful thinking. At best, driving the new car will cause less harm to the environment than will continuing to drive the new car. And that statement is based only on the differences in fuel efficiency between the two cars. It does not take into account the environmental costs of manufacturing the new car or disposing of the old car.
There’s no doubt that the Cash for Clunkers program stimulated some economic activity. Whether that was good is another matter entirely. They say that $2.8 billion in incentives were passed out. We’ll round that up to $3 billion to include the cost of administration and other expenses that were incurred but they’re not telling us about. Reports say that almost 700,000 new cars were purchased. If we figure an average price of $20,000 (lots of Camrys were purchased under the program), that $3 billion resulted in $14 billion in direct economic activity. But if we assume that the average loan on those cars was $15,000, then there is $10.5 billion in new consumer debt out there. Not a good thing, in my opinion.
Certainly there are people who benefited from the program: car dealers and manufacturers got a boost, as did those workers who got recalled to the manufacturing plants. Companies making auto loans couldn’t be complaining. But it’s not all roses. Car salvage yards are grumbling a bit because their margins have been slashed: apparently dealers are paying less per car to have them hauled off. And used car sales have plummeted. Only 700,000 cars using one-third the gas probably won’t affect gasoline retailers much. But if it was seven million, I can imagine that convenience stores that depend on gasoline purchases for a large part of their profit would feel the squeeze.
Those who supported Cash for Clunkers can go ahead blindly believing that it was unquestionably a good thing. I’m skeptical. As I showed above, the “deal” almost certainly didn’t result in a savings for most buyers. More importantly, I disagree with the idea that it’s government’s responsibility to prop up a sagging industry. I also don’t believe that the immediately visible positive effects of this program will in the long term offset the negatives that I’ve outlined.
