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Cash for clunkers economic analysis
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Clunker
A previous article in this space was skeptical of the economic value of the Cash for Clunkers program based on the following:
A) The Cash for Clunkers program is a wealth transfer from taxpayers not purchasing cars to those who actually may have purchased cars regardless of the tax incentive.
B) The Cash for Clunkers program accelerated future car purchases.
C) An unintended effect is the removal of a supply of used cars from the market since the Clunkers program requires dealers to scrap the vehicle or disable its engine. Americans dependent on the used vehicle market will see the supply of available cars diminish.
While car sales rebounded for some automakers from the same monthly period in August 2008, September sales already look gloomy. A September 16th story in Bloomberg (http://www.bloomberg.com) provides commentary by Chrysler and GM highlighting the anticipated weak sales for the month.
What if we look at the Clunkers program on a monetary cost/benefit basis? The web site http://www.cars.gov provides details on program costs. Approximately $2.877B of rebate applications were received by the program deadline covering 700,000 vehicles. This translates into approximately $4,100 per vehicle.
Under the rules of the program, the trade-in clunker had to be rated at 18 MPG or lower with lesser values for large pickup trucks and cargo vans. For the sake of this analysis, let us say the average MPG of all 700,000 vehicles traded in was 15 MPG. If the new vehicle rated 4-9 MPG higher than the trade-in, the buyer received $3,500. If the new vehicle rated 10 MPG or more than the trade-in, the buyer received $4,500. Given that the credit per vehicle was an average of $4,100, we will use 22 MPG as the average MPG of the new vehicles. Thus, the average fuel increase realized will be 7 MPG.
The EPA (http://www.epa.gov) estimates the average number of miles a car is driven in the US at 12,000 per year. Keep in mind; recent figures indicate Americans are driving less. For the sake of these calculations however, we will use 12,000 miles/year. With a 7 MPG fuel savings, Americans will save roughly 255 gallons of gas per car per year for a total of 178.5 million gallons. Using a gas price of $2.50/gallon the total savings equates to $446M.
The program vouchers covered $2.877B. This does not include the extra costs the Transportation department expended resulting from labor increases required to handle processing of applications. It also does not include the costs to finance $2.877B since of course the government did not have this money to spend on the program. If the voucher cost is financed with a Treasury Note of 10 years with a 3.5% interest rate, the yearly cost is approximately $100M. An argument could be made to use a shorter term for financing, say 5 years. Using this term with a 2.375 interest rate yields approximately $68M per year in interest costs. Over 5 years the total is $340M. We can estimate the total cost of the program to be $3.217B.
So for a cost of $3.217B we saved approximately $446M/year in fuel costs. At that yearly fuel saving figure, it takes more than 7 years to equal the program’s total cost. Clearly, a more thorough economic analysis can be undertaken with these figures but a rough order of magnitude analysis was applied. Additionally other benefits like environmental impacts are not included. Similarly, the economic cost of clunker cars destroyed is also not included. Using these figures, could you as a taxpayer justify the program?
Jim Mosquera is the publisher of The Sentinel Economic and Financial Newsletter (http://www.TheSentinel.biz).
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