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Name: Dave Leigh
Location: Union, South Carolina, United States

I was born too young. And when I die, I'll still be too young.

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Thursday, October 29, 2009

Cash for Clunkers: Behind the $24K per Vehicle Price Tag

The results are in. Edmunds.com is reporting that, according to their analysis, the government's "Cash for Clunkers" program cost the taxpayers a whopping $24,000.00 per vehicle sold. Twenty four thousand dollars per car is a pretty hefty price tag.

(Taking their cue from Prince, the government refers to the "Cash for Clunkers" program as "The program formerly referred to as the 'Cash for Clunkers' program." I kid you not. Its official name is "CARS", an acronym for "Consumer Assistance to Recycle and Save" program. As that's not confusing enough, other government sources simply ignore the name of the law and call it the Car Allowance Rebate System. Either way, who are they kidding? It's never been referred to by the general public as anything but "Cash for Clunkers". Nevertheless, I'll call it CARS from here on in.)

Unsurprisingly, the government disputes the report. True to the Obama White House's established form, Macon Phillips, Director of New Media for the White House, takes the low road to snipe at Edmunds.com, saying that the popular company released the a report that is "designed to grab headlines and get coverage on cable TV." Phillips claims that the claim "doesn’t withstand even basic scrutiny."

Except that it does.

Edmunds is no fly-by-night. They are highly reputable experts in the field of auto sales and shopper comparisons. They are so popular that if you type nothing more than "Ed" into Google, then Google will suggest Edmunds.com. They had a very reasonable approach to costing the CARS program... they took all the sales made under the program, subtracted any sales that would have been made anyway (for which CARS was not an incentive, but rather free money) and divided the result into the $3 billion cost of the program. Determining how many sales were as a result of the program was a scientific endeavor. They analyzed trends of cars not covered by the program, compared them to historical buying habits for economy cars as they relate to the other cars, and estimated sales based on those trends. Deviations would be caused by the CARS program. It seems pretty straightforward, and automobile market trends are Edmunds' bread and butter. They are market experts.

Their analysis concludes that only 125,000 cars were sold as a direct result of this program. The others would have been sold anyway... at best CARS simply accelerated a sale, or prompted an owner to trade in a car he would have otherwise kept or sold elsewhere. Given Edmunds.com's trend analyses, it's hard to argue with the estimate. Three billion dollars divided by 125,000 cars is equal to $24,000 per car.

The government prefers to use the figure of 690,000 cars sold under the program irrespective of whether they'd have been sold without the program. That would give you a figure of under $4,400 per car. Phillips also writes that Edmunds.com ignores the 4th Quarter GDP increases as a result of car makers ramping up production to replace the depleted inventory.

Well... in fairness, what the government ignores is that 565,000 of those cars would have had to be replaced anyway, which forces us to revise any estimate of the effect on the GDP wayyy downwards. So those are the facts, as reported.

There are a couple of things disturbing about the whole situation.


The first is the tone of the government's response. Seriously... the title is, "Busy Covering Car Sales on Mars, Edmunds.com Gets It Wrong (Again) on Cash for Clunkers". "Covering Sales on Mars"? Do we really need that kind of snarky, condescending, unprofessional tone from the White House? I can get away with it here because I'm not a professional journalist and I'm not a government representative, but surely the President could do better than this. Macon Phillips needs to put down the can of Brawndo and take a course or two in professionalism. Granted, this is "New Media", but that's no excuse for an official representative of our executive branch to act like a nine-year old bully in public.

Secondly, why is the government even disputing the cost? This was an incentive to get people to act in ways the government wanted them to act. In that respect alone, it was successful. But the bigger question is, what were the people supposed to do, and why were they supposed to act that way?

Here's what the law provided: if you traded your old gas-guzzling car in on a new, more fuel efficient car, then you got a voucher to offset the price of the new car. A gas-guzzler is one that gets less than 18mpg, according to CARS. Basically, if you bought a car that had 4mpg better mileage (or a truck with 2mpg better mileage) you'd get $3,500. If you bought a car with 10mpg better mileage or a truck with 2mpg better miles per gallon, and your new truck gets 15mpg or better, then you'd get $4,500. Then there are a bunch of restrictions, etc. but you could read about those (as if it mattered... the program was effectively over mere days after it started). The fact is that they were chucking $3500 or more at customers for incremental improvements such as you'd get by using a better air filter.

So my first question is, "why were they giving away so much money for such small improvements?" If it was to reduce carbon emissions it was an Epic Fail.

Look... I drive a 1991 Toyota Camry. The posted fuel efficiency (at MPGFacts.com) is 23mpg city, 31mpg highway, and 26mpg combined. Since I do more highway than city driving and my engine is tuned accordingly, I get somewhat better, but we'll use those numbers. I wouldn't be eligible for CARS because my car gets significantly better than 18mpg. My car, in fact, gets better mileage than many of the new cars covered under CARS. But guess what? My car is 18 years old, and it shows few signs of wearing out.

Furthermore, if my 18 year old car were new, and you traded in your clunker for it, it would qualify for the $4,500 rebate! A query at Edmunds.com tells me that I can buy a car just like this, used, for $1,498 at Midlands Honda, just down the road (I bought mine for $2,000 cash). If the goal were as stated... that is, if the government truly wished to improve fuel efficiency, it would have made much, much more sense to extend this same offer to used cars. In fact, in this example, the government would save the taxpayers $3,002 just by GIVING AWAY a used Toyota Camry outright! You will not see any mention of this fact in the report of the President's Council of Economic Advisors. One more reason to trust Edmunds.com

Of course the government doesn't want to do that because they don't practice money management, they practice some pretty senseless economics, and we'll get back to that. Their ecological arguments are similarly flawed. The government gave people $3,500 to fire up a factory to build a new car to replace theirs for a measly 2 to 4mpg improvement, and only $1,000 more to increase that to 10mpg. This is in a time when cars getting over 30mpg are commonplace. What you won't see in the Council of Economic Advisors' report is the cost in energy expenditures and carbon footprint for the production of these new cars.

The fact is, by every measure - ecological and economic - it is more cost-effective and "greener" to buy a fuel-efficient used car than it is to buy a new car. I have a friend who leases a hybrid. He replaces it every two years, proud and secure in the knowledge that he has the latest and greatest green technology. In the meantime he's fired up a factory 3 times since I paid $2,000 cash for my car, for about a 6mpg advantage that will never recover the cost of constructing 3 vehicles. Who's greener? I am, hands down. But he sure feels good that he's "doing something about the environment".

To my mind, it's proven beyond a reasonable doubt that the CARS program is ecologically disastrous compared to the truly conservational approach of maintaining fuel-efficient older cars, getting them off of the used-car lots, and on to the roads to replace gas-guzzlers. The math is clear: the government was not looking for conservation, reduction in carbon footprint or anything of the sort. Those requirements were in the law for show. It's a bunch of feel-good posturing with no substance.

So we come to the other reason for the CARS program, which was to stimulate the economy. Or, as John Stewart points out, to stimulate the Japanese economy. Four out of Five of the top-selling cars under the CARS program were foreign imports. So in a time of economic crisis, our government took $3 billion of money it borrowed from the taxpayers to give away, mostly to foreign car makers. All to build 125,000 marginally better cars that would not otherwise have been sold. Sheldon Filger, in the left-leaning The Huffington Post, called it "Economics for Dummies," The right-leaning Wall Street Journal called it "Crackpot Economics." Finally, something everyone can agree on.

The government might have required that the cars be built in the US, but they didn't. They might have required that the cars have better mileage than they did. What they did do was practically force a bailout on US automakers, as a result of which the United States government now owns a large chunk of GM and Chrysler (Ford, being the only company to decline, is the only company to have come out ahead). The conspiracy theorist in me warns that Cash for Clunkers was a bit of meat tossed to one side to distract the dog... which, in part, it is. But there's no need to invoke a conspiracy when simple incompetence explains everything... what the program really does is provide one big tap-dance to show that, like my friend who fires up a factory every two years, the Government is "doing something". It's a way for people who really and truly have no idea what to do to act as though they do.

So we're back to the big question. CARS gave money away whether to people whether or not they were going to buy a car anyway; even if it made no economic sense; even if it made a negative ecological impact. The CARS program was to get people to do something: what was it? They were supposed to ask for money. People need to get used to that, because in the future toward which we're heading, begging the government for things is the only way people will get them.

What do I think?
  • If your concern is is for your personal finances then your most effective strategy is to get a fuel-efficient used car and keep it running as long as possible.
  • If your concern is for your personal carbon footprint you should do exactly the same thing.
  • If your concern is for "the planet", then you should do exactly the same thing, as you would have to conclude that creating more cars to replace those we throw away pollutes more than maintaining those we have.
But, if your concern is for the long-term viability of the American economy, then you might want to consider that we cannot have a double standard for ourselves and "the country". We say we must live within our means, and we almost never do it. We waste too much. We're too dependent on planned obsolescence and constant consumption. We are graded on our ability to borrow rather than our ability to pay. We're judged by the things we have, which fuels the need to borrow. We spend money we don't have, and we think that's a good thing. We ask what can be given to us rather than what we can earn. We confuse entitlements and rights. We save nothing.

I don't want that for our country and certainly not for myself.

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