There Are More Foolish Things than Clunker Plan

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"Not where you would put your first dollar" Posted by: The Economist | NEW YORK Categories: Economy Environment

THERE'S a good summary of the cash-for-clunkers programme as an environmental policy in this AP article. The article rightly notes that if you were trying to save energy, cut oil consumption or cut carbon emissions, there are many other ways to do it far faster and cheaper.

But the AP here is also too cranky by half. By its own figures, the average clunker-trader will save $700 a year on petrol. You could almost call that a rebate to taxpayers: $4,500 spent by the government will save participants $7,000 or so over the life of an average car. (More if petrol prices rise.)  But I'll bet you won't hear that from Republicans. Multiply that by a quarter million cars, and that is $175m a year that won't be spent on petrol, most of which is sucked out of the Middle East in "countries that don't like us too much", as John McCain liked to say. It's not a lot, but it's not nothing either.

From a purely dollar-recycling point of view, $1 billion spent this year on the programme will mean $1 billion in savings over less than six years for drivers. As the average car stays on the road for 9.4 years, the rest of the savings are gravy. Admittedly, a dollar spent by the government and a dollar saved by certain taxpayers are not directly comparable. But this still is clearly not pure waste. Not to mention that, as the AP notes, the cars bought are often safer. They'll also grind up roads less than a Ford F150 truck does, reducing highway costs. In a hard-to-measure way, fewer huge cars on the road will make other car-buyers less inclined to get a monster vehicle themselves out of fear or envy.

For those who say these effects are too small to get excited about, I say that $1 billion for the programme is too little to lose sleep over, too. The economy is $13 trillion big. The federal budget for 2008 was $3 trillion, or three thousand billions, many billions of which were spent on much more foolish things than cash for clunkers. 

Addendum: As at least one commentator points out, I ignore the time value of money and other important details here. This is for order-of-magnitude illustration, and these numbers shouldn't be taken religiously.

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James_ wrote:

August 6, 2009 7:15

I have always bought American cars out of a mistaken sense of patriotic duty. My last was a Chevy. My next car will be foreign made. I took my first step into a Honda dealership the other day after dropping by a Ford dealership, and I was amazed at how much better I was treated. And, wow--the quality! I've learned that there are two types of car buyers: those who buy foreign cars, and patriotic suckers, like me.

We are being mugged by the government and the auto industry, forced to pay at the point of a gun. If you buy a GM or a Chrysler, you are an accomplice to robbery. Join me. The only way to prevent GM and Chrysler from stealing again is Chapter 7 bankruptcy. The sooner the better. (Don't worry--the leftists trying to "save" the auto industry drive foreign. Obama's "car czar" drives a Honda.)

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James_ wrote:

August 6, 2009 4:04

Unintended side effects makes cash for clunkers likely harmful to the environment for at least three reasons. First, manufacturing a car consumes the energy equivalent of about 1000 gallons of fuel, not to mention other materials. In the US, 70% of that is fossil fuel, canceling half or more of the supposed environmental benefits. You could argue that the car would eventually be replaced, but that line of reasoning is offset by my second point: fewer efficient cars will be bought outside the program. Many of these clunkers would have been traded in soon enough regardless. Furthermore, the program inflated the cost of small-to-midsize cars by a few thousand dollars (fewer rebates and dealers budge less). So, buyers without clunkers are buying less efficient cars. TrueCar.com notes that the average 2009 Focus S and SE--one of the most popular Cash for Clunkers cars--sold for $4000 more during the program period. Third, the program increases consumption in many ways. The new cars will get driven more than the clunkers would have been. Paying the bill will require excess productivity, which itself will produce carbon. The bill introduces moral hazard by signaling to gas-guzzlers that the government won't dare make them pay for polluting.

Our blogger provides lousy analysis for an increasingly lousy magazine...

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ShotByBothSides wrote:

August 6, 2009 3:38

I imagine that if you have already made the assumption that the economy should be largely centrally planned that this would seem like a good idea.

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john.hayes wrote:

August 6, 2009 3:37

These numbers are highly suspect as it ignores the capital destruction caused by converting a working car into a pure salvage car.

This number isn't huge as the trade-in cars must be clunkers to either be valued at less than $4500 or difference in value between the working vehicle and salvage value is less than $4500[1].

However, the savings are also overstated as both elderly and low-efficiency value are driven well below the average miles/vehicle[2].

All-in-all it's a terrible investment - probably a loss. It turns out that even at low gas prices people who drive long distances already know they can save money by driving an efficient car.

[1] The dealer probably has better information on this number than a typical car buyer and uses that to offer a below salvage effective trade-in value. Many people may be assumign that they can only get $4500 for the entire trade-in. [2] http://www.eia.doe.gov/emeu/rtecs/nhts_survey/2001/tablefiles/t0464(2005).pdf

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BWWilds wrote:

August 5, 2009 23:57

My strong dislike for the "cash for clunkers" program stems from the Government taking all the traded in vehicles, many of which are very fine cars and killing them. Yes, if you go to U-tube you can watch the "Volvo Cash for Clunkers Engine Disabling". They are pouring sand in the engines and running them until they are dead.

What kind of green program does this represent? What will this do in the next year or so for students and low-income families that need an older reliable vehicle. This is downright criminal!

It was pointed out that a large number of pick-up trucks have been traded in. While generally giving poor gas mileage many people have been driving trucks "as a personal car", this should of been discouraged. But the answer is not to destroy these trucks but to turn them into actual work trucks utilizing their work generating potential.

Lets put an end to the "cash for clunkers" program now. A far better idea that would of been easier to administer would of been for the federal government to have paid the state sales tax for "anyone" buying a new vehicle.

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BWWilds wrote:

August 5, 2009 23:31

As to where I would put my money for faster results,my idea cost nothing. I understand that government uses 11% of all energy consumed in America. I own several office buildings where tenants complain if they are not heated to 76 degrees in winter and cooled to 68 in summer. This 12 degree spread has almost become a demand, I suspect this is not uncommon in government offices either.

If government offices had a mandate of something like max winter settings of 70 and summer minimum of 74 a tremendous amount of energy would immediatly be saved. This would shelter both landlords and business owners across America from the scorn of workers spoiled by unhealthy and unreasonable temperature settings.

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Doug Pascover wrote:

August 5, 2009 22:37

I don't lose sleep over much, but while a $1B program is only symbolic, then it must be fair to debate the symbolism. It's right to criticize this program for the same reason John McCain was right to criticize earmark spending. If our politicians don't face a political cost for foolish spending, then they thihnk it's free.

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Heimdall wrote:

August 5, 2009 21:52

Johnny America,

Where can you snag 10% nowadays? I want in!

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Johnny America wrote:

August 5, 2009 21:26

"You could almost call that a rebate to taxpayers: $4,500 spent by the government will save participants $7,000 or so over the life of an average car."

Ummm, have we forgotten about the time value of money? At a 10% discount rate and 9.4 year life I get to a present value $4,400.

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Jason in Chicago wrote:

August 5, 2009 21:14

Can we put to rest the myth that Cash For Clunkers (C4C) was implemented for environmental reasons? At best, that was a lie to appeal to the greener among us to curry political favor. Clearly, C4C is little more than a direct-to-consumers stimulus package, in an attempt to jumpstart the market for new cars. As a cute side effect, it also happens to stick it to petroleum producers in a small way. I lament the hurtful effects of this policy, taking so many functioning used-cars, out of the market. It will be simply harder now for the poor to find affordable transportation.

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john powers wrote:

August 5, 2009 20:55

What if you drive more when you get a car that gets better mileage? Maybe some people are cash constrained by the cost of fuel.

Saying that there are stupider things to spend money on is rather weak, considering you heartily endorsed this guy for President.

JBP

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Cardinal Jones wrote:

August 5, 2009 20:50

Thank you, Tom "Pencil Dust" Harkin.

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chernyshevsky wrote:

August 5, 2009 20:44

If it were so a great deal for consumers than the government wouldn't need to bribe into people doing it, duh!

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O_GoT('[+] Site feedback'); document.write(''); Entry for August 5, 2009: "Not where you would put your first dollar" « Previous post Democracy in America home August 5

20:51 GMT +00:00

"Not where you would put your first dollar" Posted by: The Economist | NEW YORK Categories: Economy Environment

THERE'S a good summary of the cash-for-clunkers programme as an environmental policy in this AP article. The article rightly notes that if you were trying to save energy, cut oil consumption or cut carbon emissions, there are many other ways to do it far faster and cheaper.

But the AP here is also too cranky by half. By its own figures, the average clunker-trader will save $700 a year on petrol. You could almost call that a rebate to taxpayers: $4,500 spent by the government will save participants $7,000 or so over the life of an average car. (More if petrol prices rise.)  But I'll bet you won't hear that from Republicans. Multiply that by a quarter million cars, and that is $175m a year that won't be spent on petrol, most of which is sucked out of the Middle East in "countries that don't like us too much", as John McCain liked to say. It's not a lot, but it's not nothing either.

From a purely dollar-recycling point of view, $1 billion spent this year on the programme will mean $1 billion in savings over less than six years for drivers. As the average car stays on the road for 9.4 years, the rest of the savings are gravy. Admittedly, a dollar spent by the government and a dollar saved by certain taxpayers are not directly comparable. But this still is clearly not pure waste. Not to mention that, as the AP notes, the cars bought are often safer. They'll also grind up roads less than a Ford F150 truck does, reducing highway costs. In a hard-to-measure way, fewer huge cars on the road will make other car-buyers less inclined to get a monster vehicle themselves out of fear or envy.

For those who say these effects are too small to get excited about, I say that $1 billion for the programme is too little to lose sleep over, too. The economy is $13 trillion big. The federal budget for 2008 was $3 trillion, or three thousand billions, many billions of which were spent on much more foolish things than cash for clunkers. 

Addendum: As at least one commentator points out, I ignore the time value of money and other important details here. This is for order-of-magnitude illustration, and these numbers shouldn't be taken religiously.

Share Del.icio.us Digg Facebook Reddit more? Permalink Comments Report item as: (required) X Obscenity/vulgarity Hate speech Personal attack Advertising/Spam Copyright/Plagiarism Other Comment: (optional)

SIR –

Sort: Newest first | Oldest first | Readers' most recommended

James_ wrote:

August 6, 2009 7:15

I have always bought American cars out of a mistaken sense of patriotic duty. My last was a Chevy. My next car will be foreign made. I took my first step into a Honda dealership the other day after dropping by a Ford dealership, and I was amazed at how much better I was treated. And, wow--the quality! I've learned that there are two types of car buyers: those who buy foreign cars, and patriotic suckers, like me.

We are being mugged by the government and the auto industry, forced to pay at the point of a gun. If you buy a GM or a Chrysler, you are an accomplice to robbery. Join me. The only way to prevent GM and Chrysler from stealing again is Chapter 7 bankruptcy. The sooner the better. (Don't worry--the leftists trying to "save" the auto industry drive foreign. Obama's "car czar" drives a Honda.)

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James_ wrote:

August 6, 2009 4:04

Unintended side effects makes cash for clunkers likely harmful to the environment for at least three reasons. First, manufacturing a car consumes the energy equivalent of about 1000 gallons of fuel, not to mention other materials. In the US, 70% of that is fossil fuel, canceling half or more of the supposed environmental benefits. You could argue that the car would eventually be replaced, but that line of reasoning is offset by my second point: fewer efficient cars will be bought outside the program. Many of these clunkers would have been traded in soon enough regardless. Furthermore, the program inflated the cost of small-to-midsize cars by a few thousand dollars (fewer rebates and dealers budge less). So, buyers without clunkers are buying less efficient cars. TrueCar.com notes that the average 2009 Focus S and SE--one of the most popular Cash for Clunkers cars--sold for $4000 more during the program period. Third, the program increases consumption in many ways. The new cars will get driven more than the clunkers would have been. Paying the bill will require excess productivity, which itself will produce carbon. The bill introduces moral hazard by signaling to gas-guzzlers that the government won't dare make them pay for polluting.

Our blogger provides lousy analysis for an increasingly lousy magazine...

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ShotByBothSides wrote:

August 6, 2009 3:38

I imagine that if you have already made the assumption that the economy should be largely centrally planned that this would seem like a good idea.

Recommend (3) Report abuse

john.hayes wrote:

August 6, 2009 3:37

These numbers are highly suspect as it ignores the capital destruction caused by converting a working car into a pure salvage car.

This number isn't huge as the trade-in cars must be clunkers to either be valued at less than $4500 or difference in value between the working vehicle and salvage value is less than $4500[1].

However, the savings are also overstated as both elderly and low-efficiency value are driven well below the average miles/vehicle[2].

All-in-all it's a terrible investment - probably a loss. It turns out that even at low gas prices people who drive long distances already know they can save money by driving an efficient car.

[1] The dealer probably has better information on this number than a typical car buyer and uses that to offer a below salvage effective trade-in value. Many people may be assumign that they can only get $4500 for the entire trade-in. [2] http://www.eia.doe.gov/emeu/rtecs/nhts_survey/2001/tablefiles/t0464(2005).pdf

Recommend (4) Report abuse

BWWilds wrote:

August 5, 2009 23:57

My strong dislike for the "cash for clunkers" program stems from the Government taking all the traded in vehicles, many of which are very fine cars and killing them. Yes, if you go to U-tube you can watch the "Volvo Cash for Clunkers Engine Disabling". They are pouring sand in the engines and running them until they are dead.

What kind of green program does this represent? What will this do in the next year or so for students and low-income families that need an older reliable vehicle. This is downright criminal!

It was pointed out that a large number of pick-up trucks have been traded in. While generally giving poor gas mileage many people have been driving trucks "as a personal car", this should of been discouraged. But the answer is not to destroy these trucks but to turn them into actual work trucks utilizing their work generating potential.

Lets put an end to the "cash for clunkers" program now. A far better idea that would of been easier to administer would of been for the federal government to have paid the state sales tax for "anyone" buying a new vehicle.

Recommend (7) Report abuse

BWWilds wrote:

August 5, 2009 23:31

As to where I would put my money for faster results,my idea cost nothing. I understand that government uses 11% of all energy consumed in America. I own several office buildings where tenants complain if they are not heated to 76 degrees in winter and cooled to 68 in summer. This 12 degree spread has almost become a demand, I suspect this is not uncommon in government offices either.

If government offices had a mandate of something like max winter settings of 70 and summer minimum of 74 a tremendous amount of energy would immediatly be saved. This would shelter both landlords and business owners across America from the scorn of workers spoiled by unhealthy and unreasonable temperature settings.

Recommend (8) Report abuse

Doug Pascover wrote:

August 5, 2009 22:37

I don't lose sleep over much, but while a $1B program is only symbolic, then it must be fair to debate the symbolism. It's right to criticize this program for the same reason John McCain was right to criticize earmark spending. If our politicians don't face a political cost for foolish spending, then they thihnk it's free.

Recommend (10) Report abuse

Heimdall wrote:

August 5, 2009 21:52

Johnny America,

Where can you snag 10% nowadays? I want in!

Recommend (11) Report abuse

Johnny America wrote:

August 5, 2009 21:26

"You could almost call that a rebate to taxpayers: $4,500 spent by the government will save participants $7,000 or so over the life of an average car."

Ummm, have we forgotten about the time value of money? At a 10% discount rate and 9.4 year life I get to a present value $4,400.

Recommend (9) Report abuse

Jason in Chicago wrote:

August 5, 2009 21:14

Can we put to rest the myth that Cash For Clunkers (C4C) was implemented for environmental reasons? At best, that was a lie to appeal to the greener among us to curry political favor. Clearly, C4C is little more than a direct-to-consumers stimulus package, in an attempt to jumpstart the market for new cars. As a cute side effect, it also happens to stick it to petroleum producers in a small way. I lament the hurtful effects of this policy, taking so many functioning used-cars, out of the market. It will be simply harder now for the poor to find affordable transportation.

Recommend (16) Report abuse

john powers wrote:

August 5, 2009 20:55

What if you drive more when you get a car that gets better mileage? Maybe some people are cash constrained by the cost of fuel.

Saying that there are stupider things to spend money on is rather weak, considering you heartily endorsed this guy for President.

JBP

Recommend (6) Report abuse

Cardinal Jones wrote:

August 5, 2009 20:50

Thank you, Tom "Pencil Dust" Harkin.

Recommend (6) Report abuse

chernyshevsky wrote:

August 5, 2009 20:44

If it were so a great deal for consumers than the government wouldn't need to bribe into people doing it, duh!

Recommend (9) Report abuse

You must be logged in and have a pen name to comment. If you have a pen name, please log in to your economist.com account. Otherwise create a pen name.

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