A Clunker of a Plan

Okay, so it's been a darn long time since I've posted. My apologies; I've been busy. I'll get around to posting with what one of these days but suffice it to say it has to do with music, missions, and my daughter heading off to college in about a week.

But I really need to vent about this ill-conceived Cash for Clunkers program. Yeesh - talk about a waste of our hard-earned dollars.

Let's take it one spin-laden talking point at a time, shall we? We'll just debunk them as we go.

"It will stimulate the economy by boosting auto sales."

Poppycock. First, "stimuli" like this only serve to temporarily and artificially boost demand. Anyone that was going to buy a car in the next several months hit the bid on this deal, made out better than they would have otherwise, and are laughing all the way to the bank. (Until they get their tax bill.) What happens is that demand gets front-loaded by such an incentive, and people buy sooner rather than later. Then, the stimulus ends, and demand falls off a cliff - lower than where it was pre-stimulus, because future months' buyers have already jumped into the market, having been "stimulated" to do so, and there's no demand left.

Oh, sure – the incentive undoubtedly brought in a few people who otherwise had no intention of trading in their clunker for a new gas miser. But really, in an economy that’s shedding jobs faster than my head is shedding hair, how many Americans are going to trade in a paid-for car to take on a new car payment? Few. As evidence of this, since the program has been tripled to $3 billion, reports show that showroom traffic is waning, and that there's less demand for new cars.

And furthermore, the program's temporary boost to July's auto sales was insufficient to offset a broad decline in retail sales ex-autos, resulting in a decline in overall retail sales for the month. So much for "stimulus."

Then there's the fact that spending at the pump was down in July, thanks to 250,000 people owning less thirsty cars. But if we're buying less gas, we're also buying fewer Snickers, less Mountain Dew, Skoal, air fresheners and all that other crap people buy when they fill the tank.

“It will ‘green up’ America, reducing our dependence on foreign oil.”

You cannot convince me that this government is seriously concerned about greening up America, other than the extent to which pandering to the “green” lobby will green up their own pockets. "We're concerned about the earth legacy we're leaving our children," they cry, even as they pass trillion-dollar, 1,000-page bills they haven't read that will prove more toxic to our children and grandchildren than chlorofluorocarbons. My kid’s at greater risk of having to learn Mandarin Chinese and get run over by a tank for protesting against Chinese rule than she is dying from exposure to pollution or freezing to death thanks to global warming.

As for reducing our dependence on foreign oil, 250,000 more fuel-efficient cars are not going to do that by any significant extent. When is Caterpillar going to start building battery-powered heavy equipment? When are the airlines going to start flying propeller planes again? The impact of this program on our oil consumption is a drop in the bucket.

The program’s requirements allow the maximum $4,500 credit if you buy a vehicle that gets 10 mpg better than your clunker trade-in, which has to get less than 18 mpg to qualify. You can get a $3,500 credit if the new car gets 4 mpg better than your trade-in.

So let’s say you own a 1999 Jeep Grand Cherokee Limited with the big V-8 engine, like I do. That sucker drinks gas at the rate of 15 mpg. So it qualifies. Now, I can get a $3,500 credit for trading it in, if the new car gets 4 mpg better – 19 mpg, just 1 mpg above the fuel-inefficient “clunker” threshold! That’ll green up America! Let’s see, what vehicle could I buy that gets 19 mpg? How about a Honda Pilot, which is every bit as big as the Cherokee, just a bit less thirsty? Yep, another big ol’ SUV on the road. How green.

Now, let’s see what the program’s total gas savings will be. Let’s assume that all 750,000 cars under the expanded $3 billion program sell. That implies an average $4,000 credit, which means half the people traded for a car that gets 10 mpg better than the clunker, and half for a car that gets between 4 and 10 mpg better. For the sake of argument, let’s split the difference and say the people who got the $3,500 credit get 7 mpg better now – half the difference between 4 and 10. And since ten more than 18 is 28, and there aren’t a whole lot of cars that get better than 28 mpg overall, let’s be generous and say the people who got the $4,500 credit get 13 mpg better now, on average. (Granted, some people could be getting as little as 12 mpg now – but how many Hummer drivers are going to trade for a Smart Car?)

So half our participants are getting 7 mpg better than they were before, and half are getting 13 mpg better, for an average of 10 mpg improvement. Assume the average driver puts 15,000 miles a year on his or her car, which is around the book-value assumption. And 750,000 cars participated in the program.

If the average clunker got 15 mpg, and the average new car purchased under the program gets 25 mpg, and the average driver drives 15,000 miles a year, they’ll save 400 gallons of gas. If 750,000 people do this, the total annual savings will be 300 million gallons of gas – woo hoo!

Except – y’know what? That is less than one day’s total US gasoline consumption – one day! At this rate, the government would have to use more than a half-trillion taxpayer dollars to “stimulate” ourselves toward reducing our dependence on foreign oil by half.

“It will replace clunkers with outdated safety equipment with newer, safer cars, reducing traffic fatalities and serious injuries, and lowering insurance costs.”

Okay, I’ll give you that one – up to a point. I’m still safer in my Jeep than I’d be in a Smart Car or a Prius, or probably even a Corolla. And my insurance premiums on a ’99 are a darn sight lower than they’d be on any of those new models, despite their side-curtain air bags.

“People will be spending less on gas, and that means they’ll have more money in their pockets to spend on discretionary items, which will stimulate the economy and help lead to a consumer-led recovery.”

First, how much will I save in gas? Well, taking our aforementioned example of using 400 fewer gallons of gas, at today’s average pump price where I live of $2.59 for regular, I’ll save $1,036. That’s about $7.5 million saved per year under the entire program. Let’s assume every one of those dollars gets spent on discretionary items (which the July retail sales report proved did not happen, as overall sales fell even with the CFC stimulus).

That’s a boost to the consumer’s component of GDP – historically about two-thirds – of about 0.0001%. Awesome. Add in the stimulus from the cars being bought, and you’re at about a 0.2% boost. Better, but still not much. And let’s not forget that those cars would likely have been bought anyway.

And let’s also not forget that not all of that gas savings is going toward discretionary spending. In fact, not a dime of it is. Here’s why.

Let’s say I found one of those dealers who’ll match the CFC program’s incentive with an equal trade-in allowance. So using our average, I’m getting eight grand knocked off my new car. Let’s say the average new car price for the units purchased is $25,000 (that’s not far off the US average, and from what I know of the American consumer’s psyche, they’ll see the incentive as “found money,” and spend more on the new car than they otherwise would have, so it may be conservative).

So my net amount is $17,000. Add sales tax of 7.50%, and we’re at $18,275 – and I’m going to have to finance that. At the best 5-year new car rate in my neck of the woods of 6.50% (and that assumes an excellent credit score, which not all CFC participants have), and my monthly payment is $358.

So my annual gas savings will cover almost three month’s worth of car payments. Not counting the higher insurance premiums on a new car. Guess what’s going to happen to my discretionary spending, now that I have a net $3,200 a year in car payments that I didn’t have before? Add in a boost to insurance premiums of, say $400 a year, and that’s $3,600 a year, or $300 a month, less money in my pocket. So I’m going to hunker down even further, maybe even until the car’s paid off.

One could stretch, and say that since I’ll be making fewer trips to the gas station I’ll be buying fewer Snickers and less Mountain Dew. Three hundred dollars a month buys one heck of a lot of Snickers and Mountain Dew.

So, discretionary spending is going down as a result of this program. But the bright reader will say, “Aha!” (Bright people are always saying stuff like that.) “If those sales were going to happen anyway, then discretionary spending was going down anyway.”

Right you are. Thus this government program – which cost $3 billion unbudgeted taxpayer dollars and thus gets slapped right on top of the deficit, like all that Snickers and Mountain Dew consumption would get slapped right on top of the average American’s butt – has done zero to stimulate the economy. Zero.

Did it help car manufacturers and dealers? No. The sales were largely going to be made anyway. Did it help the banks? Heck, no – the loan amount they would have otherwise been earning interest on would have been $4,000 more, on average – that’s $4,000 per loan, times 750,000 loans, at an average of probably 7% interest over an average of four years. That’s nearly a half-billion dollars the banks are out.

(In case you haven’t heard, the banks could use all the earnings they can get right now.)

What about local communities and states? Nope, and nope. Less sales tax revenue, as the purchase price was $4,000 lower thanks to the incentive. Times 750,000 cars, the states and municipalities are out a cool $3 billion. And less gas tax revenue also, as people are spending less at the pump. And less sales tax revenue on the Snickers and Mountain Dew.

(They’ve especially been pushing the program hard in California. You know, that big state on the west coast that’s been issuing IOUs instead of tax refund checks because it is flat broke.)

Did it help gas stations? Nope. Will it help that nice young man who sold me a car wash today as I was filling up, and asked for my blog’s URL? I’m afraid not.

And speaking of nice young men, will it help the high school kid who is in the market for a cheap used car to get to and from work? Or the poor immigrant needing the same? No, it won’t – in fact, it will hurt them, and that is one of the unintended consequences of the Clunker program (its most apt name).

Total used car sales in the US last year were 36.5 million units. The average sales price was just under $8,000. We don’t know the standard deviation. But I don’t believe we can assume a bell-shaped curve; there are plenty of used cars for sale priced above $16,000, but none priced below zero. Looking at e-Bay auctions and the like, we don’t see a heck of a lot of cars priced below $3,000. But we do see plenty of used cars priced above $20,000. In other words, our population distribution is likely skewed to the higher side. So let’s just assume that the total number of used cars on the market priced below $3,000 is about 10% of the total – for argument’s sake let’s call it 3.5 million cars.

Why did we pick $3,000 as our threshold? Simple. If my car is worth $3,500, getting that amount for it under the Clunker program isn’t much of an incentive. If it’s worth less, I’m more inclined to hit the bid.

So let’s say 750,000 of those 3.5 million cars in that price bracket are destroyed, as the Clunker program is going to do. That’s a 21% reduction in supply. Guess what happens to the value of cars in that price bracket, now that the supply has dwindled, while the demand hasn’t (if anything it’s gone up, since there are a lot more people unemployed, underemployed, struggling with higher mortgage payments after their ARM reset, etc., in this economy?

That’s right, you remembered that day in Econ 101 – the quantity supplied goes down while the quantity demanded remains the same (or increases), and voila! The price goes up! Now, that $2,500 clunker is worth three grand – and said high school student or struggling immigrant or suddenly-out-of-work-and-fighting-to-survive-as-a-grocery-sacker cannot afford the car.

So, what next? Well, he loses that job, because he can’t get to it. He has less money to spend, and has to go on government assistance – which wasn’t budgeted. Taxes go up, consumption goes down, GDP suffers, joblessness rises.

Did it help the junkyards? You betcha! They’re the ones that will profit mightily from scrapping 750,000 cars that would have remained happily putt-putting down the highways and byways, that still have some good miles left in them, however thirsty those miles might be.

Just one question though: how much energy does it take to destroy 750,000 cars? And are the car-smashing machines powered by gas, electricity, what? Batteries, perhaps? Solar power? Wind? Just the “greenie” in me being curious, is all.

Did it help America? Well, it supposedly will help slow down global warming. So perhaps your great-great-great-great-great-great-great-great-great-grandkids will live one day longer before the next Ice Age freezes ‘em to death. Oh wait – it’s GLOBAL warming, right? And places like China and India are pumping chlorofluorocarbons into the atmosphere at a rate that dwarfs ours, and have neither the incentive nor the conscience to slow it down. So make that an extra half-day your descendants will live before hell freezes over.

But did it help America economically? First, let’s look at the aggregate. The GDP equation includes both personal consumption – what we consumers spend – and government spending, which we fund with our tax dollars. So we didn’t boost GDP – alright, we might have front-loaded some of the fourth quarter’s demand into the third (more on that later), but we didn’t actually boost it. All we did was shift the mix, taking from personal consumption and adding to government spending. It’s a zero-sum game.

And what of future quarters? And next year? That’s when the program begins to detract from GDP, as the government spending won’t be repeated, but it’ll be many months before auto demand returns to normal, with some 750,000 new units on the road. (Even for those who believe that ALL of these sales are purely incentive-driven, and would not have occurred otherwise, and therefore auto demand will return to normal after the program sunsets – 750,000 cars is less than 10% of annual US vehicle sales, and the very limited impact on GDP is as noted above.)

Okay, remember my cryptic “more on that later” when I talked about shifting demand into the third quarter? Here’s what I think one of the dirty little secrets is about this plan. Sorry for sounding conspiracy-theorist, but I tend to imagine some of the discussions that take place in those smoke-filled rooms in Washington, between politicians and their economic advisors and Fed guys and Treasury guys, and I imagine something like this:

Politician: “We have got to end this recession!”
Economist: “Well, it’s really out of our control …”
Politician: “I don’t care, dammit! Mid-term elections are coming up next year!”
Economist: “Well, the definition of the end of a recession is two quarters of positive GDP growth following two or more quarters of negative growth. But the people tend to believe whatever we and CNBC tell them, so if we had just one quarter of positive growth, they might buy into the ‘recovery’ myth, and start spending money again, and maybe sustain growth for a second quarter, and then … who knows?”
Politician: “Excellent! So other than spend an obscene amount of government money, which we’re already doing, how do we make absolutely sure that we get a quarter of positive growth?”
Economist: “Well, we’d have to front-load future demand for something … probably a big-ticket item … probably the biggest-ticket item there is, outside of a home, since we know the housing market is still in the crapper …”

And thus an idea was born.

So whose economy did we stimulate? China’s. The interest on three billion dollars is not insignificant. How do you say “You’re welcome” in Mandarin?

So much for the aggregate. What about you and me?

Well, if we hit the bid on CFC, we saved four grand on a new car. We’re saving a bit on gas. If we keep the car until after it’s paid for – a rarity in America these days, but possibly (and hopefully) the new reality – eventually we could even be money ahead. Assuming we don’t lose our jobs. But our discretionary spending has gone down, and as that filters into the aggregate, our job is even more at risk. But still, if we keep the new car until it’s a clunker, we could come out ahead.

Except on our taxes. You see, we’re already perilously close to seeing the US become so suicidally indebted, our debt is downgraded, as I’ve warned before (I think it’ll happen in 2010). Another three billion doesn’t sound like much on top of 11 trillion – but remember, it was one straw that got credit for breaking the camel’s back. And three billion for every employed person in the US is an extra $22 bucks in US debt, on average.

Not huge, but it would buy a week’s worth of Snickers and Mountain Dew.