Cash for Clunkers, An Economic Disaster
- Posted by Jeff Carter
- on September 3rd, 2010
Many folks in DC from both parties are hugely satisfied with the Cash for Clunkers program. GM and the car companies sold more cars, so it must have been great. Demand was stimulated, and I am sure they think jobs were saved or created.
The analysis is flawed. Cash for Clunkers is example A of why the government ought to just butt out.
Let’s look at the program. 700,000 cars were turned in, and 700,000 cars bought. A benefit is that less efficient cars were turned in, and more fuel efficient cars were bought. Great. The new cars will also pollute less. Super. The cost was 3 billion.
However, there are more costs than just the 3 billion dollar subsidy. Fully 20% of people who took advantage of the deal wish they wouldn’t have. Many people had higher car payments, and had cars repossessed.
The math on the saved gas:
A vehicle using 15 mpg driven 12,000 miles per year uses 800 gallons a year of gasoline.
A vehicle using 25 mpg driven 12,000 miles per year uses 480 gallons a year.
Therefore, the average clunker transaction will reduce our gasoline consumption by about 320 gallons per year.
About 700,000 vehicles were clunked; about 224 million gallons / year.
224 million gallons of gasoline is about 5 million barrels of oil. 5 million barrels of oil is about ¼ of one day’s US consumption.
At $75 per barrel, 5 million barrels of oil costs about $350 million dollars. Hmm… we spent $3 billion to save $350 million.
1 billion is 1 thousand million… 3000 / .350 = 8.47 In 8.5 years we’ll break even, assuming every clunker remained on the road that long.
Of course, they simply pulled sales forward. Sales of new cars have crashed since the program ended. John Stossel has a chart of sales here. Most of these sales came from existing inventory. Of those 700,000 cars sold, many would have been sold anyway. Only 125,000 of the 700,000 were “incremental” sales. That’s 17.8%. The US taxpayer got a 17.8% bump in auto sales from 3 Billion in spending, that actually cost us $24,ooo per car, not $4,500. Talk about your funny math.
It gets worse.
When 700,000 cars were turned in, 700,000 cars were destroyed. This took supply away from the used car market. Decreased supply normally means increased price, holding demand constant. Guess what? The price of a used car has increased 10% over last year. This hurts working families. Every time I hear a politician speak they talk about helping “working families”. Every program they design in Washington seems to hurt them.
Currently we have government programs in many segments of American business and society. Crop subsidies. Make food more expensive, not cheaper to average people. They also kill overseas production of food in places like Africa. Many home buying programs and loans designed to spur home buying. Inventory gets longer, supply increases as foreclosures mount. Neighborhoods are hurt. School programs. Read where the city of Los Angeles is spending $30,000 per student! Elite private schools in Chicago cost less than that. Our public schools are in terrible shape. Medicare results in more doctor visits, higher costs and less care. Virtually every place government tries to lend a hand, they destroy the market costing taxpayers billions.
Over at ChicagoBoyz, there is a series of editorials on the Glenn Beck rally. Lotsa people scoff at Beck. Some people hate him. But, I agree with the ChicagoBoyz analysis. This Tea Party movement is more than what it seems. This is a visceral movement that is die hard American to its core. Seeing what the politicos of both parties have planned for the country have moved millions of people to take their country back. It’s really not about parties. There are many Republicans that don’t get it, or hope it will pass. Then back to business as usual.
Democrats don’t get it, only because the movement isn’t tied to any of their core beliefs. They believe in big government programs and centralized planning. They believe in making decisions for people. Hence, Obamacare. Hence, Cash for Clunkers (which received bi-partisan support by the way). Hence, Fannie and Freddie, HUD, the Department of Education, the Department of Energy and so on.
One of the biggest problems with the Democratic controlled Congress elected in 2006 was their committee heads. These guys were the most far left in the party. They had the most seniority. Only their pet projects got through. The rest got shelved. When you look at the crowd of Pelosi, Waxman, Miller, Frank and some of the rest, you are looking at true believers in the socialist style of government.
Some Republicans get it. Looking at Chris Christie govern in New Jersey, I am pretty sure he understands what all this is about. There are some in Congress that get it. But I am not sure the ones that pull the levers of power do. If the Republicans retake the House and possibly the Senate, ask this question. Who will their committee heads be? If they are the same old cadre of guys that are seeking to line the pockets of the Republican backers, then America will not be too happy. If a feisty bunch get control and they actually pass bills that reduce the size of government, we will be in good shape. For example, wouldn’t it be nice to see the new Education chairman introduce a bill abolishing the Education department? A bill approving vouchers for underperforming schools? We will see if the Republicans get it.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)
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