Life of an Internet Entrepreneur

When President Obama unveiled Cash For Clunkers, a government program to trade in old inefficient cars at dealerships in exchange for new efficient models, many people applauded the effort for its laudable goals:

• Lowering pollution in the air by having newer, cleaner emission cars taking the place of older cars with worse emissions
• Jump-starting the American auto industry, which had been selling so few cars that dealers, factories, and suppliers were shutting their doors.
• Keeping millions of people working on the factory lines, at the car dealerships (over 1 million employees across the U.S.), and lowering the unemployment rate, a key indicator of the economy. The NADA estimates that 14.1% of all retail sales done in the USA are done by new car dealerships.
• Reducing our dependence on Foreign Oil by having more efficient cars on the road that use less oil.

As with any large program which sways supply and demand in an open market, it is interesting to look at the impact of the program to see if the results actually match the goals, as well as find out if the hidden unintended consequences of the program outweigh the advertised benefits of it. Let’s go through this by focusing on the various players in the show:

New Car Dealers

Cash For Clunkers came to a close a few weeks ago, after almost 700,000 old cars were taken out of the commission.  Dealers submitted rebate applications for $2.88 billion, which fell just shy of the $3 billion congress allotted for the program.

While dealers reported heavy foot traffic in their stores, they also weren’t getting their rebates from the Department of Transportation right away. This means that dealers, who already have significant cash-flow issues in this economy due to high payrolls, large leases, big mortgages, and floor-plan financing could now add one more item onto that list: being out $3,500 - $4,500 per Cash For Clunkers trade-in until the government pays them back (which has been a slow tedious process).

Indeed, some dealers were so concerned with the slow process of reimbursement that they stopped offering Cash For Clunkers trade-ins early. Ask yourself, if this program was so successful for New Car Dealers, why in the world would a dealership stop before being forced to stop?

Government

How much money was spent advertising and administering the Cash For Clunkers program? Over 2,000 Department of Transportation workers have spent time going through rebate applications. What about all the other costs?And, equally as important - how much oil was going to be saved by the success of this program?

Environment

Some of the media has already started looking closer at the supposed benefit of trashing the clunkers, and weighing it against the environmental goal. For example, the Las Vegas Review Journal notes that

If the clunker would have stayed on the road another four years, sending it to the junk yard now saves 10.8 tons of carbon dioxide. That translates to more than $400 per ton, if the deal for a new car involved a $4,500 taxpayer-financed rebate.

Under so-called industrial “cap-and-trade” programs in Europe and proposed in the United States — where carbon becomes a commodity that can be traded if a cap is set on the total amount of carbon dioxide emissions — then the price of a credit for reducing a ton of carbon or preventing that much emission is $20 and $28, respectively.

Even if Cash for Clunkers took vehicles off the road that could have been driven for 10 additional years, the carbon price is still more than $200 per ton, Knittel noted.

The National Center for Policy Analysis found that the rebate program cost the government $3 billion and failed to accomplish the program goals except for possibly improving urban air quality.

“There is evidence that removing older cars from the road will cut air pollution, but the numbers indicate that any reduction in carbon dioxide emissions or oil consumption will be minimal — and expensive,” according to the group.

As evidenced above, it isn’t “in the bag” that Cash For Clunkers will make a difference to the environment.

Used Car Dealers

Used car dealers employ many workers as well, and yet there doesn’t appear to have been much thought as to the impact of Cash For Clunkers on them.  Government interference in the market did two things:

• Created an advantage in the battle between used and new car dealers by advertising the Cash For Clunkers program (which only allows you to buy a new car, not a used one).  This means many people who may have purchased a used car now had a government subsidized reason for going to the new car dealer instead.
• Due to the economy, prices of used cars have been going up, as more shoppers can only afford used cars.  This created an inflated demand for the same supply of cars. Cash For Clunkers stipulates that the old car traded in must be destroyed, not resold.The net effect of that means that even fewer used cars will be on the open market, raising high prices on used cars even further - at a time when customers have trouble finding financing and paying for the financing even if they are lucky enough to get approved for it.

Taxpayers

Was this a good deal for taxpayers? They footed a $3 billion bill. Anytime you purchase something, you want to look at the efficiency of the purchase.  How much of an impact is this having?

Under the program, almost 700,000 cars were traded in.  The average MPG of Cash For Clunkers traded in was 16 MPG, and the average MPG of new cars purchased under Cash For Clunkers was  25 MPG. Assuming an average of 12,000 annual miles being put on each car, this would mean saving 270 gallons per year, per car.  Multiply that by 750,000 Cash For Clinkers traded in and you get about 202,500,000 gallons.  Then divide that by 42 gallons per barrel of oil and you get about 4,821,428 barrels or roughly .063% of our yearly oil consumption (since the US uses 20.8 million barrels a day).

Even when you calculate out the value of all the oil we’ll save, it still only reaches $361,607,100 (assuming a $75/barrel cost)…which is just barely 12% of the cost of this whole program.

Others will say that this program was good for the U.S. automotive sector, but looking at the best-sellers under the Cash For Clunkers, only 2 were American owned:

Top 10 cash for clunkers purchases

1. Toyota Corolla
2. Honda Civic
3. Ford Focus
4. Toyota Camry
5. Hyundai Elantra
6. Toyota Prius
7. Nissan Versa
8. Ford Escape FWD
9. Honda Fit
10. Honda CR-V AWD

Consumers

Let’s face it. Salaries haven’t been going up, and most Americans have debt. Almost 700,000 used cars have been taken off the road.  Assuming they were truly all in working order (although bearing in mind the Cash For Clunkers incentive is greatest for someone to game the Cash For Clunkers system in order to make the most “profit” they can by giving in the most useless, valueless car, and getting the most rebate for it), we now have 700,000 people who could have kept driving cheap used cars (lower cost to fix, lower insurance, no taxes on transaction) who have spent at least an additional $10,000 to buy a new one (either through financing or cash they had).

In addition to that cost, they immediately got a tax bill on the purchase, which in my state (New Jersey) would amount to $700-2,000.  Next, add in the higher cost of insuring a new car, and you are quickly seeing that there are many hidden costs in the transaction.

Now, you might say that they are saving money because of the more fuel efficient cars.  The fact remains that the average driver in America drives 12,000 miles, and even switching from an inefficient car to a new efficient car on the top ten Cash For Clunkers list would only yield about $675 in savings in the first year (assuming a $2.50/gallon cost of gas).

Next, you might say “it will pay off in subsequent years”, but right now the cash value for the cash strapped customer is more important. That cash can serve to invest in an appreciating item (as opposed to most new cars, which lose 40-50% of their value within 2-3 years), or that cash can be held in case of an emergency, like the loss of the person’s job.

Consumers tend to delay large purchases during bad economies until they can delay no longer, and Cash For Clunkers moved up a lot of purchasing decisions, no doubt.  We can expect lower car sales in the coming months, all things being equal, since some of the future months demand for new cars was “stolen” and used during this program.

Additionally, other large purchases, such as home appliances, home improvement, large furniture (already markets in trouble), are likely to see a decline in sales in the coming months due to fewer consumers being able to afford them while paying off their recent new car purchases.

Could It Have Been Planned Better?

I think a better Cash For Clunkers would have worked like this:

If you had a very old clunker, you would be able to trade it in for a more efficient used car, one which was a financially sound purchase for you, given the economy.  Someone who has, say, a 2004 model, can trade in for a brand new more efficient model, and still do it responsibly from a financial point of view.

The old cars traded in would not be scrapped, but rather keep getting traded in by someone with a less efficient car.

The net effect of this program would be:

• that more cars could be traded in than under the current Cash For Clunkers
• we wouldn’t be wasting tons of energy and trashing the environment by scrapping old cars that still worked
• everyone could participate in this program, whereas in Cash For Clunkers only cars deemed by the EPA to have 18MPG efficiency or lower could be traded in for the rebate.
• the used car market supply wouldn’t be artificially whittled down, preventing used cars from costing more.
• other big purchase industries (appliances, home improvements, etc.) wouldn’t get hurt nearly as much, since customers wouldn’t have to spend huge amounts of cash to trade up just one step higher.
• Americans wouldn’t be placed into worse financial condition by being forced to buy a $14,000-$20,000 car just to redeem a rebate.

What do you think?

Conclusion

The really important lesson here, that I think should be taken away, is to challenge proposed ideas for these types of programs to look for the unintended consequences in advance, and have an open discussion about them.  While I don’t expect us to always or even frequently predict them accurately, I do think that just ignoring them is a guaranteed way to fail in looking at the outcome of such a program on the country as a whole.