Now that the dust is starting to settle around the auto dealerships across America, it might not be a bad time to assess this whole "Cash For Clunkers" deal the government bestowed up us.
On the surface, it seemed like a wonderful idea. A measly $2.88 billion government subsidy generated 690,114 new car sales. I have never seen so much back-slapping and high-fiving in Washington as politicians on both sides of the aisle extolled the virtues of their wildly successful government program.
So the government doled out an average of $4,114.29 per "clunker." The clunkers - older, larger vehicles that go less than 18 miles-per-gallon - are destroyed. The engines are drained of oil and filled with seize compound and then the cars are crushed.
Good deal? On the face of it, yes. There is no argument. The program stimulated a ton of new car sales.
But here are some points to ponder.Where did the money come from?
Well, the Federal Reserve just kind of says abracadabra and it magically appears on a computer screen. OK, that's an exaggeration, but it's not far from truth. Actually, the government borrows it from places like China - with interest - by selling treasury bills.
Of course the taxpayers are on the hook for this. So you and I get to pay for new cars for other taxpayers to buy. And if you think about it, a couple of the big car companies are more or less owned by the taxpayers. So for every Chrysler and GM that was purchased under the program, we were using taxpayer money to encourage people to buy taxpayer subsidized cars. It gets worse, though, because the vast majority of cars purchased were foreign models. In those cases, my tax dollars go to help my neighbor buy a foreign car with the profits headed overseas.
How much did the program really cost?
Well, that's a tough one.
The official government line is what I quoted above - $4,114.29 per car - but that's not even close to the whole story.
First of all, the government takes credit for every clunker traded as an outgrowth of the program. The way the government sees it, not one clunker would have been traded if there hadn't been a program
But that's simply not true.
Edmonds.com tracks this stuff.
They note that approximately 200,000 clunkers would normally be traded every three months without the program.
If you back that out of the total, the cost of the program rises to $5,877 per car.
Also, the government counts clunkers as worthless, which is patently false. While some of the cars may have truly been $500 beaters, most of them were perfectly serviceable used cars which could have sold for a couple thousand bucks or more.
So if we call the average value of a clunker, say, $1,750, that means the government destroyed $1.2 billion worth of used cars to sell $2.88 billion worth of new cars.
Backing that out of the total raises the cost to $9,975 per car.
The program also had an impact - and resultant costs to all of us - on the automotive economy.
See, the clunkers actually have value beyond their likely sales value. When a clunker is traded normally, it's transported to an auto auction if it's still roadworthy. It's purchased at auction by a used car dealer and ends up back on the road.
So under the program, the transport people don't get paid, the auction loses business, and used car dealers lose a bunch of affordable cars that they could have sold to people of modest means - the people who couldn't afford to buy a new car regardless of the $4,500 government incentive.
The auto parts salvage industry also took a hit, because clunkers that aren't suitable for auction normally would be parted out.
Auto parts stores suffered to, as people rush out to buy a new car instead of replacing the battery, starter or muffler on their clunker.
The clunker program also put a dent in the late-model used car business. Used car dealers who sell lease return vehicles and late models saw their sales go completely flat while the program was ongoing.
If you happened to have a clunker available to you and were in the market for, say, a 2008 with 12,000 miles on it, you could buy a brand new model for the same money. Who wouldn't?
Also, the program forced a whole pile of automotive consumers into the market ahead of schedule. The recession caused a pretty significant pent-up demand for cars. Economists, noting an aging fleet of cars nationwide, were predicting a surge in car sales in late 2009.
Lots of those carbuyers lunged into the market because of the clunker program. I hope I'm wrong, but if I had to bet, my money would be on a very slim fourth quarter for car sales.
This calls into question the government claim that this was a big boost for the auto industry. Instead of creating a bunch of new sales, I think the program likely just pulled sales backward. This could hit the industry hard in the fourth quarter and into 2010.
Economic impact costs like these are hard to quantify, but they are legitimate - and significant.
Plus, struggling auto companies now have yet another struggle - what to do about manufacturing and demand. This artificial "stimulus" raises tough questions. Do they build more cars? Do they re-open plants? Do they bring back workers? My guess is they won't.
Finally, when the government talks about the cost of the program, it doesn't include the actual administration, only the money shelled out for the clunkers. The Transportation Department has 2,000 employees processing the 24-page dealer applications. Is their time worthless? Don't you have to factor those costs in there?
(Oh, and by the way, the majority of dealers haven't seen the first government check, even though the legislation said dealers would be paid within 10 days.)
There are people alot smarter than me who say - when you consider all the unintended consequences and administrative costs - the true cost of the program to the government, coupled with its impact on the automotive economy, could range up to $30,000 per clunker.
Will it clean up the environment?
The quick answer is a resounding yes.
Getting those gas-guzzlers off the road and putting more fuel-efficient cars out there will have a positive environmental impact.
But at what cost?
University of California-Berkley economist Christopher Knittel has an answer. His study, "The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program," Center for the Study of Energy Markets, Berkeley, The University of California Energy Institute, is quite interesting. Google it if you want.
To make a very long story short, Knittel figures the cost to reduce a ton of carbon from the atmosphere by cash for clunkers will range from $237 to $500.
OK, so what?
Well, Waxman-Markey - the cap-and-trade carbon control bill - estimates the cost of reducing a ton of carbon from US industries at $28 per ton.
And we're gonna trust these guys with health care?
