A Post Mortem On Cash For Clunkers

It has been about a month now since the Cash for Clunkers program (CFC) ended. Cheered as a success by the left, the facts, that are now coming to light, might conclude otherwise.

According to a Cars.com survey of those who bought under the program, about 70% of the buyers were going to buy a car anyway. Therefore, much of the money that the Fed spent could be easily considered a waste of money; assuming that the "real" intent of CFC was to stimulate auto sales.

Other data supports the fact that many of the buyers would have been better off dealing on their own because, under CFC, dealers didn't deal as they would have normally with a trade-in which had value to them and that they could resell. Some buyers actually traded in vehicles that were worth more than the $4500 or $3500 that they got from the government.

As we all know, many dealers are still waiting to get paid by the Fed. This is costing them money in terms of the interest that they have to pay while waiting for the rebates to come through. Also, there were some deals that the Fed rejected because the buyer or the car being traded in didn't meet all the qualifications for the program. In those cases, the dealers are going after the buyers for the rebate amount.

Another surprise for the buyers is the fact that, in some states, the rebate is taxable as a form of income. In other states, the owner could get charged for a sales tax that is equivalent to the $3500 or $4500 they received for their car; even if their cars were worth substantially less than that.

For the dealers, themselves, the foot traffic into the showrooms has fallen back to the pre-Cash For Clunkers levels (Click to See Full Story from the Boston Globe: "Car showrooms quiet after clunkers clamor ends").

Edmunds.com's analysis of September's auto sales clearly shows that the sales going forward will even be lower than before the CFC program. In fact, September sales are expected to tie a 28-year industry low (Click to See Full Story: "September sales rate will tie lowest on record, Edmunds says"). September sales are expected to be almost 12% below June's pre-Cash For Clunkers sales pace. Beyond this record low sales in September, Edmunds.com isn't very positive on industry sales going forward (Click to See Full Story: "Expect decline in car sales after 'cash for clunkers,' Edmunds.com predicts"). This was to be expected. All that CFC did, in most cases, was to steal from future auto sales and compress those sales into a 4 week period. Salesmen are probably closer to losing their jobs than they were before the CFC program.

On the used car front, the CFC program has forced a shortage of used cars and, consequently, higher used car prices are creeping into the market (Click to See Full Story: "Used cars about to get pricier, more scarce, dealers say"). This too was predictable. You can't just destroy 700,000 perfectly viable used cars and not expect the price of all used cars to go higher. Sadly, this effect of the CFC will hit the working poor the hardest.

From an economics standpoint, that $3 billion dollars spent for the CFC program was money that we didn't have. Therefore we will be paying interest on that money for a very long time. Even at a the current low 4.35% interest rate, we taxpayers will continue to pay about $135 million dollars a year for this program; about $174 per car. And, given that we have a national debt that extends as far as the eye can see, we taxpayers will be paying for this program for the rest of our lives; our children's lives; and, their children's lives.

Then, too, a third of that $3 billion was spent on people who were attracted to buying a car and hadn't really planned to. This is about a billion dollars that won't be spent elsewhere; on other things that would better serve a rebound in the economy. Generally speaking, when somebody makes a major purchase, like a car, they tighten their spending for some time after. So, in effect, we might well have hurt many other businesses with the Clunkers program.

Now, if the goal was to save the planet by increasing the mileage on 700,000 cars, think twice. On average, the CFC program might have saved about 5 miles per gallon per car. Assuming an average of 12,000 miles being driven per year and an average of 27 miles per gallon for each new car, the savings adds up to about 88 gallons of gas per-car-per-year. In terms of a barrel of oil, that is about 4.5 barrels of oil per-year-per-car or a total of 3.1 million barrels of oil for all those 700,000 cars. While that may sound like a lot, think about the fact that we import 19 million barrels of oil each day. That 3.1 million barrels a year savings is but one-sixth of a one day's usage of all the oil that America uses in one whole year. In terms of the total world usage of oil, the savings was less than one hour's worth of the world's total annual usage. (Click to See Oil Usage/Import/Export Data)

Lastly, based on an assumption that the price of gasoline holds at $2.50 gallon, that 88 gallons of saved gasoline under CFC would equate to an annual dollar savings of about $220. So, our government spent an average of $4000 per car to save $220/year. It will take approximately 18 operational years for each of the 700,000 cars in order to get a return on that investment. Assuming that the average life of an automobile in America is only 9 years, I don't think we're ever going to get our money back for that program. Of course, everyone seems to forget that we will pay $174 a year in interest expense for every $4,000 that the our government spent on the CFC program. That makes the true savings per year of about $46 dollars. Assuming an average life of 9 years per car, this means that gasoline would have to go above $35/gallon in order to break even during the life span of each purchased CFC car.

I think when all is said and done, the Cash For Clunkers will be a bust. It is just another one of these "sounds good" projects that our government constantly wastes money on. Correction: wastes "our" money on.

Note: The analysis (above) is very simplistic. In business, we would have calculated the return on investment using something like Discounted Cash Flow Analysis (DCF) that took into consideration the time value. If that type of analysis had been done on CFC, the resulting loss of money over 9 years would be greatly higher than above.