Cash for the Clunker Auto Industry

The Senate just passed another $2 billion in funding for the "Cash for Clunkers" program. If you're not familiar with this Federal jalopy, here it is in a nutshell. If you currently drive a car that gets 18 MPG or less, you can get a federal voucher for $3,500 if you purchase a new car getting a minimum of 22 MPG, and $4,500 toward a car that gets at least 28 MPG. The objective is two-fold; reduce pollution and stabilize the teetering American auto industry. Sounds great doesn't it? And the program name implies that its targeted at people who might not otherwise be able to afford a new car. At least that's what you might be lead to believe.

The reality of this program is that this is doing very little for the American economy, the environment or people in need. Lets break this down by proposed benefit.

Environmental impact: When all is said and done, roughly 700,000 cars or 00.28% of the 250 million cars on the road the U.S. will get an average of 50% better gas mileage (based on Whitehouse figures). This amounts to a reduction of less than 00.09% in annual fuel consumption. In carbon emissions, the estimated reduction is 700,000 of the 6,700,000,000 tons emitted annually by American automobiles. The cost of these nominal benefits is $3,000,000,000. Separate research at Stanford University and and the University of California, Davis concluded that the price for each ton of carbon abated by the program ranged between $200 and $500 dollars. The variance was based on the number of miles the clunkers were projected to drive if not traded. Not exactly cost effective.

According to the Department of Energy, if we all properly inflated our tires we could realize up to a 3.3% increase in fuel efficiency across the board? A 25 cent per car investment, or $30 million could have 35-times the impact for 1/100 of the cost of "Cash for Clunkers". How about reducing our federal income tax by 25 cents per car if we promise to inflate our tires?

Economical impact: It's no secret that even with bailout money, Detroit is still on life support. And I don't mean the Lions. Another objective of this program was to jump start American auto sales. The reality is that over 50% of the Cash for Clunker sales are foreign automobiles. So roughly 325,00 American-made automobiles will be sold thanks to this program. I have two questions for the auto dealers. There were 726,000 domestic passenger cars and light trucks sold in July of 2009. What was the incremental impact of this program? In other words, what was your forecast before the Cash for Clunkers subsidy? You have to assume that a portion of these sales would have occurred regardless of the program. Some consumers were already in the market and were the benefactor of timing. Others likely sandbagged their purchases until the program was in effect. So what was the true incremental impact to Detroit given that there have been 4.2 million domestic passenger and light truck sales in 2009 thus far?

An unanticipated effect of this program is the reduction in automobile donations to charities. Often people will donate if they feel the tax benefit is more significant than trade-in value. Cash for Clunkers vehicles are all marked for destruction when a truly needy individual might make use of the vehicle, if even to drive small distances.

Consumer Subsidy: By using the term "Clunker", we envision an '88 Buick with cracked vinyl seats, a radio that only picks up polka stations, holes in the floor large enough to fit several teenagers and driven by a poor old woman on a fixed income. What we don't see are the myriad of dual income families who are taking this opportunity to upgrade their minivans and SUVs. This program does nothing to help someone without the income or credit to purchase a new car in the first place. In fact, it actually has taken away some of the negotiating power of the consumer. Most will see this "free money" and not get the best deal on their new car. Dealers, on the other hand see this as an opportunity to sell cars at a higher price than normal since less of the purchase price is an out of pocket expense for the consumer. Auto prices are artificially driven up, but also legitimately driven up by supply and demand. While this subsidy may have been just enough to allow someone to get into a new car, how many were "up-sold" due to the euphoria of free cash?

If you're reading this and getting angry, please take a deep breath as I'm not trying to bash Obama or this administration. I have nothing against Obama and rarely take political sides, if ever. Kudos for creativity, but I'm just trying to call this as I see it. A gimmicky way to appease the auto industry, raise consumer confidence, and illustrate a "green" philosophy. The long term impact is nominal.

If you want to cut energy costs, how about replacing my windows? My heating and airconditioning bills are twice as much as my annual gasoline expenditures. Why doesn't the government come and insulate my attic and give me triple-pane Anderson windows with tinted glass? Or maybe a third climate zone and programmable thermostats? Or maybe they could purchase everyone a sweater. You know, one with a reindeer on it.

And for those who were socially responsible enough to trade in their 24-cylinder Chevy Enviroblaster LE years ago, how about a little stimulus cash getting thrown their way? It's like rewarding bad behavior if you don't recognize those who were fuel efficient before "Cash for Clunkers" was passed. Just a thought.

Alright- I'm off to see if I can use some paint and Styrofoam on the old Honda to make it look like a Ford F-750 Landscorcher so I can get me some clunker cash!