Rarely has a government program displayed the gross ignorance of our political and media elites as the “Cash for Clunker” program. Let’s forget about the colossal inefficiencies in operating this program and the resulting threats against dealers of fines up to $15,000. The entire program is a gross misuse of government funds.
I actually looked at participating in this program. We were replacing our son’s 1999 Nissan Altima. This ten year old car had a little over 50,000 miles on it. Initially, we had the impression that we would get the trade-in value of the car and a voucher for $3,500. We soon found out it was either/or. Given that the 1999 Altima was worth about $4,000, it made no sense to participate. Even if the vehicle was worth $3,000 it would be only a $500 advantage to us, but a cost of $3,500 to the government.
One problem is many of the cars being turned in are like my son’s or nicer. They have a value of at least $4,000, which means these people are walking away from higher resale value of their existing vehicle. Most are probably in the $2,500-$3,500 range, and thus they are getting very little economic benefit. Because that price reflects the trade-in value at the dealership, these folks would likely receive even more money if they just sold the cars themselves. .
The government is pouring out $3 billion for very little economic benefit to the individual consumer and potentially negligible benefit to the country. The program leaves them the impression they are getting “Free” money when they are receiving very little and adding considerably to the national debt.
The argument has been made that we are getting old cars off the road and replacing them with more fuel efficient vehicles. But that is happening everyday without a government program. There are now about 260 million vehicles in the United States. When economic times were better, these vehicles were being replaced at the rate of about 17 million a year. The replacement rate was about 10 million in June 2009, and jumped to 11 million in July. The new cars replaced older outdated cars, cars destroyed in accidents and cars that just wear out. The used cars move down the pipeline, replacing the old vehicles in the fleet.
Another problem with this program is it specifically prohibits trading in a car more than 25 years old. If there are indeed cars we would like to get off the road, either for fuel inefficiency or for emission deficiencies, then this program should be targeted to those vehicles which are at the end of their useful life and are not as fuel-efficient on average as vehicles produced today. These are the real clunkers. Only a federal bureaucrat could come up with a scheme restricting participation by those people who could benefit the most.
The third problem is that a lot of the vehicles being turned in are like my son’s, which are perfectly good vehicles that still have a long useful life. This is where the economic ignorance of our elected leaders gets even more astonishing.
While looking at throwing $2 billion of additional money at this program, a couple of senators (who will go unnamed to protect the guilty) stated that they supported the program because the new cars being purchased had higher fuel efficiency than they expected.
That ignores the two most important factors. First, there is no consideration of the fuel efficiency of the vehicles being taken off the road and destroyed. More importantly, there is no heed paid to the immense amount of energy used to produce the replacement vehicle. The steel, aluminum, plastic and cloth in a car all are part of a manufacturing process that eats energy during the actual assembly of the vehicle. There are thousands of parts that take energy to produce. Taking thousands of vehicles off the road prematurely without recognizing the cost of that energy grossly overstates the true tradeoffs. Saving a few miles per gallon in fuel efficiency will barely offsets the loss of the energy used by premature destruction of a perfectly usable vehicle. The program is like amputating an arm because of an infected finger.
So the government is spending $3 billion to provide very little benefit to the car buyers and to save little -- if any amount at all -- in overall energy costs. The only point I have heard that makes sense came from someone who is usually confused about economic issues – Juan Williams of NPR. He smartly stated that there is a positive perception being conveyed to consumers about spending. Many people have locked down their spending as a reaction to the uncertainty of the economic slowdown. If this program resulted in a more positive trend for consumers then we would all benefit.
Aside from the potential psychic benefit to the consuming public, Cash for Clunkers is just another boondoggle foisted upon us by people who have no clue how our economic system works. The best thing you can say about it is it is a whole lot smarter than the rest of the stimulus plan.