Friday, August 7, 2009

Unintended Clunkerquences

Unintended consequences can be fascinating. Let’s look at Cash for Clunkers.

A key selling point is that it will reduce carbon emissions. Well it will, by about one one-hundredth of one percent. Or put another way by 1/9,260th of our current carbon emissions. That’s a start, just not much of one for the cost.

On the flip side, environmentalists have raised 3 concerns that they say may actually make it a negative rather than a positive for the environment:

- Cars traded in must be immediately rendered useless and un-repairable. The preferred method of doing this is to run chemicals such as liquid glass through the engine until it dies. This process can create potentially dangerous air pollution. They have also raised concerns about the long-term impact of these chemicals left in the engines in dumps though I think this is unlikely.

- Energy used and pollution created in scraping the cars once rendered ‘useless’.

- Many of the vehicles being traded in would still be good for tens of thousands of more miles. The additional energy used by these cars over a more fuel efficient car in this period is potentially much less than that consumed in the manufacture of the new more efficient replacement vehicle. The same goes for pollution. Overall we’d use less energy and create less pollution by driving many of these cars a few more years and then replacing them with a more fuel efficient vehicle.

In other words, we may actually increase our carbon emissions by more than the one one-hundredth of one percent that the program will save. AND, the bigger we make the program, the more our unintended created emissions will be over the reductions.

Just the act of removing these cars is having unintended consequences. The vast majority are perfectly good cars, most still in very good shape according to dealers.

- Many would be excellent cars for the working poor and not so poor who can’t afford a more expensive car. In some cases the lack of affordable transportation is preventing these folks from being able to get or keep a job. This sure is benefiting a lot of people.

- Repair-A-Wreck charities who repair cars to give to those in need are beginning to report a decline in the number of vehicles being donated as people instead trade them in to be euthanized.

- Auto repair shops are also beginning to see a decline in business as people trade cars in to the clunkers program instead of repairing them. Shops are beginning to lay off workers. The cost of even more workers on welfare will come out of taxpayer pockets as well.

Abuse of the Cash for Clunkers system is yet another unintended consequence. Some auto dealers have reported that families with perhaps one low mileage SUV and one higher mileage car are trading in the SUV for a new higher mileage car to get the $4500 taxpayer incentive and then trading in their current higher mileage car for a new lower mileage SUV. In many of these cases the families overall carbon emissions and fuel mileage don’t change or at best is only increased by one or two miles per gallon.

A couple of dealers have said that they’ve seen friends and neighbors come together to do something similar.

How about government efficiency?

This program was sold to us as $1 billion to generate 250,000 additional sales of more fuel efficient vehicles. Reality is something quite different.

First comes administrative costs. Many have estimated this at 25% of the $1 billion. The numbers put out by the Obama administration put this cost at 18%, which, as admin goes isn’t terrible. Instead of 250,000 new vehicle sales though this leaves enough for 205,000. The average incentive of $4,000 thus costs taxpayers $4,878.

How many are actually newly incented sales though? According to the auto dealers association there are about 70,000 new vehicle sales on trade-ins each month that meet the criteria. EG, trade-ins that would have happened anyway, without Cash for Clunkers. So, for the first month of this program this reduces the newly incented sales to 135,000 vehicles. Now each $4,000 incentive that generated a new sale is costing us $7,407. estimates that over 100,000 people delayed purchases they had planned to make earlier in the summer until the Cash for Clunkers program was implemented. I’ll generously assume that half of these will, as a result of the incentive, choose a more fuel efficient vehicle than they had originally planned which leaves us with 50,000 people who would have made a trade that met the program criteria anyway. This reduces incented sales to 85,000 vehicles, each costing taxpayers $11,764.

What about future sales that simply got moved forward? EG, someone who’d begun thinking about trading in their low mileage vehicle for a more fuel efficient one, would have done it sometime in the coming months, and with this program was spurred to do it a few months earlier. The trade-in would have happened without the incentive, our program just got them to do it a month, two, or four earlier. We won’t really have a good idea about this number for several months, until after we see sales numbers before, during, and after the program period. My guess is that once the program has ended we’ll see a significant decline in these sales for several months. Not just a decline from high program levels to what sales would normally have been, but a decline to below normal levels. EG, people who would have traded in their car for a new more fuel efficient car in November did it in August instead.

Though I think the number is likely much higher, let’s assume that 30,000 moved planned purchases up a few months to take advantage of the taxpayer funded program. This leaves us with 55,000 newly incented sales. So…

Each $4,000 incentive that actually incented a new trade-in for a more fuel efficient vehicle will cost taxpayers $18,182.

By the time I get this posted I’m guessing that the program will have increased to 3 billion of our dollars. This will increase the administrative efficiency from about 18% of funding to perhaps 16%. Over the now 2 months the program will run we would have had 140,000 normal sales which spread out through $3 billion is better than 70,000 spread out over $1 billion. Previous sales delayed to take advantage of the program will not be effected. Future sales brought forward to take advantage of this taxpayer funded incentive will increase slightly as some who would have done a similar trade in early 2010 now do it in 2009. Accounting for these changes the $3 billion program will likely generate 180,000 new trade-ins that would not have otherwise happened and will cost us about $16,666 for each $4,000 average incentive payment. That certainly is better isn’t it.

Now that we know that the original 250,000 vehicle estimate was off, let’s revisit the environmental impact. At best, that the original $1 billion program would have incented 50,000 and the extended program will incent 180,000 trade-ins. An estimated 10,000 of these will be ‘family neutral’ as we discussed earlier which leaves us with 170,000 incented trade-ins. The environmental gains then are actually 32% less with our spending $3 billion than the promises were for our originally spending $1 billion.

Another supposed benefit of the program was to help US Autoworkers by spurring new sales of US made vehicles. The latest figures on trade-ins through the program indicate that 55% of trade-ins are for foreign autos with Toyota and Honda leading and 45% are for US autos (GM, Ford, and Chrysler.) Of the 55% foreign sales an estimated 40% of those are actually final assembled in the US with approximately 30% of the underlying parts coming from US suppliers. So at best 51% of the program benefits US workers and 49% benefits foreign autoworkers, mostly Japan.

I have not had time to figure out how many of the US vehicles are actually assembled outside the US but assuming this is any more than 4% (and I’d guess closer to 35%) that puts less than 50% of the program benefiting US workers.

I don’t have anything against helping Japan other than that I don’t think we can afford over $1.5 billion in US taxpayer money going to help Japanese and other autoworkers when we need that money in our own economy.

A final interesting consequence of this program is that it’s resulting in more foreign cars on our roads. Less than 10% of the cars being traded in and destroyed are foreign (over 90% are thus far GM, Ford, and Chrysler) but 55% of the new vehicles purchased with our tax dollars are foreign. Overall Cash for Clunkers will result in a net increase of 598,000 more foreign cars on our roads than US cars.

And we’re spending $3 billion for this?

Well, not exactly. We don’t have any of that $3 billion. We’re borrowing it. From Asia. Primarily China. And there’s interest on top of that $3 billion. This has got to make Asia smile. We’re borrowing $3 billion from Asia, paying them interest on it, and then using about half of it to incent people to buy Asian made vehicles.

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