So what might the effects be of the $3 billion “Cash for Clunkers” program.

First let’s look at the gas savings.  This from Business Week.

“Now do some easy math. Let’s assume that the average number of miles driven for both the new and old vehicles is 10,000 miles per year. The clunker thus would have burned 625 gallons per year. The new car? Only 400 gallons. That’s a savings of 225 gallons per year per car. It’s a nice pocketbook boost for consumers. With gas at $2.70 per gallon, they’ll save $600 per year, assuming they drive the same number of miles (which actually is a questionable assumption).

And at 250,000 cars traded in so far, that adds up to 56 million fewer gallons consumed in the U.S. per year

That sounds like a lot. You could drive 1.4 billion miles on that much gas. But it’s only a small percentage of the total gasoline consumption in the U.S. Last year, Americans burned about 138 billion gallons. So cutting that by 56 million gallons is a reduction of only 0.04%. And since auto emissions of carbon dioxide are directly proportional to gasoline consumed, greenhouse gas emissions would also go down a minuscule 0.04%.”

The article was written based upon the first billion put into the program.  The program grew to a $3 billion program and is now over.  So multiply the above by 3.  So 56 million gallons becomes 168 million gallons, or 0.12%.  With 750,000 cars traded in (3X250,000 for first billion),  at $600 per year in savings per year ($2.70 p/gallon, 10,000 mile avg driven per year) per customer that’s about $450,000 million in gas savings per year.  Of course if gas goes up or down in price that affects the yearly savings going forward.

An important point to remember is the program is a one off program, but the effects continue for the life of the new vehicles. 

The jobs part is more difficult to figure.  GM re-hired 1,350 workers, in part because of Clunkers and will add overtime hours for another 10,000 workers.  Ford has said it intends to add hours as well as workers, but hasn’t specified any numbers.  Because the inventory numbers have been slashed industry-wide, the industry as a whole is expected to bring back some workers, but no one is predicting anything close to the workforce levels that prevailed pre-recession.

Also workers are likely to be re-hired in the supporting automotive sub-industries like engine component makers and the like.  But being able to dis-aggregate the eventual numbers and tie them to a one off program like Clunkers is next to impossible. 

In a recent speech former Pres. Clinton said he’d consider using the same concept with electric cars when it becomes time to introduce those next generation vehicles. 

Despite it’s obvious popularity, however, critics are more numerous (at least in the major media) than are supporters.  As one example, sustainable energy advocates are upset because the additional $2 billion is likely to come from funds previously earmarked for clean energy development.

An article in Newsweek points this out specifically.

“Cash for Clunkers is clearly popular, but it isn’t exactly environmentally friendly, say critics. After the initial $1 billion was used up in less than a week, Congress is now proposing to extend the program with an additional $2 billion. That money would come out of the $6 billion that the Department of Energy received from the federal stimulus plan and has used to fund start-ups that build lightweight wind turbines, design new ways to store energy on electric grids, and create cheap solar panels for rooftops.

(Update published Aug. 6, 2009: One such start-up that’s received this DOE money is Beacon Power Corp., a Massachusetts-based renewable energy company. Beacon creates devices that recycle and store energy on the electric grid, making the flow of electricity more efficient. The company received a $43 million loan guarantee through the DOE’s stimulus program. This will help them borrow money from the federal government at an interest rate of no more than five percent, which gives them a crucial injection of credit and capital in this tight economy. “It was also a validation of our company and the work we’re doing with the energy storage system on the grid,” says Gene Hunt, spokesman for Beacon Power.

If the Senate approves the extension of Cash for Clunkers, the DOE would have not have the money to seed any new initiatives like Beacon Power; $4 billion has already been allocated to specific programs. “If you’re looking at it from the perspective of growing a green economy, spending money on innovative green technology is a better use,” says Carol Lee Brown, senior manager for the Transportation Program at Ceres, a Boston-based environmental group.)

Brown and other environmental advocates say the program is more focused on helping the auto industry than putting fuel-efficient cars on the road. Consumers receive rebates of between $3,500 and $4,500 when they turn in cars that are less than 25 years old and that get 18 miles per gallon or less, and then buy a new car. But consumers don’t necessarily have to buy a particularly fuel-efficient car with the rebate. They could trade in a gas-guzzling sport utility vehicle for, say, a new truck that gets only slightly better gas mileage. “You’re putting money out there and allowing people to make bad decisions,” says Ann Mesnikoff, the director of the Green Transportation Program for the Sierra Club. The way the plan is currently written, we “don’t know if we’re seeing a big trend in people buying more fuel-efficient vehicles” says Mesnikoff.”

A NYT article argues that the effects will be short term.  Though that would appear to be restating the obvious–it is a one off program after all (except for the gas savings, which continue).

“The demand from the program instantly revved up industry sales to their highest levels since last fall. Even after tallying the benefits, though, car companies will sell fewer than 11 million new vehicles this year in the United States, a major decline from the 16 million sold in 2007.

Automakers are under no illusion that recent traffic portends a sustained recovery for their business any time soon.

“We are going into the next couple of months with our eyes wide open,” said George Pipas, chief market analyst for the Ford Motor Company. “Our view is that we will come down off this sales pace pretty quickly.”

The popularity of the clunker program caught government officials, manufacturers and dealers by surprise. Initial funding of $1 billion was exhausted just days after the program kicked off in late July, prompting the Obama administration to hastily add another $2 billion.

“This was a sweet little spurt of sales, but it’s hard to imagine it will have any lasting impact,” said Rebecca Lindland of the research firm IHS Global Insight.”

And for you Obama bashers out there, here’s a nice list of objections by someone called Parapundit.

“Writing in the New York Times David Sanger reports on the sorts of objections to the Cash For Clunkers program that the New York Times notices.

The first is that the program is simply not ambitious enough — in an effort to make sure American carmakers are among the biggest winners, it set the mileage requirements for newly purchased cars too low. The second is that Congress and the White House are essentially rewarding car owners who in years past chose to buy gas-guzzlers — violating Mr. Obama’s own first rule of environmentalism, which is that polluters should pay.

And the third question is the one that haunts any big government subsidy: Does it make more sense to pay Americans to buy a new, slightly more efficient car than it does to insulate their homes? Or to go to the health club, in hopes of lowering future health care costs?

That’s the best they can do? How about a few other objections?

• The Cash For Clunkers Program steals sales from future quarters. Some of these cars would have been purchased this fall or winter. So sales will dip this fall and winter.
• People who are spending more on cars are cutting back on other expenditures. In fact, in July non-auto retail sales dropped 0.6% while auto sales rose 2.4%.
• It is redistributionist in a totally lottery way. Just happen to have an old car with very little resale value? Just happen to want a new car that fits the program’s criteria. You get a deal at the expense of everyone else.

I have an even more fundamental objection: American taxpayers are paying other citizens to get cars that stimulate the economies of Japan and South Korea. What about the American economy?

The top five models purchased in the week ending Aug. 5 included three Toyotas — the Corolla, the Prius and the Camry — along with the Honda Civic and the Hyundai Elantra.

Um, I want more American jobs, not more Japanese jobs. Japan not my country (though its an interesting place to visit). I do not pay taxes to the Japanese government. I do not have a Japanese passport.” 

Tags: Cash for Clunkers

This entry was posted on Saturday, August 22nd, 2009 at 8:22 am and is filed under Economics, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.