Cash For Clunkers: Wasteful Spending?

The American Cash For Clunker (CFC) program is a “double eco” program. A term made up by this writer to describe the plan’s two tiers. The first “eco” is obviously economics. The second “eco” is the environmental kind.

CFC is based of the German model of the program. A couple of states had been running programs that were similar to CFC but the nationwide plan is based on the program running in Germany.

The hopes of the program are simple. Get gas guzzlers turned in for more fuel efficient vehicles. At the same time help the car industry stay a float long enough for economic recovery.

The way the program works is also fairly simple. For most vehicles, if your car was manufactured in 1985 or later and has a fuel economy rating of 18mpg or lower, then your car qualifies as a clunker. For heavy-duty trucks the rules are a slight different.

If your car is a clunker then you can trade it in for either the $3500 rebate or the $4500, depending on what you qualified for. That qualification depends on the how much better the new car is than the old, in fuel-economy.

After the trade and purchase, the clunker is destroyed.

So why all the fuss over this plan?

Well one of the main reasons was that the plan initially ran out of money in the first week. Not surprising considering the same happened during Germany’s implementation of the program. Congress quickly approved another two billion dollars for the program after the one billion first set aside dried up. The program runs through Nov. 1, the deadline and fears of limited funds caused a rush to the dealership early, causing the shortage of money so quickly.

A Wall Street Journal reporter has a complaint about the economic benefits, specifically that there won't be any, “The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.”

I think the logic is ridiculous because not only does it ignore the environmental aspect of the program, it is also comparing the car industry to the furniture industry. These are not the same things.

Eric A. Morris of the Freakonomics Blog, wrote for The New York Times, “unlike most [other] stimulus spending, CFC is targeted directly at one of our most distressed industries (the auto sector) and at our most distressed state (Michigan). Moreover, CFC is providing stimulus right now, when we really need it.”

But the WSJ reporter does make a valid point about taking money from one taxpayer to help another, though it is extremely over simplified.

It is true that the money is coming from taxpayers but not from one and it is not going to another. There problem is that it is going to another taxpayer that has made bad decision. Therefore the system is rewarding bad decisions. It is all of our taxes helping those that made foolish decisions when purchasing a vehicle, decisions that the government, the taxpayers, the financial institutes and the car industry at the time were all fully supporting. And I say taxpayers because it was us that were buying these clunkers.

And to the people who did the right thing by purchasing a fuel-efficient car, sorry that this plan does nothing for you, beside giving you the satisfaction of being ahead of the curve, of not owning a clunker that you do not want and of knowing that you started helping the double ecos long before the implementation of CFC. And your share of the taxes is there to make sure others follow in your footsteps.

As far as the complaint that “the subsidy won’t add to the net national wealth” I would have to say that Eric A. Morris has to disagrees, again.

He writes, “CFC largely pays for itself, at least in the net. The average customer will reap an estimated $700 to $1,000 dollars per year in reduced fuel costs. At that rate, society will have achieved a net direct benefit (not even counting the environmental pluses) by the time the lifetime of the car ends. Who can’t get behind a pro-environment program that actually makes society money instead of costing us?”

Apparently a lot of people are not getting behind this program.

Allen Sanderson, an economist at the University of Chicago, echoes the WSJ reporter’s concerns about having to destroy one’s assets, calling it a waste and calling CFC a silly program. The clunkers required labor and resources to build and now all of that has gone to waste. Consider a similar program to replace old light bulbs with more efficient ones, he says. Would you smash the old bulbs? My answer would be: If the reason behind switching the light bulbs was to save energy and money on the electricity bill, then yes.

The cars are being destroyed, not for the economic part of the program, but for the environmental part of the program. It is a lesson learned from the mistake Germany first made with their CFC plan. Many of the clunkers were ending up in foreign countries through the black market. And so if the cars remain in use then the CFC program is only have effective, if at all.

Jeremy Anwyl, the CEO of the car research site Edmunds.com, thinks that the effect on the car industry will be second to none. Anwyl says that even without the program, people trade in approximately 60,000 clunkers a month. While CFC has encouraged more people to trade in their vehicles, Anwyl argues that most of them would have come in sooner or later either way.

"It encouraged anyone that had a clunker that would have traded in their vehicle over a three- or four-month period to do so over three or four days," he says. "So, at the end of this you have to wonder how many additional sales were actually created."

Again the argument has been simplified and the environmental aspect has been ignored. There is no guarantee that the people turning in the 60,000 clunkers would bought a more fuel efficient car or a new car. Many, due to the economic times, may have opted for a used car, thereby spending less than they would have if they bought a newer car. Plus, if they decided to purchase a used vehicle, it only helps the dealership and not the manufacturer.

On top of that I would add, the 60,000 clunkers that would have come in anyway, will come in anyway and some of them will end up buying new cars and some will buy used cars and that will further help the car industry.

There are those that would not have considered trading in their car or purchasing one at all if it wasn’t for CFC’s added nudge.

Kristine Burke from Allvoices.com was concerned about adding debt to the already heavily indebted American family. She wrote, “With Americans already carrying about $8,000 in non-mortgage debt for every man, woman, and child in this country, losing their homes to foreclosures, facing rising unemployment and benefits costs, is it wise economics to give us an incentive to buy new cars? Doesn’t that mean even more consumer debt?”

Raising an excellent point and to which I would have to say that it is an issue that the financier of the car loan has to be careful with. It is the responsibility of the financier to do the proper calculations to ensure that the consumer is not handed a loan that he or she can not afford. And if the consumer can not afford it, then the financier should deny the consumer the loan.

But the rebate is there to make the monthly payment be as low as possible. The price of a car is the lowest it has been in a long time. Add to the already low prices some bargaining, the rebate from CFC and the rebates a few car dealers and companies are adding on top of the CFC rebate and the car loan is not something many people can not afford.

In fact Robert Hemsley, a man who took advantage of CFC gave financial survival as the reason for turning his van in for a new car. In an NPR report Hemsley said he traded a 12-year-old Chevy van that got 14 miles a gallon for a Nissan Cube that gets 30 mpg on the highway. He says he'll cut his gas costs by almost two-thirds.

"Just saving money, stayin' alive, making a buck, paying my bills,” he said explaining his decision.

So far the arguments against the Cash For Clunkers program have been all economical but there are also argument against it that are environmental too.

The NPR report continues by saying, “But even before Hemsley drove out of the lot, his new car had actually added carbon dioxide to the atmosphere. That's because it takes electricity to make a new car, and fuel to ship it.

"’The estimates vary, but somewhere between 3 and, say, 12 tons of CO2 are produced for every car you make,’ says William Chameides, dean of the Nicholas School of the Environment at Duke University.

“Chameides calculates that if you trade in an 18 mpg clunker for a 22 mpg new car (22 miles per gallon is the minimum mileage allowed for a new car under the program), it would take five and a half years of typical driving to offset the new car's carbon footprint. With trucks, it might take eight or nine years, he says. “

Just like many of the economic attacks to CFC, the environmental attacks ignore the second tier of the program. It goes without saying that in order to supply people with fuel-efficient car, someone will have to manufacture the car.

If under the example given by Chameides happens, the dealership has at the very least sold a car, stimulating the economy a little through loosening up credit slightly and by giving automakers some work.

Many of the calculations used for figuring out these numbers assume the car will only last for the time of the loan. Many car last beyond the five year loans, therefore having an effect on the environment and the economy well beyond the five year view of these calculations.

When deciding on whether or not the Cash For Clunkers program is a good or wasteful program, one must realize that it is a program meant to do two things. You can not attack one tier while ignoring the benefits of the other.

Also one should not act if CFC is the only program out to help with the environment and the economy. It is just one piece of the plan to survive the economic downfall with the least amount of scrapes and bruises, while reducing the negative effects we have on the environment.

To learn more about the qualifications for Cash For Clunkers click on this link http://www.allvoices.com/contributed-news/3894351-cash-for-clunkers-how-does-it-work

and to learn what the mpg of your car as well as others go here www.fueleconomy.gov.

For the article by Eric A. Morris click here Cash for the Climate - Freakonomics Blog - NYTimes.com