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Did Cash for Clunkers cash-in or clunk-out?
Did the program have any measureable environmental or economic effect? The 3Q 2009 GDP growth rate was 2.8 percent, the National trade deficit shrank in October, oil prices are fairly stable, home sales are increasing, and consumer confidence is rising. Conservatives will have you believe this is happening in spite of any governmental stimulus. The current administration, obviously, purports the stimulus is working. Three months after it ended, does Cash for Clunkers (CARS) deserve any credit?
Participation in CARS totaled 677,081 vehicles sold in one month, or approximately 0.29 percent of the national fleet of passenger vehicles according to the Federal Highway Administration. The government outlay of cash reached $2.85 billion dollars, or an average of around $4,200 per participant. Mission accomplished? The program was “wildly successful” according to the website cars.gov.
Additionally, according to the official September release from the President’s Council of Economic Advisors, “Goldman Sachs estimates that CARS will add 0.8 percentage points to GDP growth at an annual rate in the third quarter of 2009.” Detractors from Macroeconomic Advisers argue that “almost all the sales under this program just moved forward transactions that would otherwise have taken place over the next several months.” Obviously, a payback period from pulling sales forward exists, but something happened.
A tangible figure is needed to quantify the effect of CARS. There has to be some aspect we can measure, a figure that can’t be argued arbitrarily or muddled with abstract concepts. For simplicity sake, ignore the many possible secondary benefits, including the boost to factory jobs, the influx of cash to dealers and workers, the additional income provided to financiers from new car loans, the reduced emissions from cleaner burning cars, etc.
Look no further than the MPG rating of the bran-spanking new fleet of 677,081 cars and trucks out there burning gas as they chew up the road. The widely accepted fuel economy improvement is 9.2 MPG, or an increase from 15.8 to 24.9 MPG. That seems pretty significant, but what effect does it have?
Assuming the average vehicle in this program is driven 13,500 miles per year (a compromise between 12,000 and 15,000 mile figures that are out there), the gallons of gasoline burned by one vehicle will decrease from 854 gallons per year to 542, or 312 fewer gallons of gas consumed per year, or a 36 percent drop. At $2.60 per gallon, that translates to savings of $812 per year, or $68 per month. Easily then, at a microeconomic level, purchasers of new cars under the program will decrease their cost of fuel, as well as significantly decrease the cost of upkeep and repairs, leaving cash to burn at the store and jumpstart the economy, right?
Well, the answer is probably not. A huge portion of the clunkers traded-in were worth little money and most participants owned the clunkers outright or had very small monthly payments. The net effect is certainly negative considering a new car monthly payment is higher than $67 per month. Thus, the program actually decreased discretionary spending for the participants. Retail spending is a popular indicator for economic health, implying that the program actually hurt the economy in a micro-economic sense.
However, there are certainly macroeconomic effects to look at before we write off CARS as a stimulus disaster. First, let’s explore how macroeconomic factors weigh in. General theory necessitates a significant shock to the national or world economy to impart any change on a macro-level. For example monetary policy changes (inflation), significant inventions to increase productivity (the assembly line or internet), and even wars take years, if not decades, to fully resolve. Changes filter slowly through the extremely complex global financial and trade system.
The Credit Crunch in July 2007 comes to mind as the largest economic shock in recent history. Two and a half years after the credit markets seized up, we’re still recovering. The main cause of the crisis is convoluted and the scapegoats myriad. An enormous portion of the blame falls squarely on the housing market bubble. The bubble, created with the help of many hands, peaked in roughly 2006, and it took another year of rising interest rates, falling prices, failed speculation, and risk-ignorant investment to crunch the system, fully burst the bubble and bring the whole economy screeching to a halt.
Understanding that significant macroeconomic change takes years, if not decades to develop, is there any chance that CARS has had any tangible affect yet? One could actually make a case that it has and will. Returning to the tangible figure of the increased fuel economy of the CARS fleet, our easiest measurable tells us that each car is saving 9.8 MPG, driving 13,500 miles per year, and saving 312 gallons of gas per year, for a total of 211.4 million gallons of gasoline saved per year (312.26 gallons x 677,081 cars). That’s, like, a lot, right? At $2.60 a gallon, that’s $549.7 million dollars per year spent other places than the gas pump. Over half a billion dollars seems significant. To get true context, though, it is necessary to explore the effect on oil companies and producers.
The average barrel of crude oil produces 19.5 gallons of gasoline (along with several other byproducts). For simplicity’s sake, we’ll ignore the byproducts and make the effective total number of barrels decrease by 10.84 million per year (211.4 million gallons/ 19.5 gallons per barrel = 10.84 million barrels). Approximately 65 percent of crude oil consumed in the United States is imported, according to the U.S. Department of Energy. Assuming $70.00 a barrel, this translates to a decrease of 7.05 million imported barrels and a cost savings of almost $500 million. So, a half-billion dollars again, that’s, like, a lot, right?
Considering the United States imports approximately 5.227 BILLION barrels of crude oil per year at a cost of $369.4 billion, the reduction of imported crude oil attributed to CARS translates to roughly 0.21 percent. Wrap your head around that.
Looking at both sides of the argument, the program presumably reduced the amount of discretionary cash for participants and the impact of increased fuel economy is a blip on the screen in reducing crude imports by 0.21 percent. So, did CARS work? If it is going to take almost a decade for the housing market to recover, and years for vehicle demand to recover from the CARS program, why not just leave it alone? The government is leaking incentive money all over the place on top of a $1.4 trillion deficit. The intent is to shock to the national and world economic system; trying to jump-start a macro-disaster-recovery-plan at a microeconomic level. Spending $2.85 billion to get a 0.21 percent reduction in annual crude oil imports seems to be out of whack. The 0.21 percent is a ridiculously small number, but it is something. And that doesn’t take into account the countless other positive impacts listed above.
The crude imports decrease is a tiny, but tangible, effect. The government has essentially flapped its butterfly wings over the auto industry trying to pump some cash into the economy and “create jobs” as this administration likes to say. Ultimately, we won’t know the outcome for years, but in terms of decreasing oil dependence and fixing the economy, CARS seems to be a small step in the right direction.
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