24 October 2009

"Cash for Clunkers" -- Clunk or Slam Dunk?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Sungmin Song says:

I am writing a blog post about the government funded “Cash For Clunkers” Program. For a little bit of background information: The government created this program to encourage US consumers to trade in their old “clunkers” (defined as vehicles that receive less than 18mpg in total) and in return they receive a subsidy of $3,500 - $4,500 towards the purchase of a newer, cleaner and more fuel efficient vehicle that receives at least 24 mpg or more. Another caveat to add to this is that the stated 18mpg total fuel rating is the vehicle’s off the lot fuel rating (Even if that was 10-15 years ago).

I believe there were three intrinsic motivations behind this program, one being to remove gas guzzling ozone destroying machines off the road and the second being to encourage the American people to spend money, and lastly for consumers to bail out our failing auto industry (i.e. GM, Chrysler and Ford). The program is nearing an end considering that the $3 billion or so the government set aside for the program has nearly been depleted. The final numbers reported include: approximately 690,114 requests submitted by dealers, $2.87 billion in subsidy money (pending) there as you can see, the supply has been met with plenty of demand.

To do some analysis, allow me to refute some of the assumed original intrinsic motivations of the government as well as some other issues included.
  1. Assuming that half of the consumers used the $4,500 subsidy as a down payment towards the purchase of say a cheaper $15,000 car (hopefully), this means that they will essentially be $10,000 in debt. Say a fourth of the consumers spent the $4,500 subsidy towards a nicer $25,000 car which means about $20,500 in debt. And say the final fourth used the $4,500 subsidy towards the purchase of a much nicer $35,000 car. If we multiply the amount of debt accumulated (assuming everyone used the $4,500 as a down payment, because we’re in a time where we do not have any cash lying around) this is what we’ll come out with:

    345,057 (690,114 consumers/2) x $10,000 (debt) = -$3,450,570,000
    172,528 (690,114 consumers/4) x $20,500 (debt) = -$3,536,834,250
    172,528 (690,114 consumers/4) x $30,500 (debt) = -5,262,119,250

    Approximate Total: -$12.248 Billion in debt

    I don’t want to look at the negative side of things because it is supposed to be an excellent program but think about what got us here in the first place, sub-prime debt to people who can’t pay them off. Can this be a microcosm of what brought us into this mess in the first place?

  2. The other intrinsic motivation was to have consumers to help out our ailing auto-industry (particularly GM and Chrysler). However, according to the final report that came out the top 5 vehicles that were purchased are the following:
    1. Toyota Corolla
    2. Honda Civic
    3. Toyota Camry
    4. Ford Focus FWD
    5. Hyundai Elantra
    And for space sake, 4 of the final 5 cars on the original top 10 list are not US-auto industry cars but cars that perhaps were manufactured in the United States but foreign cars where the revenue goes straight back to its own country origin.
Bottom Line: The “Cash for Clunkers” plan sounded great in words but in practice it may not prove to be as promising and potentially damaging to a good portion of the 690,114 Americans who participated in the program. (Hopefully these people aren’t the same ones that defaulted on their sub-prime mortgages!) I do really wish that this program does encourage people to take out their wallets and spend more (if they can afford it), because we do need a whole lot more spending from our fellow Americans.

5 comments:

sarah lee said...

your website failed me twice in trying to post a comment to your students article.

David Zetland said...

@Sarah -- but not that comment? Weird. Sorry. (Blame blogger/google -- not my site :) Please email it to me if you want me to try...

JWT said...

This was a monumentally stupid idea, period. All it did was to move sales forward one month. Check out September and October sales for yourself. Any half ass idiot should have known that would happen. On more than one occasion, I met my numbers for the quarter by having a one free with one, or a dollar off a case, etc., sale the first two weeks of the third month of the quarter. It worked everytime.

The one and only purpose for Cash with Clunkers was to clear out dealer's lots. I suspect that the real reason for the Cash for Clunkers was to take some of the political pain out of all the GM and Chrysler dealers who got shut down.

Sungmin, if you are going to play this game, you are going to have to get a lot more cynical!

Cars4Charities said...

Cash for clunkers was a complete failure. It didn't help the auto industry. It only destroyed some 700,000 cars that ran. Now used car prices are up and revenue for car repair shops and charities that rely in the income from car donation is down.

JWT said...

All of those cars, except the Prius, were made in the U.S. The REVENUES from the Japanese manufacturers stayed in the U.S. to pay wages, health benefits, taxes, utilities, pay suppliers, etc. Only PROFITS (if there were any) were repatriated. A big difference!