12 August 2009

Environmentalism: Cash for Clunkers

The Objectivist
Cash for Clunkers: Kindergarten Legislators
Dunkirk-Fredonia Observer
August 10, 2009

The Cash for Clunkers program (Car Allowance Rebate System) is incredibly stupid. It is economically inefficient and an incredibly wasteful way to help the environment, if it helps it at all. The program speaks volumes that our President and Congress would spit out such a childlike program.

The Cash for Clunkers program initially set aside $1 billion for U.S. residents to trade in less fuel efficient vehicles for new, more fuel efficient ones. Congress and President Obama then later spent another $2 billion to keep the program going. Purchasers were given either $3,500 or $4,500 depending on the trade-in. The program was designed to stimulate the economy by boosting auto production and sales and help the environment by replacing gas-guzzlers. After the first week of the program, the Department of Transportation asserted that 250,000 vehicles were sold under this program in less than a week. In addition, the clunkers were less fuel efficient (average 15.8 miles per gallon) compared with the newly purchased vehicles (average 25.4 mpg), thereby producing a 61% increase in fuel efficiency. Oddly, the car experts at Edmunds.com noted that a Ford SUV was the most widely purchased new vehicle.

Consider the economic effects. First, Edmunds.com points out that in any given month 60,000-70,000 clunker-like-deals happen without any government program in place. Because the program was to last for 4 months (July 1st to November 1st), 240,000 such trade-ins would have occurred anyway. The superfluous nature of this program can be seen in that, as Edmunds.com reported, 100,000 buyers put their purchases on hold waiting for the program to begin. Using a low-end estimate that 150,000 such trade-ins would have occurred anyway, and this surely underestimates the number, the government spent $1 billion to cause an additional 100,000 cars to be traded in. That is, the government spent $10,000 per additional car sale. It could have used to this same amount of money to give Kias to 90-100,000 people. Clearly, this would have better for the American people.

Second, the program required that dealers destroy the power train components (engine and parts by which power is sent to the axles). This is unbelievably wasteful. Consider the following variant on an example from 19th Century economist Frederic Bastiat and more recently from the Cato Institute’s Richard Rahn and journalist Adam Maji. Town thugs decide they want to promote economic growth by creating business for people in the window business. They smash other people’s windows, thereby creating more business for window-makers and –installers. This diverts money from where it would otherwise have been spent (for example, new houses and clothes) to windows. This makes the people poorer because it diverts money from more preferred to less preferred goods. Nothing in this example changes if the thugs use government money to pay people to smash their own windows. The destruction of cars with significant economic value makes us poorer just as would the destruction of windows.

Third, the program is a money loser. The average American car travels 12,000 miles per year. The increase in fuel efficiency means that because of the trade-in the owner will buy 287 less gallons of gas per year, thereby saving him $861 per year (287 gallons x $3 per gallon). Even if the program on average gets owners to trade in their car two years early, the government will be spending at least $3,500 to save roughly $1,700. This is idiotic.

Consider next the effects on the environment. Assume that there is a problem with global warming from CO2 emissions.

First, the 61% increase in fuel efficiency does not mean that we will burn that much less gas. This will occur only if drivers with more efficient cars won’t drive more. However, Declan McCullagh from CBSNews.com and others argue that with more efficient cars people drive more. This also is in line with common sense. You’re less likely to drive to see a friend in another state if you are driving a large gas-guzzling truck than if you are driving a Prius. If this is correct, then the trade-ins will produce less saving in gas than the mpg difference suggests.

Second, it takes a significant amount of energy to build a new car. It takes an average of 6.7 tons of CO2 to build a new car. Assuming you save around 2.8 tons of CO2 per year by burning less fuel (287 gallons x 19.4 lbs. CO2/gallon). Hence, if on average the program only gets people to trade in their car two years early, the program actually increases CO2 and is thus bad for the environment.

The government disagrees and estimates the program will save 365,000 metric tons of CO2. Even if this is correct, and I doubt it, this is a tiny sum. It is .05% of how much China increases its CO2 emissions each year. It is .006% of the total U.S. CO2 output. That is, it is a drop in an ocean of emissions.

Third, even if the program does save CO2, the estimate by Nina Rastogi of www.slate.com is that it will cost the government$175.53 per ton of CO2. This is incredibly wasteful in that a ton of CO2 currently sells for $17.50 on the European Climate Exchange. Note Rastogi is using data from William Chameides, dean of Duke University’s Nicholas School for the Environment.

Why would Congress and the President adopt a program which is bad for the economy and probably bad for the environment? One reason is that the program is very popular. How could it not be? If a program gave me $4,500 of other people’s money to do what I was going to do anyway, I would like that program too. A cash-for-furniture program and cash-for-clothes program would be popular for the same reason. A second reason these guys adopted the program is that the government is promoting its own business and that of a benefactor, the United Auto Workers. The government owns 61% of GM and the UAW owns 18% of it and the latter also owns 55% of Chrysler. They are helping themselves out using taxpayer-funded inducements. A third reason is that with the government now borrowing $1 out of every $2 that it spends ($1.8 trillion out of $3.9 trillion), all spending discipline has been lost. When the bill comes due, the current Congressional delegation will be long gone.

The Cash-for-Clunkers program provides clear evidence that the President and Congress have a childlike view of the world.


The Objectivist said...

This program will cause used car prices to increase. If so, then it raises prices for the poor and lower middle class. Like the minimum wage, the left is likely harming the poorest Americans in order to benefit their unions, environmental groups, and other groups that have more political weight.

The Objectivist said...

One wonders whether this will even increase car efficiency over the long run. Given gains in fuel efficiency and gradually dropping prices for hybrids and other such cars, I wonder if a more gradual replacement of clunkers with more efficient cars would save more fuel. This is in part because we can expect increasing efficiency over time and because if gas prices spike up there will be more incentive to buy more efficient cars.