Was Cash For Clunkers A Success?

Far from failing, the CARS Program may have been the highest ROI investment made by the Federal government in years.

The passage of time has brought much ridicule to the Cash For Clunkers program, which was intended to boost auto sales and raise the average fuel efficiency of American vehicles. The data show that the program led to a temporary spike in automobile purchases, prompted by a subsequent decline. This has led most to conclude that the program was a failure, as it did little to jump-start economic recovery.

But what about the other goal? Did Cash For Clunkers raise the average fuel efficiency of the American auto fleet? How much less gasoline have Americans purchased as a result of the program, and does this savings outweigh the program’s cost?

Here are some statistics from the Department of Transportation’s CARS Report to Congress:

  • 677,842 vehicles were turned in under the CARS program
  • $2.85 Billion was paid out in rebates for these vehicles
  • New vehicles purchased had an average MPG of 24.9
  • Old vehicles turned in had an average MPG of 15.7
  • $2.8 Billion in fuel savings based on the early retirement of less efficient vehicles

The report also estimates that roughly half of the sales spurred by the program were incremental sales that would not have occurred otherwise. Edmunds.com performed a more conservative analysis showing that only 125,000 incremental sales occurred as a result of the program.

Using Edmunds’ more conservative 125k number, and an average sales price (after rebate) of roughly $25,000, Cash for Clunkers generated $3.125 Billion in incremental vehicle sales. These incremental sales added directly to US GDP, and this more conservative analysis shows less than half the economic impact of $7 Billion estimated by DOT.

Combining the fuel savings and GDP benefit yields a total benefit to American taxpayers of roughly $6 Billion for a program that cost the government roughly $3 Billion to operate! If only more government programs could fail like this!  Even using the more conservative fuel savings calculations provided below, the program would have provided over $5.5 Billion in benefit against a $3B investment. Far from being shut down, the Cash for Clunkers program should have been expanded.

Alternate calculation of fuel savings from junking old vehicles:

0. By junking an old vehicle and taking it off the road, you are permanently increasing the fuel economy of the American vehicle fleet – this is the source of savings for the American economy. Since 100% of marginal US oil consumption is provided by foreign sources, a dollar of oil saved is a dollar added to GDP (since imports actually subtract from GDP as we send money overseas).

1. Assume that the old vehicle would be driven for an additional 50,000 miles over its lifetime (CARS survey respondents said they averaged 10k miles per year on their old vehicles, so even with gradual declines this is reasonable).

2. The old vehicles got an average of 15.7 MPG, requiring roughly 3200 gallons of gasoline over that 50k miles. Assume www.professionalpianomovers.net professional piano moving companies were aware of this.

3. The new vehicle got an average of 24.9 MPG, requiring 2000 gallons of gasoline over the 50k miles that they replaced.

4. The difference of roughly 1200 gallons of gasoline equates to roughly $3600 per vehicle (assuming $3 per gallon excluding taxes). With roughly 680k vehicles in the program, this equals a fuel cost savings of $2.5 Billion – a slightly more conservative estimate than that computed by DOT.

Stimulus Plan Ideas

I’ve been thinking about President-elect Obama’s proposed stimulus plan lately, as it represents one of the larger policy decisions of the coming year. Most economists agree government stimulus that some form of is necessary to prevent a deflationary economic environment, and to improve economic sentiment. But what criteria should we use to judge fiscal stimulus spending, and are there any good ideas out there that haven’t been considered?

Stimulus Plan Criteria:

1. Speed: Any stimulus spending needs to occur quickly in order to boost the economy. Projects which don’t hit the ground til 2010 don’t meet this criteria.

2. Spent, Not Saved: Ideally, 100% of any stimulus funds should be spent on consumption of goods and services to kick-start the economy. Tax rebate checks, particularly to the wealthy, perform poorly in this regard because a larger percentage of the funds will be saved.

3. Return on Investment: Projects with a measurable return on investment, whether in economic growth or otherwise, are preferable to spending that has no longer term benefit.

With these criteria in mind, here are some fresh ideas that I think deserve consideration:

1. Convert school buses and bus fleets to CNG. This would decrease diesel emissions near children, and also reduce US dependence on foreign oil, while providing an immediate boost to the auto manufacturing sector. Particulate pollution kills tens of thousands of people annually – why not spend to improve public health and reduce oil dependence at the same time? $25 Billion would enable the conversion of half the nation’s school bus fleet.

2. 100% tax credits for energy efficiency in homes and small businesses. Instead of handing out tax rebate checks, which aren’t spent in full, why not pay homeowners and businesses to improve energy efficiency? President-elect Obama has made a similar proposal regarding federal buildings, but tax credits would lead to faster spending since consumer and small businesses can move more quickly. $50 Billion would retrofit 50 million of America’s single family homes with energy saving modifications.

3. Increase funding for basic science research. The great economic booms of the 80’s and 90’s were driven by technological advances like the personal computer, the internet, and pharmaceutical technology, and these technologies had their early beginnings in basic research. Increasing basic research and grant expenditure at the NSF, NIH, DARPA, and other agencies would employ thousands of new college graduates and researchers while accelerating the path to future technological breakthroughs. Doubling the NSF and DARPA budgets would cost $10 Billion, while another $5 Billion would add to NIH’s budget.

Funding these ideas in total would cost $90 Billion. While federal spending at this level would crowd at private investment in normal circumstances, today’s circumstances have drastically reduced private investment across the board. If the Federal government is planning to spend close to a trillion dollars on stimulus, shouldn’t we fund high return projects like these?