Friday, August 07, 2009

Cash for Clunkers Donkey Math

Well congress thinks they finally have a winner with the “cash for clunkers” program, and are looking to extend it for another 2 billion tax payer dollars. Let’s just take a peak at the donkey math and see if this makes any sense to the taxpayers that are paying for the program. First off, not all of the 1 billion (soon to be 3 billion) will be distributed as rebates. The government has to administrate the program, and that costs money. Out of the first billion spent the costs averaged $6000 per rebate. As with all government programs, they get to skim some off the top for themselves. Next, we do not actually have the money to pay for the program, so we will need to borrow it. So we will need to pay back the 6k per car with interest. So let’s try to calculate the amount of interest we will end up paying by the time it is paid back. Interest rates are pretty low right now, but there is also no plan to pay off the deficit anytime soon. Obama’s budget plans for 1 trillion dollar deficits for the next ten years. We can’t start paying off the 3 billion for cash for clunkers until all of the subsequent borrowing after the program is paid back with interest. Since we know that we will be borrowing at least an additional 10 trillion over the next ten years, and we will have to pay that back first with interest, I think you can see that it is going to be at least another 30 years or more before we start to pay off the 3 billion. Even worse is that we are borrowing most of the money in short term T-bills that will need to be continually rolled over at market rates over the 30+ years. So it is basically just like putting the program on a maxed out credit card with a risky adjustable rate, and no plan to pay it back. Under these assumptions, we will pay somewhere around $12,000 in interest in addition to the $6,000 in principle for a total taxpayer expense of $18,000 per $4500 clunker rebate. Genius!

Well it even gets worse from here. People will argue that we are saving the earth by getting the bad gas mileage cars off the streets and getting people into better mileage cars. That’s the whole point, right? That’s some pretty simplistic thinking. The program is actually worse for the environment than no program at all would be. Lets me explain. It costs energy to make a car. Lots of energy. You have to melt and form all that steel. You have to make and ship all of the parts. You have to assemble it by moving large items around the assembly floor. You have to ship the car from the assembly line to the dealership. Making a car is an energy intensive activity. If we are going to take a car that is still running, and may have 2 to 4 more years left, and throw it in the trash for a better mileage new car, then the energy cost to make a new car needs to be low, or you don’t actually save any energy. With the energy cost of a new car being so high, saving 4 to 10 miles per gallon over the 2 to 4 years the clunker would have continued to run, simply does not pay for the extra energy required to build a car that was not needed yet.

So in summary, the cash for clunkers plan costs $18,000 per car to taxpayers over a 30+ year payment schedule, and actually increases United States energy consumption, even with a 4 to 10 MPG improvement per car.

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