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Ow! My Head Hurts!

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November 02, 2009 – Comments (19)

Okay, my head doesn't really hurt, but I've known a few coffee drinkers (okay, these folks drink extreme armounts of the stuff) over the years who, when suffereing from caffeine depravation, will get a forehead-splitting headache.

If the analysis done by Edmunds.com is anywhere close to accurate, our economy must be suffering from a migraine at the moment.    

Last August I blogged about my concerns over the Cash for Clunkers program -- how I thought it was nothing more than an artificial stimulant which, at the moment, might make us feel a little better but that, down the road, would do little if anything to address the underlying economic problems.

Well, at $24K per additional car sold as a result of the program, will someone please pass the Tylenol?!

Oh sure, some additional cars were sold.  Sure, some of the most ineffecient and biggest polluting vehicles were taken of the road permanently (and that is a good thing), but at what cost?

But what else could we have done with that 3 Billion dollars?

Healtcare reform seems to be a hot topic lately.  According to this 2008 data, we could have given health insurance to about 237 thousand families for a year.

Or, according to this data we could have fed about 169 thousand families of four for a year.

The list, of course, could go on... and on... and on.

Maybe I do feel a headache coming on.

If you'll all kindly excuse me, I think I need to refill my coffee cup about now.

Regards,

Russell (a.k.a. TMFEldrehad)

19 Comments – Post Your Own

#1) On November 02, 2009 at 11:54 AM, blake303 (29.30) wrote:

The Edmunds numbers do not make sense to me. Why are non-incremental sales excluded? Just because a sale would have happened anyway does not mean that an inefficient car would have been taken off of the road permanently. Using the total number of cars sold the cost is $4,347/vehicle, which is in line with the rebate.

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#2) On November 02, 2009 at 12:18 PM, blake303 (29.30) wrote:

I saw this comment on Steven Levitt's blog on the same topic, which sums up the flawed logic in the Edmunds numbers nicely:

"I find this form of “accounting” annoying regardless of the politics. Say I take my two kids out to dinner - I buy them each a meal for 5 bucks each. One isn’t hungry. Does that mean I spent $10 bucks “each”? since one meal didn’t get eaten?" Report this comment
#3) On November 02, 2009 at 12:47 PM, TMFEldrehad (99.99) wrote:

It's Levitt's logic that's flawed.

Agree with the numbers or not, Edmund's logic is correct.  It cost $24K per each additional car sold as a result of the program.  In other words, in order to get the additional 125K cars sold, we had to spend $3Billion.  Alternatively, the government could have spent $0, and would have sold zero additional cars.  For each additional car sold that's $24K per piece.

In your restaurant analysis, it did, in fact, cost $10 per meal eaten.

Going back to the first comment:

Just because a sale would have happened anyway does not mean that an inefficient car would have been taken off of the road permanently.

True, but what Edmund's was trying to figure out was how much it cost for each additional car sold, not each additional 'clunker' taken off the road.  That's a different analysis (and frankly, if that were the government's goal it could have accomplished it much less expensively by simply buying the clunkers outright, at market value, and destroying them).

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#4) On November 02, 2009 at 12:57 PM, blake303 (29.30) wrote:

Edmunds has the flawed logic. Stimulating demand for car sales was not the only objective of the program. The other goal was to remove inefficient cars from the road permanently. Without C4C 565,000 inefficient cars would still be on the road, which Edmunds is completely ignoring. Since 690,000 inefficient cars were eliminated at a total cost of $3 Billion, the $24K number is utter nonsense. 

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#5) On November 02, 2009 at 12:58 PM, blake303 (29.30) wrote:

The 565,000 being cars that would have sold without the program, but not destroyed under C4C. 

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#6) On November 02, 2009 at 1:01 PM, TMFEldrehad (99.99) wrote:

That it cost $24K per each additional car sold as a result of the program:  true.

That there may have been other benefits of the program not included in the above analysis (like taking clunkers off the road):  also true.

They're not mutually exclusive (and I still say if taking clunkers off the road were one's goal, one could have done it a lot more effeciently).

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#7) On November 02, 2009 at 1:42 PM, blake303 (29.30) wrote:

I think it is irresponsible to misrepresent what the program's goals were. You are right - there were multiple goals and they are not mutually exclusive. But Edmunds is assuming that an incremental increase in sales was a singular, exclusive goal of the program. Focusing on a single short term goal (increasing sales) while ignoring long term goals (reduction of fuel consumption, improvements in air quality, etc.) is cherry picking. Edmunds is taking the total expenditure and applying it as if a boost in sales is the sole objective, but a portion of the total expenditure (and good luck quantifying it) was to get these inefficient vehicles off of the road. It doesn't seem like I am going to dissuade you at this point, but as I see it dividing the total expenditure by a fraction of the vehicles turned in is careless and deceptive. 

You may disagree, but I think this is nothing more than a publicity stunt by Edmunds. Piling on the Obama administration is popular and an easy way to make headlines. Some of the criticism aimed at the president is warranted. Although in this case I do not think it is, which is largely based upon the calculations I made in your first cash for clunkers post. What would you propose as a more efficient use of $3 billion that achieves BOTH goals? 

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#8) On November 02, 2009 at 1:44 PM, TMFDeej (99.29) wrote:

I'm one of the biggest bashers of government spending there is and I know that Uncle Sam is one huge, inefficient beast.  Having said this, consider the source of the information that you're citing.  Furthermore, as a taxpayer I was offended by the clunkers program (the part of me that works in the industry liked it though).

There is no doubt that the true per unit cost of the C for C program was more than the average base government credit, but trust me the Edmunds.com estimate is flawed (it's way too high).

Edmunds isn't exactly known in the industry for its fantastic analysis.  They like to squawk about how they have PhDs working there, which doesn't surprise me because anyone with familiarity with the industry and any common sense would look at some of the things that come out of Edmunds and say huh?

Look at the numbers logically.  Using Edmunds' light vehicle sales figures, which quite possibly are wrong knowing them, light vehicle sales jumped by nearly 540,000 in the two month period after the program was introduced.  Let's say that there was a 113,000 unit negative pull-ahead factor in the month after the program ended.  That leaves a sales increase of approximately 425,000 immediately after the program ended.  Even if one assumes that the industry was recovering prior to the introduction of the Clunkers program, and I believe that it was, and that sales would have improved, they would not have improved by nearly as much as 425,000 over that two month period.

Furthermore, the Edmunds.com numbers use their sales forecasts, which are most likely wrong, to conclude that sales in October, November, and December will be lower than they would have been had the Clunkers program not existed.  There was a month or two hangover from the program because dealer  inventory was depleated, however no one knows for certain what sales would have been like if the program did not exist.  Edmunds.com is making an assumption. 

One could just as easily assume that the Clunkers program generated consumer excitment and made people more interested in buying a new vehicle.  This sort of thing happens all the time when an innovative, major new incentive program is introduced.  For example, when General Motors introduced 0% financing for up to 5 years for the first time after September 11th, or when it introduced Employee Pricing for everyone the sales of the entire industry rose, including the sales of manufacturers who weren't running similar programs.  All of the talk about buying new vehicles in the news, commercials, etc... increased consumer awareness and got people thinking about buying a new vehicle who might not normally have done so.

Edmunds is using a hot political issue, making some weak assumptions, and using the headlines that it is generating from this statement for its own gain.

My $0.02.

Deej

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#9) On November 02, 2009 at 2:37 PM, jstegma (29.43) wrote:

I think one of the key issues in the cash for clunkers program that was overlooked was that poor people were denied the chance to buy the clunkers.  There was some real economic loss in compacting them.  You can argue that it was offset by economic gains elsewhere, but poor people were more directly affected by the loss of the clunkers that they could have purchased and driven.  It was a truly strange program when you think about it.

Could you do the same thing with trailers and new houses?  Trailers are eyesores and tend to breed trailer trash, so we'd benefit if there were less of them.  If you turn in a trailer and buy a new house, the govt will give you $30k and we'll burn the trailer to avoid having it used again.  (Being a fun-lovin' Republican who lives in a town with a lot of trailer parks, I'd add a provision that the new house has to be at least 100 miles from the site of the former trailer, but I digress, as I often do.)

The stimulus cost something like $250k to create a job.  How about if we just paid $250k to the family of any (counted in rate) unemployed person who commits suicide?  It would presumably reduce the unemployment rate. 

I think the government has gotten too cute for its own good with all this "stimulus" stuff.  If you want to hand out money, just decide the size of the pool, divide by 300 million, and mail out the checks. 

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#10) On November 02, 2009 at 4:49 PM, ETFsRule (99.94) wrote:

"I think one of the key issues in the cash for clunkers program that was overlooked was that poor people were denied the chance to buy the clunkers.  There was some real economic loss in compacting them.  You can argue that it was offset by economic gains elsewhere, but poor people were more directly affected by the loss of the clunkers that they could have purchased and driven.  It was a truly strange program when you think about it."

This is (sort of) a legitimate concern. But, I am pretty sure there are still enough clunkers out on the roads. For one thing, cars that get over 18 MPG were ineligble for the program:

"Generally, trade-in vehicles must get a weighted combined average rating of 18 or fewer MPG (some very large pickup trucks and cargo vans have different requirements)."

In addition, all of these cars were ineligible: http://en.wikipedia.org/wiki/Cash_for_clunkers#Last_minute_car_ineligibility

The rest of your post sort of degenerated into a bunch of bizarre nonsense, but I hope this helps to alleviate your concerns about a lack of cheap cars for poor people to buy.

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#11) On November 03, 2009 at 10:35 AM, AbstractMotion (53.87) wrote:

Yeah it amazes me that we're so eager to rip up old cars due to inefficiency.  It's very very hard to break even on the amount of energy and emissions that are actually involved in producing a new vehicle.  One could argue that the cars were made anyways, but production would have lowered to accommodate excess inventory ultimately.  Plus the costs and waste that goes into disposing of a vehicle.  It did pretty well for a government program, compared to what we're effectively paying with the housing tax credit and all.  You have to ask yourself how any of this is going to help the economy as a whole down the line too.  

 

I realize that the size of many of these programs is dwarfed by the ridiculous sums of money extended to the banks, but I don't think it's too far fetched to say the money could have been spent much better on large infrastructure projects that would ultimately boost productivity and commerce (high speed rail for one).  Or from the energy independence angle to incentive the replacement of old heating oil systems and so forth.  I'd honestly even feel better about giving out low interest loans to solar or wind developers.  The biggest problem with a lot of these programs is that they're essentially mini bailouts in disguise meant to spur excess consumption that really offer very little in terms of a return on investment down the line.  There seems to be this mentality that any spending is good spending as long as it employs a few people for the length of a project.  While I don't agree with all of FDR's views, the projects he spent on ultimately had a large and lasting impact and could be considered investments.  Government as a whole needs start planning before they spend, and that goes for wars, bailouts, and stimulus.

 

 

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#12) On November 04, 2009 at 1:01 PM, ETFsRule (99.94) wrote:

AbstractMotion: The average new car purchased had 61% better fuel economy than the average trade-in. That's significant, and will save us a lot of money.

People point out how expensive it is to junk these cars. That's true. Due to the recycling expenses and everything else, the overall cost of performing each trade-in has been estimated at $2000/car.

However, wouldn't these cars have eventually been junked anyway?? Yes, we are junking them earlier due to the C4C program. But, just because it costs $2000/car to trade them in, that doesn't mean that C4C generated an additional net cost of $2000/car. Most of that money would've been spent within a couple of years anyway, when the cars finally went to "car heaven". All we did was move up the expense. So, I believe the net cost per car is much lower than what many people are estimating.

Next, consider the fact that most cars depreciate by about 35% in their first year. Assuming the average value of these new cars was about $16,000... that represents a savings of $5600 for every car purchased under the program, which otherwise would not have been purchased within the next year.

It's impossible to know exactly how many cars this accounts for, but it's probably a fairly significant number of cars, when you consider the the state of the economy and auto inventory levels. This savings probably pays for the entire program by itself.

Now, obviously you can argue that all these new cars should not have been made... and I would tend to agree with you. But that's not the point. They were made... so we may as well drive them. You argued that production levels could be altered to eventually lower the inventory levels. That's true, but that would put a lot of additional strain on the auto companies, and it would still take time for inventory levels to drop. It would not happen fast enough to prevent these vehicles from depreciating in value.

Next, you have the fact that lives will be saved due to the superior safety features of the new cars purchased. I have no idea how many lives, but it's undeniable that some number of lives will be saved due to this factor.

Lastly, you have the savings due to repair costs that will be prevented. If you're ever owned a car with over 100,000 miles on it, you know how expensive the repairs can be. I wouldn't be surprised if many of these drivers would have had to pay over $1000 in repairs - which in many cases could be higher than the value of the vehicle itself!

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#13) On November 04, 2009 at 5:22 PM, jstegma (29.43) wrote:

Yeah, exactly - think of the repair costs that were prevented.  Since when are mechanics not a valid group of employed people?  To them those are repair revenues.  Wave bye-bye!  We just took the money and transferred it from the mechanics to the automakers.  Then we handed that money to the new car buyers from the taxpayers. Wave bye-bye again!

I'm of the opinion that Americans go through cars way too fast.  They stay good for a very long time if you take reasonable care of them.  So this program was just the government discouraging frugality and subsidizing consumption.

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#14) On November 04, 2009 at 5:48 PM, KKnese (< 20) wrote:

Cash for Clunkers was healtcare reform on the cheap.  Why you ask?  Because cars emit carbon monoxide and other components of smog.  Smog triggers asthma.  Less pollution causes fewer asthma attacks, which causes less use of rescue inhalers (drugs) and fewer visits to the emergency room (healthcare spending).  Add the people with emphysema, the ones with COPD, the birth defects caused by the mother's inhalation of smog and you get the idea.

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#15) On November 04, 2009 at 11:57 PM, AbstractMotion (53.87) wrote:

ETFsRule:  You're looking at this from a purely monetary perspective which wasn't exactly what I was arguing.  My point is that if you look at this from a resources and emissions perspective we ultimately expended a lot more energy and resources then if these cars had just been driven a few more years.  True that some money is involved in that transaction, but that wasn't the primary focus of my arguments about disposal vs production 'costs'.  I'm not really arguing that this wasn't by all means a great deal for anyone who bought a car under the program (I don't think this was ever being debated).  

 

The depreciation argument is basically a bailout one as well as it benefits the dealers and auto industry as a whole, it also depends very heavily on the incremental effect of the C4C program.  If you use the numbers from edmunds and your own depreciation/value statistics then we saved around 1.3 billion for the auto industry using a 3 billion dollar investment.  I also think that 35% is a number for a car that's actually been driven, new cars that really haven't left the lot shouldn't depreciate that rapidly over the course of a year (a lot is lost from them just leaving the lot).  There's still going to be some depreciation regardless, perhaps higher amounts for used cars that were not bought in favor of new cars, etc.  This article covers that aspect a bit, as well as the price impact of the C4C program.  

 

It's too hard to value the life part of it, who's to say a similar number of accidents or deaths would not have been prevented by people using a light rail line funded by that $3 billion.   Maybe an ambulance or two would have gotten to a heart attack victim sooner, or a car jacking attempt gone wrong been avoided, etc.  I'm not trying to downplay the importance of it, but it's likely other options could provide similar benefits.

 

I think it's hard to argue that we simply couldn't have made a better investment with this money that would be paying off for years and years to come with better net benefits.  I mean I'm sure there's a lot of ways in which this program could have been worse, but I really don't think that should be criteria for declaring a program a great investment.

 

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#16) On November 05, 2009 at 12:50 PM, ETFsRule (99.94) wrote:

"I think it's hard to argue that we simply couldn't have made a better investment with this money that would be paying off for years and years to come with better net benefits.  I mean I'm sure there's a lot of ways in which this program could have been worse, but I really don't think that should be criteria for declaring a program a great investment."

Sorry, but I do disagree with that. It was a good investment, whether you look at it financially, socially, or any other way.

You can't really compare it to light rail, because we aren't forced to choose between C4C or light rail. We're doing both. The stimulus bill contains spending for light rail, and throwing another $3 billion at it probably wouldn't have gotten the job done any faster - the limiting factor is time.

And obviously Obama plans to spend money on green energy, infrastructure, and plenty of other programs. We aren't choosing between one thing or the other... the question is whether or not it was a good investment to supplement those long-term projects with a short-term program like C4C. And I believe it was a good investment, for the reasons I mentioned earlier.

"My point is that if you look at this from a resources and emissions perspective we ultimately expended a lot more energy and resources then if these cars had just been driven a few more years."

I disagree with this. What energy and resources are we spending on C4C? Do you mean the energy used to junk the cars and recycle their parts? Because that money still would have been spent anyway, it just would have been done a year or two from now. It seems to me that the net cost in time and energy from C4C is very small - and most of the cost estimates that I've seen, including the Edmonds report, have some very serious flaws in their reasoning.

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#17) On November 05, 2009 at 1:02 PM, ETFsRule (99.94) wrote:

jstegma: Sure, people could spend $500 to fix a vehicle that's barely worth $1000. But the following year when another problem comes up, it's going to cost them another $500. Not exactly an efficient usage of our time and money if you ask me... especially since C4C will save us a yearly average of roughly $700 per car on gasoline (assuming gas stays at $2.50 per gallon... which it probably won't).

It's a shame that the repair shops will lose revenue... but we may as well just pay them to dig holes and fill them in again. That's about as worthwhile as fixing the same old cars over and over again.

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#18) On November 05, 2009 at 2:06 PM, jstegma (29.43) wrote:

ETFsRule - My guess is that continuing to drive the same cars year after year is probably "greener" than upgrading to the most efficient state-of-the-art models every few years.  Using what you have instead of constantly buying newer and better is about as green as you are gonna get.

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#19) On November 05, 2009 at 10:30 PM, AbstractMotion (53.87) wrote:

ETFsRule:   I'm glad you're such a fan of the program.  Personally I think the money could have been spent better, but you're entitled to your opinion.   


It takes a certain amount of resources to make a new car, plain and simple.  If you artificially stimulate demand you'll be using more of them.  Or causing more to built in the future then would have had inventory cycled down at a slower rate.  People seem to be implying there was some impending immediate need for these cars to be taken off the road.  The basic criteria for exchange did not necessitate cars on their last leg or high in mileage.  Many of these cars could have and likely would have been driven for longer if it weren't mandated that they were scrapped.  Ultimately this is going to lead to additional cars being built to fill in for demand with less used cars circulating around as well.  There are likely hundreds or thousands of cars that will be flat out destroyed instead of circulating around the market for a few more years, something will have to displace that.

 

You seem to be implying that we're spending enough on infrastructure and energy to have somehow saturated the market to the point where we just couldn't invest anymore.  Sorry, but I'll definitely have to disagree there.   The President himself has stated he's planning for the long term and there's really no reason that money could not be spent on a rail line or a few solar plants in the southwest if they wanted to.  Likewise spending isn't unlimited, any money spent could have likely gone somewhere else.  The President or congress might want to spend a ton of money, I don't think it's uncommon for that happen in this country.  However it might not be politically practical to in the future and we're really already facing a growing debt problem at the national level.  Ultimately money needs to be prioritized and spent wisely for these very reasons.

 

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