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Speaking of Bad Assumptions....

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November 05, 2009 – Comments (17)

A recent blog post of mine drew some fire for leaning on data from Edmunds.com - critcism which stated that Edmunds' assumptions were simply unreasonable.  You know what?  Fair enough.  I don't know enough about the industry to say one way or another and am certainly willing to admit that there's a possiblility that Edmunds' figures were off by good margin. 

Apparently, however, there are more than enough bad assumptions to go around for everyone.

A couple of my recent blog posts which were critical of the Cash for Clunkers program have draw a little bit of fire from Fools who argue that the fuel savings alone justify the $3 Billion pricetag for the program.

Without picking on anyone in particular (as I've seen this kind of logic presented a couple of times), the argument goes something like this:

Average mpg differential between new car and clunker:  24.9 vs. 15.8

Average cost for a gallon of fuel:  $2.50

Average lifespan of a car:  150K miles.

Cars traded-in during program:  About 750K

Therefore one can calculate the fuel savings as follows:

Gallons used by a new car:  150K miles / 24.9 mpg = 6,024 gallons

Gallons used by a clunker:  150K miles / 15.8 mpg = 9,494 gallons

Difference in gallons:  9,494 - 6,024 = 3,470

Dollars of fuel saved = 3,470 gallons / car x 750k cars x $2.50 / gallon = $6.5 Billion

Well worth the $3 Billion pricetag, no?

 

Um...  well... no.  Not by a longshot!

 

There are two problems with the above approach I can think of right off the bat, one far worse than the other one, but let's address the lesser problem first.

First, the $3 Billon was spent today whereas the $6.5 Billion would be saved over the lifetime of the vehicles.  One would need to discount the $6.5 Billion spent over time at some discount rate to get the equivalent in today's dollars in order to have a valid comparison.

But that's not the real problem.

The real problem is the 150K miles assumption.  The above math assumes that not only would the new car be driven for 150K miles, so would the clunker!  That, I believe, is an assumption far worse than any made by our friends at Edmunds.

In fact, the U.S. Department of Transportation reports that the average life span of a vehicle is just over 13 years, with a final mileage of 145,000 miles. (link)

Furthermore, according to Hyundai, The average age of a trade-in model was nearly 14 years old; the average odometer reading was more than 140,000 miles. (link)

So, if we assume Hyundai's experience was similar to the industry as a whole, the average remaining lifespan for a clunker traded in wasn't 150K miles, but only 5K miles.

Using the same calculation as above but instead using 5K miles as the amount of miles over which the fuel savings are realized leads to a savings not of $6.5 Billion, but of only $217 Million.

Now, one, I suppose, could argue with some of the assumptions presented here too.  Fair enough.  Feel free to substitute your own if you wish.  In no case, however, is the fuel savings in the billions of dollars nor does it even remotely come close to approaching the amount of money spent on the program.

It just simply doesn't add-up.

Regards,

Russell (a.k.a. TMFEldrehad)

 

17 Comments – Post Your Own

#1) On November 05, 2009 at 10:38 AM, TMFDeej (99.46) wrote:

Hi Russell.  I don't disagree with the AP's findings.  Dealers have told me that lots of people traded in trucks for trucks.  Despite the government's hiding behind an environmental veil, it really was nothing more than a way to jump start auto sales so to speak.  And that's exactly what the bill accomplished.

The mere fact that you are mentioning Edmunds.com in your blog for the first time ever is all the proof that I need that their plan of using a hot political issue to generate free publicity for itself is working.  The company is a media hound.  It has an extremely active media relations department that it uses to generate traffic for its site.  As far as they are concerned, the more that people are talking about them, the better.

The majority of Edmunds' revenue comes from advertising, which is generated by page views.  To think that it is not benefiting from this free pub is naive.  They are very much so.

I still strongly contend that Edmunds' analysis of the cost per unit of the Clunkers program is a joke. 

I don't particularly like the program either, but you're spitting on a fire here.  The cost of the Clunkers offer is a drop in the bucket compared to the trillions of dollars that politicians have lined the coffers of "banks" to use the term very liberally with.

Deej

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#2) On November 05, 2009 at 10:48 AM, TMFEldrehad (99.99) wrote:

I don't particularly like the program either, but you're spitting on a fire here.  The cost of the Clunkers offer is a drop in the bucket compared to the trillions of dollars that politicians have lined the coffers of "banks" to use the term very liberally with.

You'll get no disagreement from me.  I was critical of the bank bailouts, and the GM bailout too.  That there are bigger problems than Cash for Clunkers is certainly, in my opinion, true.  That doesn't mean I'm not going to level crticism where I think criticism is due, as I believe it is here.

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#3) On November 05, 2009 at 11:30 AM, JaysRage (90.49) wrote:

I'll add one more variable that is not being calculated into the equation.   If we assume that the trade-in vehicles were actually being driven, then we can assume that these vehicles with 140,000 miles on them would require some repairs.   These repairs require at the very least parts, and in some situations labor.   The car companies make money on the parts and the dealers make money on the labor.   That money is not subtracted out of the economic "stimulus".

If the cars were not being driven and therefore not likely to need repairs, then they would not qualify for any fuel savings numbers. 

Just one more reason, any way you slice it, cash for clunkers was a huge disaster. 

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#4) On November 05, 2009 at 11:44 AM, Melaschasm (65.13) wrote:

I agree that cash for clunkers was a terrible economic program.  Unless you compare it to TARP.  Compared to TARP, cash for clunkers was a brilliant way to generate economic growth.

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#5) On November 05, 2009 at 12:44 PM, blake303 (29.54) wrote:

You can pick on me. I can handle it. We are using different assumptions. All of this is incredibly difficult to quantify as I have suggested previously and we can go back and forth about assumptions ad nauseum, so this will be my last rebuttal. Here is my rationale, and I hope that it is not as bad as you insinuate. Although, I admit it is purely anecdotal:

Every person/family that I know who drives a clunker has not upgraded to a new corolla or civic when their cars die. They wait until the beater reaches the end of its life, scrap it, and locate another cheap beater that has a few years left in it and the cycle continues. CFC incentivized car buyers to purchase a new vehicle with better fuel efficiency. I made the assumption that without that incentive they would have continued to replace their clunker with a clunker of similar value. I do not believe that I said the 150,000 miles had to be driven in the same clunker. If I did - you are correct, it was a terrible assumption.

I completely agree with your dispute regarding my lack of discounting. At the time I did my back of the napkin analysis the only calculator available was the basic solar type. Determining an appropriate discount rate and PVing the benefits back really would have been a headache.

+1 Rec.

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#6) On November 05, 2009 at 1:10 PM, blake303 (29.54) wrote:

On a lighter note


Ford Unveils New Car For Cash-Strapped Buyers: The 1993 Taurus 

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#7) On November 05, 2009 at 1:12 PM, blake303 (29.54) wrote:

Well I blew another attempt at embedding. At least the link works.

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#8) On November 05, 2009 at 1:12 PM, TMFEldrehad (99.99) wrote:

Every person/family that I know who drives a clunker has not upgraded to a new corolla or civic when their cars die. They wait until the beater reaches the end of its life, scrap it, and locate another cheap beater that has a few years left in it and the cycle continues. CFC incentivized car buyers to purchase a new vehicle with better fuel efficiency. I made the assumption that without that incentive they would have continued to replace their clunker with a clunker of similar value.

Gotcha, and while I hear where you are coming from, I would as you consider this...

Let's assume that a clunker is, indeed, replaced by a similar clunker.

If these people by another old, used car instead of replacing it with a new one, who are they buying that other old, used car from?  Perhaps someone who is selling it because they, themselves, are buying a new, more effecient one?  Maybe the 'chain' is a few people long, but eventually it's going to lead to someone buying a new car and the results end up the same as the clunker being directly traded-in for the new car -- unless, of course, the total number of vehicles on the road is changing.

If you make the assumption, however, that the total number of vehicles on the road has changed as a result of the program, one has to assume that the number has gone up, not down (after all, the program gave incentives for purchasing new cars).  More cars on the road means more fuel used -- and this would actually offset the fuel savings figures based on my assumption, and make them even lower.

In any event, I do truly appreciate the Foolish spirit of the discussion and fully agree that this is very difficult to quantify.

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#9) On November 05, 2009 at 1:35 PM, blake303 (29.54) wrote:

Agreed. It takes a lot maybes and what-ifs to arrive at a conclusion on either side of the argument and by the time you arrive at one you have exposed yourself to an endless wave of criticism and counterargument.  I do like to see Fools actually using logic, math, and research to support their claims rather taking something spoken in the media (or worse, the Internet) as fact, which is far too common in this venue. Well done.

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#10) On November 05, 2009 at 1:38 PM, TMFEldrehad (99.99) wrote:

After re-reading the above, I could have made the point much more clearly...

Let me try to put it another way.

Ordinarily, a person driving a clunker, instead of participating the the program, might instead have driven the car another 6 months or so (on average, 5K miles based on the above) before the wheels fell off, necessitating the purchase of another (slightly newer) clunker.  This purchase would have set-off the 'chain' that lead to someone buying a new, more efficient car.

In this case, the 'net' clunker for new car 'swap' would have happened 6 months (or 5K miles) later than under the program, making 5K the appropriate number of miles to use in attempting to quantify fuel savings.

Clear as mud?

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#11) On November 05, 2009 at 1:49 PM, nottheSEC (81.21) wrote:

1) People were junking gas guzzlers in cash for clunkers Ford explorers from the late 90's <20 mpg topped the list according to US news and world report.

2)People were buying over 29 mpg's Focuses, Civics, Corrolas and Cobalts according to US news and world report.

http://autos.yahoo.com/articles/autos_content_landing_pages/1036/top-cash-for-clunkers-trade-ins-and-new-cars/

3) Trading in 90's cars for 2009 cars will always save fuel.

4) Blake is right most people I know( unofficial) would have bought a cheap used car. When interest rates came down they could afford a newer used car 6% @ 5 years for a $15,000 car is $325 a month. If you add the clunker as a down you get a new  Focus, Corolla basic stick.

5) JAYSRage is right though independant mechanics gonna suffer less big ticket repairs for older cars. Dealerships will suffer but over the last 10 years are more and more not distributing certain parts/color fix it kits for cars so you HAVE TO go to the dealership.Unintended consequences  

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#12) On November 05, 2009 at 1:50 PM, nottheSEC (81.21) wrote:

the point is some fuel saving but less repairs for the little guy

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#13) On November 05, 2009 at 1:52 PM, TMFEldrehad (99.99) wrote:

I do like to see Fools actually using logic, math, and research to support their claims rather taking something spoken in the media (or worse, the Internet) as fact, which is far too common in this venue. Well done.

The same applies to you, Sir.

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#14) On November 05, 2009 at 6:57 PM, truthisntstupid (94.09) wrote:

So all the good this program might or might not have done for lower-income folks who were saved from having to settle for another hope-to-hell-it-starts-tomorrow-so-I-can-get-to-work piece of junk doesn't count because you're visualizing this "chain" wherein some guy somewhere up the line would have benefitted enough from all the money they had to spend trying to make a living driving a chain of beaters to buy himself a nice new car.  As a poor person who has definitely been poorer, I think I recognize exactly what I'm reading.  Classical Republican Laisezz-Faire trickle-UP economics.  As I tell people, I used to be a republican...but I'm all right now.

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#15) On November 05, 2009 at 8:51 PM, snafflekid (72.96) wrote:

I say the "Cash for Clunkers" program was mostly corporate welfare for the car industry. It was preferrable to handing $3Billion to car companies and hope they do the right thing with it.

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#16) On November 06, 2009 at 12:01 AM, Teacherman1 (62.19) wrote:

Maybe the Govt should have just made a commitment to buy X amount of American Made Cars at a discount from the manufactures (at a lower but still profitable price), then sold them to dealers at the same price. Limiting the markup allowed. Letting local banks floor plan them, then finance them.

This would have saved many more jobs in the auto industry, and all of the related suppliers, the local econonomy where the cars were sold, and the taxing bodies where they were sold, 

It probably would have cost less in the long run then all of the auto bailouts and job losses.

Something which I proposed in an email that apparently went to never, never land, about a year ago.

Just a summary completely lacking in details, but worth thinking about. 

JMO and worth exactly what I am charging for it.

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#17) On November 06, 2009 at 12:31 AM, ease1 (82.16) wrote:

# 15 + 1 rec.  This is exactly the case I believe.  Lot's of folks said "let'em fail" and the govt. knew that it would not be good to see a giant like GM completely die.  Rather than continuing to give the money directly to the auto co. they filtered it through the public.

Of course this makes one wonder what their excuse is for Citi and AIG.

Personally, I know of people that traded in perfectly working used cars just to get a new car for the sake of the rebate.  One person I know of mentoned to me that it was time for his bailout and he was getting in on the action.  I don't know that this speaks for a majority of the recipients of the program but I suspect a number of them were of that thinking.

Looking at the numbers, I can't see how savings are in the billions.  Besides that, is this sustainable?  Even if the numbers above are wrong and the savings ARE in the billions, how can this be sustained with any consistancy.  The 750k cars are but a small dent in the overall inventory.

The other question I have is what was the real purpose of the program?  As stated earlier in my reply, I believe it to be mostly for proping up the auto industry.  But there is also the oil dependance issue.  Not to mention that some have referenced the global warming (uh, oh - it's climate change now) site of it.  I only mention that because I've seen many references as oil and reliance and climate being a primary motivator.  

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