Debt For Clunkers

You have probably heard a lot about the so-called "Cash For Clunkers" program on the news, how it's so helpful and so popular, and going to do so much good for so many people, and for the economy, and so on and so forth. I have a different take. I think that this program is so idiotic that it's hard to know where to begin.

First, pitching the idea as "free money" toward the purchase of a new car, if you are turning in a qualifying car, with sufficiently poor gas mileage, which quite a few Americans do own, and then setting aside only a Billion Dollars for the program. I know, you're thinking, only a Billion? A billion is a ton of money, and you're right, it is, it's a ridiculous amount of money in fact, but bear with me. One billion dollars, at $4,500 a pop only goes as far as 222,222.2 cars. When people think they are getting "free money" you will have a lot more takers than that. So, thinking that they may have run out of money, although they don't know because they can't even process the claims that have been made so far, Congress has thrown in another Two Billion dollars, just to be on the safe side I guess, bringing the total amount of Cars that could be turned in to 666,666.6, but with no idea if even that will be enough.

Besides this, as I mentioned previously, the claims aren't being processed. The way the program works is that a person takes their "clunker" to a dealership, and the dealer determines, according to Government guidelines, if the "clunker" qualifies for the program, and if so, goes ahead and makes the deal, taking the $4,500 off of the price of the new car, and then submitting the paperwork for the deal to the Government, which, in turn, is supposed to cut the dealer a check for the $4,500. The problem is that while dealers are making deals and turning them in to the Government, the claims aren't being processed and the checks aren't being cut, so the dealers, already operating on the edge, are being forced to absorb a $4,500 hit on each car they sell on this program, at least in the short term.

Another problem is the simple fact that the Federal Government (quickly becoming a National Government, but I'll have to address that separately) is out of money. Even with no increase in spending, but just continuing the programs in place now, and leaving tax rates as they are today, we would continue going deeper in the hole. Of course, they are looking to increase spending by trillions of dollars over the coming years, and by comparison, three Billion dollars doesn't seem like much, but we are at the point were every single penny the Government spends is just more debt. So this program is yet another three billion dollars in debt, and that doesn't include the cost of processing all the claims, which will be significant because the Government never does anything efficiently.

Now we come to the claim that this program will have some positive impact on the environment. This is simply not true in the least. For starters a study has shown that supposed savings in gas, if in fact they were to be as claimed, would only amount to shutting down energy production in this Country for one hour per year. But that doesn't take a lot of other things into account. For starters, if paying less for gas, or getting better gas mileage, people will drive more, this is a studied and proven fact. Besides that, all of the cars that are turned in under this program will be destroyed, and therefore will need to be disposed of, which will have a negative environmental impact. Then there is a production cost (both monetarily and environmentally) of all the cars that will initially be produced to make up for the false bubble of demand for new cars over the short run, and transporting them to the dealerships. On top of that is the fact that some of these cars that are being destroyed would otherwise have been traded in and auctioned off to some junkyard or something, where people would have been able to pull spare parts off to use for their own vehicles that they are still driving, now those spare parts will not be available, causing new parts to be produced, having a higher environmental impact, as well costing the operators of the vehicles who need the parts considerably more than they would have paid otherwise.

Next we need to ask if this program is a good deal for people who participate in it. For the most part, people who participate will be purchasing new cars, the cost of which $4,500 will scarcely put a dent in, meaning that they will be taking out huge car loans to make up the difference. So, the great deal that they are getting means that they are trading in a car that they can afford in order to take $4,500 off of the price of a car that they can't even come close to affording, even with the discount, in order to save a couple of bucks a month in gas (remember they will also drive it more) giving them a huge pile of car debt, meaning that this "great deal" will be a net loss to their monthly disposable income. I suspect (and this is just me, I don't have a study on this) that a large share of these people will default on these loans (wow, what a blessing that will be to them). And besides, just a simple look at the math tells you how stupid this is. You take a car that qualifies as a Clunker under the program, which we will assume for the sake of this discussion is paid off (if it's not, things are even worse) and turn it in for the $4,500 discount on a new car. People are being encouraged to get Hybrid cars, because they get the best gas mileage. A new Toyota Prius starts at $22,000, but let's face it, most people won't go for the most basic model, so let's assume that they are somewhat reasonable and choose a model that is around $25,000, so they will be forced to finance around $20,500. They probably don't have triple A credit, and so, won't get the best interest rate, so, over the life of the loan, they are going to be paying back, on the conservative side, around $25,000. Even if we assume that gas goes up to $5.00 a gallon, roughly twice today's price, that $25,000 would have put 5,000 gallons of gas in their old clunker. Even at 15 miles per gallon, that would have taken them 75,000 miles. Now in their new Prius they will get roughly 50 miles per gallon (according to toyota.com/prius) an improvement of 35 miles per gallon, so that same 5,000 gallons of gas will take them 250,000 miles, but they still bought that 5,000 gallons, plus they spent $25,000 paying off the new car. To go the same 75,000 miles that the 5,000 gallons would have taken them in the old clunker would cost $7,500, so, apples to apples, to go the same distance, they will have paid $7,500 more with the new car. Adding that amount means that the old car would have taken them 97,500 miles for the same amount of money. So, they will have to drive this new car for 97,500 miles just to break even on the deal. Most people don't even keep a car that long, but assuming they do, let's remember that to this point they have not saved one single penny, that's just the break even point, assuming they haven't had to put any new parts on the car, which they would have and which would be considerably more expensive than on their old car, and service costs more also, so they'd have to drive a few thousand more miles to make up for that, but after they they should be to the good, right? Well, sure, but if they want to make back all of the money that the spent on this "great deal" they will have to drive that Prius for an additional 1,625,000 miles, and that doesn't include the increased cost given that they will drive more because they are getting better gas mileage. Some deal huh?

Worse still is what this will do to the new car market in the US. First, it will create a bubble in auto sales while the program runs it's course, followed by a collapse when people who would have bought a car later on now don't need one, and people who would have bought used cars can't because they have all been destroyed by Uncle Sam. Far from stimulating the economy, this program will be devastating.

So, what we get is a net negative environmental impact, significantly more debt, both for the nation, and for the suckers... I mean people... who participate in the program, and a significant net negative economic impact over the long term, especially as these people start to default on the car loans that they can't afford on cars that they could never afford and should not have purchased.

But that's not the worst part. As bad as all that is, it is nothing compared to this. The same morons who came up with this dud of a deal want to run your health care.