Saturday, August 08, 2009

"Cash for Clunkers" renewed -- tallying up winners and losers, by the numbers 

The Cash for Clunkers CARS program has been renewed, with another $2 billion added to it, good enough to turn another 500,000 working cars to scrap, 750,000 total.

After previously examining the program and how it is a classic example of the Broken Window Fallacy in action in a rather long post, let's here just recap who wins and loses from it, and by how much.

The average "clunker credit" is budgeted by Congress at $4,000. The maximum trade-in value of cars under the program is $4,500, so we can guestimate the average trade-in value of a clunker brought in to get the credit at half that, $2,250.

The clunker credit is actually paid to the dealer, not the car buyer. After the buyer and dealer negotiate a price the buyer gets a credit against that invoice price in the amount of the credit. But the dealer has the opportunity during negotiations to move the price up to capture some or all of the credit for himself.

In fact, the first thing a dealer will do when negotiating such a sale is subtract from the credit and take for himself the amount of the trade-in value of the car. He must do this to keep himself whole compared to accepting a conventional trade-in for the car -- where he doesn't destroy the car the buyer brings it but sells it himself later. The remaining amount of the credit will be split between the dealer and the buyer.

Using the average numbers for the credit and the trade-in value of a clunker, an example works out this way...

The buyer wants to buy a new car with a market value of say $25,000, meaning the dealer can sell it for cash in that amount. The buyer's current clunker has a trade-in value of $2,250. With a conventional trade-in he could buy the car from the dealer for $22,750 cash. But he asks, why settle for a trade-in of just $2,250 when he can get a credit of $4,000? (Actually either $3,500 or $4,500, but we're using the average number here.) Thus, he applies for the "clunker credit".

Now the dealer isn't going to take less than the $25,000 market price he can get in cash. And with the "clunker credit" he gets $0 value from the trade-in vehicle, which must be destroyed. So to get back to "even" compared with a trade-in, he must take the first $2,250 of the credit for himself, in lieu of trade-in value, to receive $25,000 for a car with a cash sale price of $22,750. At this point most of the credit has already been consumed and neither buyer nor seller is ahead compared to a conventional trade-in.

But there is still $1,750 of the $4,000 credit left over. This will be split in the price negotiation between the dealer and the buyer. How much each gets depends on supply and demand. If the dealer ...

* Is flooded with buyers asking for clunker credits while he has only a few credit-eligible cars to sell, he can move his selling price up from $22,750 cash, by an amount approaching $1,750, to grab the bulk of the remaining credit for himself.

* Has only a few people come in asking for the credit, and he has plenty or credit-eligible cards, he'll keep his selling price near $22,750 cash to not miss any sales, and the buyers will get most of the remaining credit.

In reality, all reports are that dealers were flooded with "crediteeers" while their car inventories have been low -- but for simplicity, let's assume dealer and buyer split the $1,750 remaining credit evenly. Thus each gets $875 compared to the results of a conventional trade-in of the same clunker, the buyer saves that much off his purchase price and the seller gets that much more to pad his bottom line.

Thus we can see the results of CARS program per sale:

[] The average buyer gains $875 ... at a cost to taxpayers of $4,000.

[] The average dealer and buyer combined gain $1,750 (no matter how they divide it between them) ... at a cost to taxpayers of $4,000.

So the average car buyer and seller make several hundred dollars each, but taxpayers lose more than twice as much.

But if the dealer and buyer combined gain only $1,750, while taxpayers pay $4,000, where does the other $2,250, most of the credit, go?

It goes to pay for the destruction of a car, which was still a productive, useful economic asset with positive market value -- a trade-in value of $2,250, and a retail value no doubt a good deal higher than that.

That has independent effects. Reducing the supply of cars on the road by supply-and-demand increases the price of cars, their cost to buyers. In particular, destroying used cars before their time increases the price of used cars. So ...

[] Car dealers win again, by the resulting increase in the price of the cars they sell, and their increased margin on used cars they buy and sell.

[] Car buyers lose by the increase in the price of cars generally -- and lower-income car buyers, those who need to buy used cars, lose in particular.

[] Society overall loses by both the loss of productive assets, $2,250 per car, and the charge imposed on taxpayers to pay to produce that loss. (Nobody can say $2,250 of tax money spent to destroy a working car worth that much was used "productively".)

Final tally, per average cash-for-clunkers sale:
+ $875 for the car dealer
+ $875 for the individual car buyer
(or, if you prefer, +$1,750 divided indeterminately between dealer and buyer)
- $4,000 to taxpayers
- $2,250 to society for loss of productive assets.
-$4,500 net per transaction.
Multiply the above by the 750,000 transactions allowed by the program extension, and we get: car buyers and dealers divide gain of $1.3 billion, taxpayers pay $3 billion, the economy loses $1.7 billion of productive assets = total net cost to society $3.4 billion.

But what about gain to the environment because the new car gets at least four miles per gallon more than the destroyed one?

Well, the word "conservation" is defined as "destroying productive, useful assets with positive market value" only in the Newspeak Dictionary. Even treehuggers know that.

So much for the numbers. Now some editorial thoughts:

1) Some people who have used the clunker credit have told me, "So what if 'taxpayers lose', I'm a taxpayer, it's my tax money, and I'm entitled to win using it!"

Right -- and this perfectly exemplifies the political dynamic by which the US government has piled up a debt, explicit and implicit, of $64 trillion.

An interest group gets itself a tax subsidy of $1, for which its share of the tax cost is only 10 cents, dumping the other 90 cents on other taxpayers, and declares "We win!" Except every other interest group in the country is doing the same thing and dumping all their excess tax cost on it.

And in the end, as a taxpayer, you are liable for all of it. The coming cost of carrying $64 trillion in debt is here. That tax bill is what you are asking for when you say, "An $875 (or $1,750) benefit for a cost of $4,000 added to the national debt is a good deal!" And if you live another 20 years, you are going to get it.

2) Note that of the average $4,000 per-purchase credit, the portion that actually goes to the car buyer as an incentive to buy a new car is only about $875! That's only 22% of the tax cost of the credit! One would think even Congress could create an $875 incentive for less than $4,000 of tax cost.

Yes, this means Congress could have given consumers the same-sized financial incentive to buy just as many cars at only 22% of the tax cost -- or to buy almost five times as many cars at the same tax cost -- if it had simply sent an average "$875 new car purchase incentive check" directly to car buyers (not to dealers) upon closing a purchase, without paying to destroy 750,000 serviceable cars.

The program then would have been hugely more efficient per incentivized sale -- and society would be better off by having 750,000 more productive, useful vehicles on the road.

3) Curiously, the inherent regressiveness of destroying used cars to raise their price and put profits into the pocket of big business is going totally unremarked. Who needs to buy used cars? Not the rich!

I'm trying to imagine the reaction if a Republican administration had charged taxpayers to pay for destroying assets relied upon by the lower-income workers on a daily basis ... to increase the price lower-income workers had to pay for them ... to increase the profits of big business. I kind of think the howls from some liberal quarters would be unrelenting.

But today progressives are mute. Not a word about it.

Perhaps this shows that when the rubber meets the road, so to speak, real political control of the Democratic "progressive" left is firmly in the hands of an alliance of big businesses (say: "carbon permit give aways"), big unions and rich Volvo and Prius-driving Sierra Clubbers. On occasion, when convenient, they let Barbara Ehrenreich and her friends out to talk about the problems of low-income workers, for PR reasons. But not when it would affect real vote-buying policy, like this.

4) The Administration and members of Congress are loudly hailing this program as "the best stimulus ever!" ... 'nuff said.

Let's just hope that as politicians who are moving their lips they are lying as usual. Because the one redeeming trait of the clunker credit is that, relative to the size of the auto industry and economy (the same idea could be used many other placed within it!) it is tiny.

If they really believe the credit has been "the best stimulus ever", there is nothing at all to prevent them from expanding it to apply to one or two full years' worth of trade-ins ... that would ten or twenty million used vehicles bought at over-market price, at the cost of taxpayers, to be destroyed ...