Friday, August 07, 2009

Fact Checking President Obama on CARS

President Obama, desperate for a win, is terming the Cash for Clunkers program 'a success.' How desperate is he? Recently, he sank to playing the race card, again. Anyway, with CARS the president is claiming an unassisted triple play, he says it is a grand slam home run. Here is what President Obama says about CARS :
This program has been an overwhelming success, allowing consumers to trade in their less fuel efficient cars for a credit to buy more fuel efficient new models. It has given consumers a much needed break, provided the American auto industry an important boost, and is achieving environmental benefits well beyond what was originally anticipated. The program has proven to be a successful part of our economic recovery and will help lessen our dangerous dependence on foreign oil, while reducing greenhouse gas emissions and improving the quality of the air we breathe.
Well, President Obama is claiming a lot... except the benefits cited are either false, fanciful or de minimus. We know President Obama loathes facts, but here they are:

CARS Does Not Help Consumers

While it did provide some consumers with a subsidy, it penalizes the vast majority of automobile buyers this year, especially the Americans that already went green. Moreover, it can accurately can be characterized as a transfer of wealth from from the prudent to the imprudent.

CARS Benefitted Foreign Auto Industry More Than American

Likewise, foreign automobile companies were boosted higher than the American auto industry. Two strikes against President Obama.

The False Promise of Economic Recovery

As far as a successful part of the economic recovery, famed economist Henry Hazlitt eviscerates the false premise of the blessings of destruction in his book Economics in One Lesson. The lesson says that destruction of perfectly serviceable capital investments create economic entropy, and do not improve the economy. All the president had to do was read one lesson and he would have gotten it. Additionally, the law of unintended consequences has not yet spoken. What about all the automobile repair jobs that will disappear with the aged cars? Suppose a mechanic can service a hundred cars on average. The clunker program just destroyed 10,000 mechanic jobs. Finally, it is ludicrous on it's face that $1B, or $3 billion can boost the economy, when $787 billion has probably made it worse.

Greening Of America Not A Factor

Finally, President Obama boasts about reducing dependence on foreign oil and espouses the greening of America through this program. Even the Associated Press calls it a 'blip', and they did not factor in the destruction of the environment by the million new landfill occupants.

The Bottom Line

Clearly, after the fact check, this is no triple play, it isn't a grand slam. It isn't even a success, since more harm was probably done. I'd almost give President Obama a walk, a fielders choice, or a balk... yes he got to first base but it was an error. He only got there by stealing our children's money to give to people that did not earn it. Note: we have not even factored in the fraud, waste and abuse that is sure to follow with this program. Check back to this space when you hear about the first inevitable shyster bilking the clunker government.


MORE: OBloodyHell, in the Comments:

He wants to know "what could be wrong with the government subsidizing fuel efficiency?"
===============================

On the surface, sure -- "What could be wrong with replacing cars with more fuel efficient models? You'll save gas in the long run".

But, as with most things in economics, it's never that simple. First off, it takes energy to make a car. And it takes still more energy to destroy a car, which this "mandate" requires for all cars swapped out. But we won't even concern ourselves with this factor for the moment. Let's instead look at a simple, easy to calculate number -- What is the fuel cost savings alone?

The figure stated in the article (link) is that the difference, on average, for swapped cars is:
Newly purchased cars: average fuel economy of 25.4 mpg
Cars removed from service: average fuel economy of 15.8 mpg.

Now, from that, it's pretty easy to get an actual estimate of the true savings from this program. The average American drives, fairly consistently, about 10k to 12k miles per year. So let's take both those mpg figures, and divide them into that 12k worst-case figure, to see how many gallons of fuel is saved every year:

12000/15.8=759.5 gal/yr
12000/25.4=472.5 gal/yr

So the new cars will use roughly 287 gallons of gas less, for each year in operation. At US$3.50/gallon, that's a fuel cost savings of $1000 per year.

Notice that -- it's going to be more than four years (assuming that they all got the max $4500 trade in) before this program "saves" more than what the fuel alone is worth.

Most people only own their cars for a total of five years.

And that does not take into account the aforementioned fact of the creation/disposal costs, energywise, of the new/existing vehicles. In truth, fuel costs would have to be far, far higher than they are -- on the order of >$10 per gallon, before they become a major cost of ownership factor.

In reality, fuel costs are a notable but still fairly small percentage of the purchase/ownership price of a car. MPG should be considered when one is choosing to buy a car, but it has no business as a primary factor in the actual decision that it is time to purchase a new car. They just don't represent an important enough cost of ownership statistic.


..And, in the end, this is why the government has to pay people to do this -- it's not a rational component of the "Time for a new car" purchase decision. While most people can't explain this, analytically, as I have, most have an underlying sense of how much they're paying out for their cars, and know when it is time to buy a new one. and trading in the 16mpg car for the 26 mpg car just doesn't cut it.

As usual, the "government solution" is hardly an optimal, sensible one. It represents nothing more than the narrow fixated notions of one or more federal bureaucrats with no concept of how to make an important decision using an analytical justification.

6 comments:

OBloodyHell said...

.


The Real Bottom Line:
===============================

Bob, the current mania for "fuel efficient" cars is as rational and sensible as Tulip Mania was in 17th century Holland.

On the surface, sure -- "What could be wrong with replacing cars with more fuel efficient models? You'll save gas in the long run".

But, as with most things in economics, it's never that simple. First off, it takes energy to make a car. And it takes still more energy to destroy a car, which this "mandate" requires for all cars swapped out. But we won't even concern ourselves with this factor for the moment. Let's instead look at a simple, easy to calculate number -- What is the fuel cost savings alone?

The figure stated in the article (link) is that the difference, on average, for swapped cars is:
Newly purchased cars: average fuel economy of 25.4 mpg
Cars removed from service: average fuel economy of 15.8 mpg.

Now, from that, it's pretty easy to get an actual estimate of the true savings from this program. The average American drives, fairly consistently, about 10k to 12k miles per year. So let's take both those mpg figures, and divide them into that 12k worst-case figure, to see how many gallons of fuel is saved every year:

12000/15.8=759.5 gal/yr
12000/25.4=472.5 gal/yr

So the new cars will use roughly 287 gallons of gas less, for each year in operation. At US$3.50/gallon, that's a fuel cost savings of $1000 per year.

Notice that -- it's going to be more than four years (assuming that they all got the max $4500 trade in) before this program "saves" more than what the fuel alone is worth.

Most people only own their cars for a total of five years.

And that does not take into account the aforementioned fact of the creation/disposal costs, energywise, of the new/existing vehicles. In truth, fuel costs would have to be far, far higher than they are -- on the order of >$10 per gallon, before they become a major cost of ownership factor.

In reality, fuel costs are a notable but still fairly small percentage of the purchase/ownership price of a car. MPG should be considered when one is choosing to buy a car, but it has no business as a primary factor in the actual decision that it is time to purchase a new car. They just don't represent an important enough cost of ownership statistic.


..And, in the end, this is why the government has to pay people to do this -- it's not a rational component of the "Time for a new car" purchase decision. While most people can't explain this, analytically, as I have, most have an underlying sense of how much they're paying out for their cars, and know when it is time to buy a new one. and trading in the 16mpg car for the 26 mpg car just doesn't cut it.

As usual, the "government solution" is hardly an optimal, sensible one. It represents nothing more than the narrow fixated notions of one or more federal bureaucrats with no concept of how to make an important decision using an analytical justification.

.

suek said...

I read somewhere - but can't find the link at the moment - that the C4C program actually costs somewhere between $20,000 and $45,000 per vehicle. The number was derived from the average of older vehicles that were turned in over the years and compared to the increase in the number turned in in response to the program. The increase was not terribly high. Then the dollar amount of the payout was applied to the increased number of cars, and depending on certain variables, came out to the 20-45K number.

I'll try to find it - I know I didn't think it was invalid on the face of it, but I didn't really think about it too hard either.

AT also has a couple of articles that indicate that the new car sales are all (or mostly) going to foreign manufacturers, and the cars being turned in are primarily US manufactured cars.

OBloodyHell said...

> AT also has a couple of articles that indicate that the new car sales are all (or mostly) going to foreign manufacturers, and the cars being turned in are primarily US manufactured cars.

They're foreign makes manufactured mostly in the USA, with the primary exception being the risibly overpromoted Prius. -- apply the earlier analysis, with the Prius's 60 mpg figure, vs. a standard Honda Civic's figure of 40k, and realize that the MSRP of the Prius is about $4500 more than said Honda. Worse still, the hybrids are driving those 40mpg Honda models out of the market... so the best you can get that's non-hybrid is more like 30-35mpg). In actual fact, gas prices have to be at and remain at more than $5 per gallon for about 7 years of ownership before the Prius just returns its price premium in fuel savings alone. And this assumes that the maintenance costs are not well beyond those of a standard vehicle, which seems suspect.

You might have other reasons for buying a Prius -- but if you think it's saving you money, you're woefully mistaken.

suek said...

_Finally_ found it! What do you think?

http://seekingalpha.com/article/152909-cash-for-clunkers-may-cost-up-to-45-354-per-vehicle

Bob in Los Angeles said...

Suek -- The analysis approach is good, just early. The data on how many cars are traded in on a given quarter very interesting. So we need to find out how many cars are eventually traded in under this program, then difference them from the norm.

OBloodyHell said...

> _Finally_ found it! What do you think?

The rationale behind it is far too sensible for it to matter to a politician.