Was Clunker Buying A Good Idea?
You’re offering me $4,500 for this old piece of junk? Where do I get the money? But there is a catch to it, right? I have to buy a new car I don’t need to get rid of this junker I am through with?
For those who were about ready for a trade, and able to pay for the new car, it was a good deal. Proof of that was the speed at which the funds were exhausted and the program was ended. That is American ingenuity at work – not in government, but among the people who know a good deal – for them – when they see it.
An examination of facts leads to different conclusions for the US government.
The rationale was to get the old gas guzzling clunkers off the road to save energy and thus improve the environment. Was that thinking sound?
To find out, compare two cars, a clunker and a new one. We will assume that both cars are driven 10,000 miles per year, that the new car gets 4 miles per gallon better gas mileage than the old one, both degrade equally in efficiency, and that both are run for 100,000 miles over 10 years. Under these conditions the old car used 5,556 gallons; and the new one would use 4,545 gallons of gas, a saving of 1,011 gallons over its useful life.
Since refiners get about 20 gallons of gas from one barrel of crude oil, that translates to 50.55 barrels of oil we would not have to import. At about $69 per barrel, that is $3,488 saving on the buying of crude oil, as a result of using a new car instead of the clunker.
That $4,500 trade-in bonus had to come from somewhere. Let us treat that as a gift amortized over 10 years at 6% interest. The result is a cost of $611 a year (like principal and interest payments) so the total government cost is $6,114 over the 10-year amortization period. It starts sounding like not such a good deal for the taxpayers. But there is more bad news.
The old clunker was already paid for, but when its owner trades, he will have to pay off the difference between the new car cost and the $4,500 he got for the clunker. The picture gets dimmer. The government, Uncle Sam, didn’t handle all this for nothing. A good guess is that the overhead cost to Uncle Sam, the tax payer, was 20% to administer this deal, and deal with the dealers – a hidden cost of $900. But it is a safe bet that no one knows how much this overhead really added up to.
It did not come free of administrative and overhead cost at the dealer’s office either as he had interest to impute or pay on the money he advanced to clunker owners until Uncle Sam paid him as promised. Uncle is always a slow payer.
The clunker had continued to serve its owner well, When it went to the junkyard, still a useful car, it had to be replaced by the new car that had to be manufactured, using raw materials, energy, labor, and emitting environmental degradation, to make and deliver the new car. It did not come free of all its attributed costs; costs that have been conveniently overlooked by the politicians pushing the clunker program.
The worst offenders among the clunker class were not traded in because the owners could not afford to buy a new car, even if it was a good deal. They are still on the road, gulping gasoline like drunken sailors, belching gas, and blowing smoke out the tail pipe.
All in all it was a bad idea devised by amateurs. The fact that people scooped up all deals available in under one fourth of the time estimated by bureaucrats is proof enough that the government got taken by average Americans who know a good deal when they see one.
Hey, I’ve got a couple of clunkers and a 440 engine I’d like to sell. Any takers?