Diary

Cash for Clunkers is a Clunker

I’ve been thinking about what this program actually accomplishes, given that it is being touted as this “big score” for the economy.
 
So I decided to get into the details and run some numbers. Here is what I have found:
 
The Washington Post ran an article on August 4th saying that the average mpg of cars that people are turning in is 15.8 mpg and the average of the new cars are 25.4 mpg. We’ll round that to an even 10 mpg increase.
 
So with the increase in mpg, the owner will use less gas over the lifetime of the car. If we use 100,000 miles as the lifetime of the car, the owner would save about 2,650 gallons of gas. At $2.50/gallon gas, this is a good deal for the owner but has significant hidden consequences.
 
The federal government levies a $0.184 tax per gallon and states levy additional taxes (I’ll use IL @ $0.338/gallon) and sales tax (IL @6.25%). If we use the same $2.50/gallon gas price, the loss of tax revenue for that new vehicle equates to around $1,800.
 
That doesn’t seem so bad until you factor in the scale of this program and the means to finance it. The initial $1 billion sets aside the $4,500 allotment for 222,222 cars. If you multiply the 222,222 vehicles with a loss of $1,800 per vehicle, you end up with a tax shortfall of $400 million.
 
On the financing end, it is the issuance of long dated treasury bonds that is covering this program. At Friday, August 7th’s 30yr T-Bill rate, the cost to finance $1 billion of debt is $850 million.
 
So in the end, for every $1 billion issued for the Cash for Clunkers program, it costs $850 million to finance the program and it creates a $400 million tax revenue shortfall.
 
That is total fiscal incompetence.