Macro Economics
C4C -- Revenge of the New Deal?

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By evaitl
August 12, 2009

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Have New Deal Economics made a come back?

I took a look at the "wildly popular" cash for clunkers program, and I'm less than impressed. One reason put forward for the program is that it helps the environment by eliminating carbon. Let's take a look at that claim.

A couple of numbers to start:

Wiki says the externality cost for atmospheric carbon is about $43 per ton.

LA Times reports the average mileage for trade-ins is 15.8 and for the new cars is 25.4.

Edmunds reports that the average cost excess trade-in is about $20,000 per sale. This is because even though the government is only paying about $4K per car traded in, many of those sales would have happened anyway. If 200,000 eligible car sales would have happened last month, but with C4C in effect 240,000 car sales happened we've managed to pay about $20,000 for each excess sale.

So plugging in these numbers:

�15.8 average mpg for tradeins
0.0633 Gallons per mile for old cars
25.4 average mpg for new cars
0.0394 Gallons per mile for old cars
0.0239 gallons saved per mile

2.4 kg carbon/gallon
0.06 kg carbon saved per mile
1000 kg /ton carbon
43 external cost per ton
2.47E-003 external cost difference per mile
20000 Cost per excess trade in
8101582.69 Miles car needs to drive before break even

�I believe it is unlikely that somebody is going to get anywhere near another 8 million miles out of a 1990 Ford Explorer.

As for the stimulus aspects -- to me a stimulus should create wealth. Hoover dam was a stimulus project. Dropping a couple million on some of the interesting DARPA projects could at least potentially create wealth. Job retraining creates soft capital. However, with Cash for Clunkers, we are requiring that the old cars be destroyed.

$3B spent on the program at about $4K/car means that 750K cars will have their engines destroyed. The difference between scrap value and the pre-C4C value of each of these cars is about $2K. By my math, we are spending $3B to destroy $1.5B in wealth.

All we are getting out of this $20K per excess sale is that we are accelerating some sales from future quarters. CEOs and CFOs regularly get fired (and sometimes go to jail) when they get caught packing distribution channels in order to make their quarterly numbers.

So what? Most people on this list don't care about that 1990 Ford Explorer. However, the woman with two kids and who just got out of a bad divorce, and worse marriage, may care a lot. The unemployed painter or drywaller who is finally giving up on Michigan and needs to pack his things and move someplace else for a job may also care. Thanks to this program, these cars are being destroyed and these people are out of luck.

This reminds me of the Depression: On one side of the country, the government set up "model" dairy farms -- but would fire anybody who actually tried to make them efficient. On the other side of the country, the government was paying farmers to poor milk down drains. Meanwhile, people were starving.

Long before the New Deal, this was known as the Broken Window Fallacy

Somewhere during the Great Depression some politicians got the idea that collecting and destroying wealth (pouring out milk, plowing under crops) was a way to make us all richer. What they were actually doing however was exacerbating the depression to buy votes. Have we really sunk to that level again?

Next quarter when this money runs out will be a very bad quarter for the auto industry and the Democrats will almost certainly want to extend the program again. Remember -- all of the dumb farm programs we have now were created as emergency measures to get us through the Depression. Most of those programs are alive and well 80 years later when that depression is long gone and almost all of the people involved are long dead.