Cash for Clunkers

E-mail to Rep. Neugebauer:

I received the following message from Dave and consider it a very good mathematical analysis of the Cash for Clunkers program. We need more of this critical analysis on the financial aspects of every program that you folks consider in Congress. Note that it is simple math and logic. It does not contain differential equations or advanced calculus.

Art

"Cash for Clunkers

Maybe we should require our politicians to be more careful with our money:

Pete Kornafel, chairman of the GAAS scholarship committee, writes:
Here's some basic math regarding the average "clunker" which got 15 mpg and the "average" replacement which gets 25?
A vehicle at 15 mpg and 12,000 miles per year uses 800 gallons a year of gasoline.
A vehicle at 25 mpg and 12,000 miles per year uses 480 gallons a year.
So, an average clunker transaction reduces U.S. gasoline consumption by 320 gallons per year.
The total is about 700,000 vehicles ? so that's 224 million gallons/year.
That equates to a bit over 5 million barrels /yr of oil.
5 million barrels of oil is about ¼ of one day s U.S. consumption.
And, 5 million barrels of oil costs about $350 million dollars at $75/bbl.
So, we all contributed to spending $3 billion to save $350 million in oil.

Dave's additions:
The average "on the road" lifespan of the new replacement vehicles will probably be 7-10 years, so lets say 9 years.
And the average price of oil over the next 9 years is likely to be roughly $160/barrel.
(http://www.inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp)
(Average, annual, inflation adjusted price increase of 17.5%)
So 9 years x 5 million barrels @ $160 = $7.2 billion
3 billion plus interest over 9 years @10.4% would be 7.2 billion, so that looks to be a pretty good return on our investment.
BUT the average time in service of the old "clunkers" that were replaced may have been only 3 years, after which time they likely would have been replaced anyway, without our subsidy, and with replacements that will be even more fuel efficient. So really, for this thing to work, we must recover our $3 billion investment in 3 years.
So 3 years x 5 million barrels @ $104 = $1.6 billion
So most likely, we are only getting 1.6 billion in value for our 3 billion investment. In other words, we are simply throwing away $1.4 billion of our hard-earned money. I'm not sure that is a prudent action and I don't think it is what I want to be doing with my money.
And of course one other question remains: Why aren't the people who are directly benefiting from the replacement of a a clunker paying the whole cost of the replacement? Why do we have to pay part of the cost of their new vehicles? They are the ones benefited with a new vehicle AND fuel savings!
How would you feel if I asked YOU to give me $5,000 toward buying myself a new vehicle? Where is my incentive to work if the government will make you give me your money? And where is your incentive to work, if you know that the government is just going to take away your money that you earned, and force you to give it to me???
If there is any hope of this program being effective, the missing 1.4 billion dollars will need to help our nation thru subsidizing the auto industry by at least that much. That seems unlikely.

I humbly suggest that this kind of poor logic and corruption is part of what contributed to our current financial crisis. And so now it appears that the "cash for clunkers" program, and likely others like it, are shortsighted and ultimately ineffective measures that will only worsen our problems.

I think we each need to require more of ourselves and our elected officials, and make sure they are moving us in the right direction instead of in the wrong one."