Cash for Clunkers’ Real Cost

As Frederic Bastiat succinctly noted long ago, when determining the effects of a specific action, it is necessary to consider not only “what is seen” — the observed effects of that action — but also “what is not seen” — opportunities forsaken for the chosen course of action. In public policy, this means that it is necessary to look not only at the alleged benefits of a specific policy after it’s enacted, but also at what would have happened if that policy had never been enacted.

Viewed in this light, the Cash for Clunkers program is a costly boondoggle that will yield little net benefit. The car buying site Edmunds.com compared car sales under Cash for Clunkers with typical car sales over a similar period as that of the program’s existence, and found a net increase of only 50,000 cars — at a cost of $20,000 each.

How is this possible? Edmunds.com’s research shows that typically 200,000 vehicles worth less than $4,500 are traded in for new vehicles every three months. At best the current Cash for Clunkers program will fund 250,000 such transactions in the same time period — a gain of only 50,000 vehicles. Given that this program is budgeted to cost $1,000,000,000, this increase will come at the cost of $20,000 per extra sale.

But it may get worse yet. With so many car buyers taking advantage of what many perceive as “free” government cash, the Cash for Clunkers program is nearly out of money. Naturally, politicians who supported the program take this as a sign of success, and therefore now want more money for the program. They’re likely to get it.

Worse, the Edmunds estimate is actually conservative, which means that costs could go even higher. As Avery Goodman of the business site Seeking Alpha notes:

The highest rebate is $4,500, and the lowest is $3,500. If everyone qualified for $4,500 per vehicle, about 222,000 vehicles would have just taken advantage of the government’s money. At $3,500, 286,000 vehicles will have been sold.

I assume that, given all the raving, the government will eventually get around to assigning more money. It will take at least 2 or 3 months for the legislation to work its way through Congress. Meanwhile, if all buyers have qualified for the higher $4,500 rebate, the “cash for clunkers” program will mean a marginal increase in car sales of 22,000 this quarter. $1 billion divided by 22,000 means a net cost to the government of $45,354 per car.

If all buyers only qualify for the $3,500 rebate, it means a marginal increase in sales of about 86,000, or a net cost to the taxpayers of $11,628 per vehicle. In all likelihood, however, there will probably be a mix of vehicles qualifying for various rebates between $3,500 and $4,500. Based upon that assumption, Edmunds.com estimates that the average cost to the taxpayer will be about $20,000 per vehicle.

Thus, two important things are not seen by Cash for Clunkers advocates — the fact that most of these car sales would have occurred anyway and  the business investment taxed way to pay for this wreck. (Thanks to Margaret Griffis for the tip.)