Don't Let a Journalist Evaluate Cash for Clunkers

Monday's WSJ article: Clunkers in Practice: One of Washington's All Time Dumb Ideas proves one of my long time suspicions: Most newspaper journalists write because they don't have enough sense to hold a business job. (Proof: look at circulation of newspapers now that they have competition from the Internet.)

From a business perspective there are two issues on whether cash for clunkers was worthwhile: the first is the long-term value proposition which was to come from energy savings and the second is short-term stimulus which is the effect it had on total sales.

The value proposition was supposed to come from the forced purchase of higher mileage cars that replaced lower mileage vehicles so that there was an increase in mileage and commensurate decrease in gasoline usage. The following is from a popular e-mail explaining this:

A clunker that travels 12,000 miles a year at 15 mpg uses 800 gallons of gas a year. A vehicle that travels 12,000 miles a year at 25 mpg uses 480 gallons a year. So, the average Cash for Clunkers transaction will reduce U.S. gasoline consumption by 320 gallons per year. They claim 700,000 vehicles so that's 224 million gallons saved per year. That equates to a bit over 5 million barrels of oil. 5 million barrels is about 5 hours worth of U.S. consumption. More importantly, 5 million barrels of oil at $70 per barrel cost about $350 million dollars. So, the government paid $3 billion of our tax dollars to save $350 million. The government spent $8.57 for every dollar saved.

This is almost correct. The increase is permanent over the life of the vehicles. This means the savings is for around 13 years, the average life of vehicles, so the energy savings payback is $4.5 billion or around $1.50 for every dollar spent. According to this, Cash for Clunkers more than paid for itself based on energy savings.

The WSJ referenced the article “Is CARS a Clunker” by Abrams and Parsons which made me laugh. This article stated that the cost per vehicle was $2600 (including the value of the clunker) and the gas saving was 840 gallons. They did a nice calculation on the environmental savings in pollution costs of $.71 per gallon or a total of $596 and concluded that the program costs $2000 per vehicle. Ha ha, they must’ve been trying to see if we were paying attention because they left out the savings from the gasoline that wasn’t used. If 840 gallons were not used then there would be a savings of $2100 at the current national average cost of $2.50 per gallon. The net benefit of the program is $100 per vehicle if you assumed that gasoline that is saved has a cost benefit.

The WSJ seems to think that the current drop in sales indicates the program was a failure. First of all the drop in sales simply brought them down to the trend of the months before the stimulus and shows no indication of significant reduction in sales. In fact, auto sales for September were down only 22.7% while year-to-date sales, which include the clunkers stimulus, were down 29.2%.

As a former brand manager, I’m surprised that sales didn’t drop below trend. There may have been relatively little forward movement of purchases because the vehicle had to be worth much less than $4,500 and replaced with a new vehicle. Most of the people with vehicles this cheap only buy vehicles when the old one dies and then probably buy used vehicles. (I learned this raising about $8MM though vehicle donations.) I’d estimated before the program ended that the purchase move forward/back was not more than 33% but it appears to have been much less than this. In fact, the data shows no reduction in sales trend so it is all net gain.

The Wall Street Journal really needs to get a brand manager to evaluate programs like this, not a journalist.

Disclosures: None for this article

Comments

[mncarguy:]

There is a flaw in your argument. Certainly it could be argued that the life of the new vehicle is 13 years, but the savings assumes that if someone didn't buy a car under clunkers, they would keep driving the clunker for that lenght of time. That probably woldn't be the case as many of these vehicles were on their last legs and the owners would have purchased a new vehicle in the short term anyway.

Oct 06 06:31 AM

[VennData:]

The Wall Street Journal is an ideal example of the adage: those who cannot work, write. Those who cannot write, write editorials.

Oct 06 06:52 AM

[mcbain:]

"trend of the months before stimulus"... I think this trend would have been higher if people had not heard that the government was considering a cash for clunkers program for 6-8 months. I believe many people held off on buying new cars waiting for the program. I know I did.

Oct 06 07:18 AM

[Jeff B.:]

Here is the bottom line folks. Any reasonable program that gets older, less efficient & more polluting vehicles off the road is good for everyone in the long run. However, such programs will never shore up the domestic auto industry until they start producing superior vehicles -- which they don't.

Oct 06 08:53 AM

[One Eyed Guide:]

MNCarGuy:

You're right that the length of time is too long at 13 years, but it would have more work than this article merited to estimate on how short the period should be or how much of the mileage increase is lost over time due to vehicle replacement. The Abrams et al article had it at 3 years with a cliff change but this seemed wrong to me. If the Gov. actually publishs the average age and mileage of the trade in populations a better estimate could be done.

On Oct 06 06:31 AM mncarguy wrote:

> There is a flaw in your argument. Certainly it could be argued that
> the life of the new vehicle is 13 years, but the savings assumes
> that if someone didn't buy a car under clunkers, they would keep
> driving the clunker for that lenght of time. That probably woldn't
> be the case as many of these vehicles were on their last legs and
> the owners would have purchased a new vehicle in the short term anyway.

Oct 06 09:04 AM

[RSchoenberger:]

As a journalist who has written extensively about Cash for Clunkers, I would like to point out one major issue with this blog post.

You refer to the WSJ report as it were a news article. It is an editorial on the Journal's opinion page. While the term journalist applies to both news and opinion writers, there are very distinct differences between the two jobs.

A reporter's job is to present the facts and fairly and completely as possible. An opinion writer's job is to present a specific point of view. In the case of the Journal, that point of view tends to be very conservative with a healthy dose of skepticism toward any government intervention in private markets.

Editorials in Automotive News and Detroit's major newspapers had more positive views on the impact of the clunkers program. That's not to say any of those publications was right or wrong, just that they are presenting different opinions on the same sets of facts.

If you look at the Journal's news reports on the clunkers program, you'll find a much more even-handed approach to evaluating the pros and cons.

Robert Schoenberger
The Plain Dealer
cleveland.com

Oct 06 09:55 AM

[Terry Shelton:]

I didn't hear any comments (one side or the other) to suggest that C4C had a lesser impact because Toyoda still imports 40% of its vehicles sold in the U.S. Japan, Korea nor Germany participated in the $3 bil the U.S. taxpayers spent. C4C is good policy but poorly considered (administered).

T. Shelton

Oct 06 10:29 AM

[One Eyed Guide:]

Robert,

You are correct, I should have titled the article "Don't let an Editor evaluate Cash for Clunkers.

My apologies to thoughtful and detailed journalists.

However, I don't expand this apology to the Editors of the WSJ as this was clearly a poorly researched article that quoted an incomplete cost analysis and had poor trend analysis. Many current government actions have been poorly thought out and there are many fine analyses in the WSJ that point out these short comings. Unfortunately, this was not one.

One Eyed Guide

On Oct 06 09:55 AM RSchoenberger wrote:

> As a journalist who has written extensively about Cash for Clunkers,
> I would like to point out one major issue with this blog post.<br/>
>
> You refer to the WSJ report as it were a news article. It is an editorial
> on the Journal's opinion page. While the term journalist applies
> to both news and opinion writers, there are very distinct differences
> between the two jobs.

Oct 06 12:40 PM

[WTF-J:]

To call the program a success and for the math to work presumes that the new cars wouldn't be sold without the program. Coupling the C4C "bubble," with the post-C4C "hangover," suggests that the program was indeed a bust. (Except for car dealers, Toyota, Honda, and Ford.) There were probably better ways to impact the environment with $3B.

Oct 06 01:14 PM

[Mad Hedge F...:]

myr Was that nice for you, dear? Now that cash for clunkers has expired, new car sales have cratered. September is coming in at a 7 million unit run rate, lower than before the program started, and down 24% from already depressed YOY levels. It really makes you wonder what will happen when the other government stimulus programs run out. The $8,000 tax credit for first time home buyers ends November 30, and unless you have a deal in contract, the program is effectively over. That is thought to be behind the recent weakness in new home sales, the biggest beneficiaries of the program. Is this the beginning of the “square root,” or the “W.”

Oct 06 02:03 PM

[DavidF:]

I for one would not have bought a new car. My kids were driving a 24 year old car that got 12 mpg. We couldn't afford anything better and pay the college tuition ( and yes the kids work). Now they have a very nice Ford Focus with all the latest safety equipment and get 28 mpg. Where were all the talking heads when the oil companies got billions and the college tuition deduction was eliminated? Where were all the talking heads when it was a "budget buster" to eliminate the AMT? The W-2 earners making 100K-200K have gotten nothing, no college financial aid, no tax breaks, nothing. Now we get relatively a few pennies and all the talking heads go into a meltdown. Think it's easy? Report every penny of your income and fill out the FAFSA and be told you can afford to pay about 40% of your take home. "Well" the financial aid office said," you can take a second mortgage, a lot of parents do". Now THAT idea worked out real well didn't it.

Oct 07 01:02 AM