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Why the Cash for Clunkers program is a failure.

Consumer Economics Failure  |  Market Economics Failure

Introduction

I'm not normally one to pay attention to the rest of the world, I've got too many things going on in the garage, and new cars, short of what appears on Top Gear bore me to tears. But, with all the commotion on the automotive forums I finally had to look into things and understand the value or lack thereof with this program. So far, I can only determine that there is a tremendous lack.

Impact on the Consumer's wallet.

I started by exploring my primary vehicle: 2002 Ford Explorer Flex-Fuel

With my Explorer, the car is completely paid off, I've kept up the maintenance (as the car has been in the family since new) and the overall quality of the car is nothing short of close to showroom excepting some clear coat peel on the black side panels, a crack in the rear tailgate (because of poor design), and the AC transistor presently needs to be replaced. The car has 116,229 miles on the odometer this morning which equates to an average of 15,334 miles traveled per year. The original sticker price of this car was $27,585 and title designates a list price value of $24028. The City MPG is listed at 15mpg, the Highway at 21 MPG.Based on records covering the last 7 years of ownership the average fuel economy of this car, with me driving, is 22.5 MPG. The fuel tank holds ~20gallons of fuel. Now, in my family we buy cars for cash, we've got an ingrained gut response at the concept of financing something that will be worth less when paid for than it was at purchase. For the sake of comparison, I went ahead and pretended that the car was originally purchased with trade-in down payment of $5,000 and financed over a period of 48 months at a 4 percent interest rate, something that would have been reasonable at the time of purchase.

Using excel I built out the following Total Cost of Ownership spreadsheet for the vehicle from 2002 to 2019 (I had to pick an end date far enough out to appropriately model things). In this spreadsheet I covered the relevant expenses to me, as a vehicle owner in Arizona (In other words, our annual registration is based on an amortized schedule of the vehicle's original value, so registration costs have a significant impact when it comes to owning a car). Also, you'll note that the mileage halves in 2010. I'm married now, and we've determined that 1/2 of the mileage I used to drive winds up on the wife's car. In other words, our vehicles split the miles. The maintenance column covers oil changes. You'll note that the figure is a little high. Even though I change my own oil, we always use the highest quality synthetic motor oil, oil filters, air cleaners and fuel injector cleaner. Finally, in 2010, I started assuming that the maintenance costs would skyrocket on the car. Note that I do the work myself, so the dollar costs are for repair parts, not labor. The assumption is that I'd spend 20% more on repairs each year. If you look at the total amount, it's just shy of $10,000 dollars. For that amount I can more or less rebuild the entire car!

Here's the spreadsheet output:

Year Down Car Payment Insurance Registration Mileage ** Gas $ AVG Avg MPG Gas Cost Basic Maint* Repairs*** Description TCO / Annum
2002 $5,000.00 $5,114.52 $1,800.00 $468.01 15,334 $1.40 22.5 $954.12 195 $8,531.65
2003 $5,114.52 $1,800.00 $391.96 15,334 $1.50 22.5 $1,022.27 195 $8,523.75
2004 $5,114.52 $1,800.00 $328.27 15,334 $1.70 22.5 $1,158.57 195 184.97 $8,781.33
2005 $5,114.52 $1,800.00 $274.92 15,334 $2.25 22.5 $1,533.40 195 $8,917.84
2006 $5,114.52 $1,800.00 $230.25 15,334 $2.50 22.5 $1,703.78 195 1233.57 Maintenance $10,277.12
2007 $0.00 $1,080.00 $192.83 15,334 $2.81 22.5 $1,915.05 195 600 Tires $3,982.88
2008 $0.00 $1,080.00 $161.50 15,334 $3.26 22.5 $2,221.73 195 $3,658.22
2009 $0.00 $1,080.00 $135.25 15,334 $2.46 22.5 $1,676.52 195 310.95 Struts/AC $3,397.72
2010 $0.00 $1,080.00 $113.28 7667 $3.00 22.5 $1,022.27 195 373.14 $2,783.68
2011 $0.00 $1,080.00 $94.87 7,667 $3.25 22.5 $1,107.46 195 447.768 $2,925.09
2012 $0.00 $1,080.00 $79.45 7,667 $3.50 22.5 $1,192.64 195 537.3216 $3,084.42
2013 $0.00 $1,080.00 $66.54 7,667 $3.75 22.5 $1,277.83 195 644.7859 $3,264.16
2014 $0.00 $1,080.00 $55.73 7,667 $4.00 22.5 $1,363.02 195 773.7431 $3,467.49
2015 $0.00 $1,080.00 $46.67 7,667 $4.25 22.5 $1,448.21 195 928.4917 $3,698.38
2016 $0.00 $1,080.00 $39.09 7,667 $4.50 22.5 $1,533.40 195 1114.19 $3,961.68
2017 $0.00 $1,080.00 $32.74 7,667 $4.75 22.5 $1,618.59 195 1337.028 $4,263.35
2018 $0.00 $1,080.00 $27.42 7,667 $5.00 22.5 $1,703.78 195 1604.434 $4,610.63
2019 $0.00 $1,080.00 $22.96 7,667 $5.25 22.5 $1,788.97 195 1925.32 $5,012.25
total $5,000.00 $25,572.60 $23,040.00 $2,761.75 $26,241.59 9997.173 $93,141.65

Based on the data output in the table, my total cost of ownership from 2002 to 2019 equates to $93,141.65 (a pretty impressive and scary sum, at least right now). This breaks down to an annual average total cost of ownership of: $5,175.

Then, I started poking around on the government's web site, and finally ended up at Edmunds.com, which has much better information. After scanning through all the vehicles on the list, the closes comparable vehicle that I could quality for was the 2009 Ford Escape Hybrid. (bleh!) So, the car I'm trading in for is smaller, which when you have a wife, two children and two 100lb dogs, I'm not sure if everyone will fit. We can barely squeeze ourselves, the dogs and luggage for road trips into the existing Explorer.

To get the estimates included in the spreadsheet I went and got the average retail price of the base model (not an uprated one) for my zip code which is $28,301, I also researched what the average loan rate and terms are for people buying cars under the clunkers program (6 years at 7.5%, which is actually somewhat generous, as many folks are paying a higher interest rate and spreading payments across 7 years!). I got a progressive quote (my present insurer) to find out what my costs would be to get the correct coverage for the car during the repayment cycle. The NADA high trade-in value for the car is $3,375 (which, you couldn't convince me to trade it for, btw). I also added $1,000 in cash as part of the down payment, and the $4,500 credit on top of that. During the life of the vehicle I added repair costs for brakes & new tires, as I know they'll need replacing at least once. There's likely more service work in there, but I don't have the vehicle's maintenance schedule handy.

Year Down + Trade Car Payment Insurance Registration Mileage ** Gas $ AVG Avg MPG Gas Cost Basic Maint* Repairs*** Description TCO / Annum
2002 $5,000.00 $5,114.52 $1,800.00 $468.01 15,334 $1.40 22.5 $954.12 195 $13,531.65
2003 $5,114.52 $1,800.00 $391.96 15,334 $1.50 22.5 $1,022.27 195 $8,523.75
2004 $5,114.52 $1,800.00 $328.27 15,334 $1.70 22.5 $1,158.57 195 184.97 $8,781.33
2005 $5,114.52 $1,800.00 $274.92 15,334 $2.25 22.5 $1,533.40 195 $8,917.84
2006 $5,114.52 $1,800.00 $230.25 15,334 $2.50 22.5 $1,703.78 195 1233.57 Maintenance $10,277.12
2007 $0.00 $1,080.00 $192.83 15,334 $2.81 22.5 $1,915.05 195 600 Tires $3,982.88
2008 $0.00 $1,080.00 $161.50 15,334 $3.26 22.5 $2,221.73 195 $3,658.22
2009 $0.00 $720.00 $135.25 10,223 $2.46 22.5 $1,117.68 130 0 $2,102.93
2009* $8,875.00 1703 616 475.4568 5,111 $2.46 32.5 $386.89 50 $7,606.35
2010 4087.2 1478.4 $398.20 7,667 $3.00 32.5 $707.72 150 $6,821.52
2011 4087.2 1478.4 $333.49 7,667 $3.25 32.5 $766.70 150 $6,815.79
2012 4087.2 1478.4 $279.30 7,667 $3.50 32.5 $825.68 150 $6,820.57
2013 4087.2 1478.4 $233.91 7,667 $3.75 32.5 $884.65 150 $6,834.16
2014 4087.2 1478.4 $195.90 7,667 $4.00 32.5 $943.63 150 1000 tires $7,855.13
2015 2384.2 1478.4 $164.07 7,667 $4.25 32.5 $1,002.61 150 250 brakes $5,429.27
2016 0 1080 $137.41 7,667 $4.50 32.5 $1,061.58 150 $2,428.99
2017 0 1080 $115.08 7,667 $4.75 32.5 $1,120.56 150 $2,465.64
2018 0 1080 $96.38 7,667 $5.00 32.5 $1,179.54 150 $2,505.92
2019 0 1080 $80.72 7,667 $5.25 32.5 $1,238.52 150 $2,549.23
total $9,375.00 $50,095.80 $25,686.40 $4,692.90 $21,744.66 3045 3268.54 $117,908.30

After doing the final tally, the total cost of ownership for the same time period (2002 - 2019) winds up being $117,903.30. That's $24,761.65 dollars more to earn the $4,500 dollar discount. Not good economics methinks.

So, in a major recession, which considering that foreclosure rates just jumped again, is not ending any time soon, the goverment wants to give us $4,500 of our own tax dollars to buy a new car which will incur almost $25,000 dollars of additional debt per purchaser. Does this sound right? It sounds pretty horrible to me!

Consumer Economics Failure |  Market Economics Failure

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Contents copyright 2008, 2009 - Jody F. Kerr

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