‘Cash for Clunkers’ To Continue

It now looks like the wildly successful “Cash for Clunkers” program will get another $2 billion of funding after the initial $1 billion was used up in about a week. While to get the $4,500 or $3,500 subsidy the improvement in gas mileage only had to be 4 mile per gallon, the actual improvement for the new cars being sold vs. the clunkers being traded in has been 9 miles per gallon.

If we assume that the clunkers could have been on the road for three more years, and that they and the replacements would have been driven 12,000 miles a year, that adds up to a savings of 300 gallons of gas saved per car per year, or 900 gallons per car. With 250,000 cars sold under the first installment of the program, that works out to a cumulative savings of 225 million gallons of gas saved.

Not a complete answer to our dependency on imported oil, but not exactly a drop in the bucket, either. If the second installment works just as well, we up to a cumulative savings of 675 million gallons fewer of gasoline burned.

This is in addition to the benefit of actually putting auto workers (and suppliers) back to work, and car dealers being actually able to sell some cars and keep their employees. As a result, some of the spending will come back to the government in the form of the income taxes these workers pay.

Keep in mind that it will also result in smaller losses at General Motors and Chrysler, and we the taxpayers have rather substantial equity interests in those firms.

As a result of the program, Ford (F) actually posted a year-over-year increase in sales in July (2.2%) its first increase since 2007. Yes, three of the top five models sold under the program were made by Toyota (TM), but two of those are built in America, as are the other two — one from Honda (HMC) and the other from Ford.

Traditionally, increased sales of durable goods like autos are one of the key engines to power the economy out of a recession (housing is the other traditional engine). The pick up in the sales rate to 11 million from down close to 9 million is a very significant move.

Granted, it is still well below the 16 million rate we were averaging a few years ago, but it is highly unlikely we will get back to those levels for a long, long time. The American consumer simply has far too much debt and needs to rebuild his or her balance sheet. The option of tapping the equity in the house to get a new SUV is simply no longer available.

Still, relative to the rest of the money that has been thrown around trying to stabilize the economy and the banking system, the $3 billion spent on the two installments of the plan is chump change. It is, for example, only 25% of what passed through American International Group (AIG) to pay in full the credit default swaps of Goldman Sachs (GS).

Despite the obvious success of the program, there are those who would like to see it killed, and since the House has already recessed for August, the bill has to pass the Senate without amendments. Senator Harry Reid (D-NV) has indicated that he has the votes to do this.

The question is: why do some want to kill the program?

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