Cash For Clunkers: Analyzing The Idea

One of the new ideas (.pdf) being bandied about by Congress is a $4,500 voucher that will be given to any person or business who is going to buy a new vehicle in exchange for an old vehicle that gets bad gas mileage (i.e. less than 18 miles per gallon).

Let me see what that yields:

1. Assume that the average person drives 12,000 miles per year.
2. Assume that the average mileage a car gets is 22 MPG.
3. Assume that there are 250 million vehicles in the U.S.
4. Assume that the MPG of the lowest 25 million is 15 MPG.
5. Assume that a new car MPG is 29 MPG.

Therefore: 300 million people in America multiplied by 12K miles that each person drives on average per year divided by the average 22 MPG that their cars get, and that means that the United States uses 163 billion gallons of gasoline per year on road vehicles.

Then, for $112.5 billion spread over 5 years:

1. 25 million 15 MPG vehicles would be replaced by 29 MPG vehicles.
2. At 12,000 miles per year, x25 million by a 14 MPG difference:
1. 10.3 billion gallons of gasoline would be saved per year.
2. 10.3 B gallons x $2.50 / gal = $25 billion saved per year or $125 billion over 5 years.

It's a bit socialist in its application, I agree, using government money to decrease expenses of the citizenry, but look at it this way: The federal government is spending $34 billion to bail out automakers, and not a single additional car is being sold, and not one bit of benefit (other than saved jobs) is making it back to the public in general.

About 17 million cars per year are sold in America. This "Cash for Clunkers" program would cover (or add to that number) 5 million cars sold per year. For $112.5 billion, the federal government could (a) bail out or prop up the auto industry for the next 5 years, (b) spur domestic spending, (c) decrease vehicle gasoline consumption and increase fuel efficiency of cars in America by at least 6%.

It's not much, but like I said, if you're going to bail out the auto industry, I would think that this is a much more practical and beneficial way of doing it.