Edmunds has released this analysis explaining their approach on determining the cost of Cash for Clunkers.

Their approach differed from mine, but provides insight into one of the assumptions. I had assumed that 50% of the assumed gross margin derived from the Cash for Clunkers units were “marginal.” Edmunds’ PhD’s have corrected that, stating that they believe 125,000 units were marginal, which is only 18% of the 690,114 units traded in. This is a big variance that hurts the marginal return to taxpayers on their investment in the auto manufacturers.

Their approach takes the nearly $3 billion in claims filed and divides it by the 125,000 marginal units. The implied statement is that the other 565,114 units were unnecessarily subsidized by the government. Those costs, therefore, become attributable to the necessarily subsidized units, or the 125,000.

While the targeted endpoint isn’t different from my analysis, by discussing this research I realized I left out a consideration, and that is government overhead. This is something that Edmunds shares with me - neither of us considered the cost of administration. This is a material omission, as the claims were not processed and paid at no expense.

In short, by assuming only 18% of the sales were marginal, and by considering marginal costs of administration, the -34% return for taxpayers that I originally calculated is significantly understated, with the real return being much, much worse.

I was reading through comments at the WSJ the other day when a poster drew a connection between Cash for Clunkers and healthcare. The general idea followed this line of reasoning (paraphrasing):

Do we really want to entrust healthcare to the same entity that generated the massive failure of Cash for Clunkers.

I’m not really sure that is a fair question, as some I’ve asked have said that their opinion is that Cash for Clunkers was always meant to be a failure, financially at least. For some strange reason, that does almost make sense.

In any event, I was curious as to how Cash for Clunkers shaped up in terms of a return for the taxpayer.

I broke the analysis in the following parts:

1. Capital Outlay 1: total claims in dollars
2. Capital Outlay 2: financing expenses
3. Return 1: savings from the cost of oil
4. Return 2: dividends from auto manufacturers
5. Return 3: cash equivalent of the environmental impact

Each of these is viewed as marginal, in that they would not have otherwise occurred.

The executive summary: Cash for Clunkers created a -34% return for taxpayers.

A pdf showing the full analysis is attached here.

Essentially, the argument follows the line that tax dollars were used to stimulate the economy, aid the auto manufacturers, and generate a benefit to the environment. To accomplish this, we spent $2.9 billion. In return, we saved $1.3 billion on oil, and in theory would receive $1.1 billion in additional value or dividends through ownership of auto manufacturer stock (assuming all equity is owned by US taxpayers - probably not a valid assumption). We also saved CO2 emissions to the tune of 11 million tons. However, because not everyone can pay cash for these new vehicles, additional financing costs of $0.8 billion would need to be incurred.

The end result is that on our $2.9 billion investment, our return is ($1.0 billion).

To be fair, I tried to keep my assumptions, where used, conservative, in that I did not deliberately try to force this into a negative return situation. This statement alone will reveal my preconceptions, but if anything my awareness of these notions was heavily guarded against. From that standpoint, I think the bulk of the analysis can withstand argument. However, I would appreciate any feedback on the approach and results.