Tuesday, August 4, 2009

Potlatch writ Large

Potlatch - the custom of intentionally destroying goods and wealth in a public manner to enhance ones status.

The media has been reporting that the fedgov's CARS program is out of money. Actually they keep referring to the program by the utterly inaccurate sobriquet Cash for Clunkers, despite the fact that the actual program details actually rule out anything that most folks would consider a "clunker".

The rules say the car has to be less than 25 years old, so that 78 Ford LTD that spews black smoke and needs an oil fillup with every tank of gas doesn't qualify. A 2006 Toyota Tacoma on the other hand, does qualify. (of course it's worth well more than the $4500 voucher.)

And in one week the program is out of money... Lets look at the Math.

In any given month 60,000 to 70,000 vehicles are traded in that would qualify (and be worth less than $4500 trade value) under this program. And remember, ANY vehicle that is less than 25 years old and gets 18 mpg or less (per the EPA) qualifies. The question is whether it is worth more as a trade, or more under the .gov program.

So every month, consumers trade in 60-70,000 of these vehicles. Due to the press coverage, approximately 100,000 people postponed purchasing a new car until the program went into effect. Due to rumors of funds running out approximately 60-70,000 people accelerated their new car purchase by a month or two.

And that is how you sell 4 months worth of cars in one weekend. I suspect when this all shakes out, we will see that the vast majority of these purchases were simply time shifted by consumers to take advantage of the program. Then again, we can't expect our congresscritters to actually think about the consequences of their actions now can we?

As for how things work, Edmund's has a nice chart:


Thus in a hypothetical example, if you were thinking of trading in your Explorer, you could get $3500 for it if you bought another Explorer that got 2 mpg better than your existing one, or $4500 if it got 5 mpg better. (again, it's the window sticker "combined" mileage that matters, not the true real-world mileage) If you wanted to trade it for a passenger car it would need to get 10 mpg better to qualify for the full payment. The Fusion is a very nice car that may qualify in this case.

Of course, any Explorer that is less than 10 years old is worth at least $4000 on the open market, so the only real point in trading it in under this program would be to avoid the hassle of selling it yourself. Becasuse lets face it, the dealership would only give you $1500-$2000 on a $4000 car anyway right?

I use the Explorer as an example because Ford dealers are reporting that the #1 vehicle turned in under this program are Explorers.

Oh, and the dealership is required to disclose to the customer the "scrap" value of the vehicle, and deduct the scrap value from the price of the new car as well.

Remember that 18mpg figure I mentioned earlier. Well, it's interesting. Turns out that a whole bunch of Toyotas and Hondas are rated at 19mpg by the fedgov. Brand loyalty is very strong. If you own a Ford it's good odds that your next car will be a Ford, same for a Honda. GM buyers tend to stick with GM as well, although since the bailout GM and Crysler have both been loosing market share to Ford.

Thus the big winners here are the domestics, as people trade their old Ford for a new Ford, or an old Chevy for a new Chevy. Hundai is also a big winner since their primary target is folks buying their first "new" car. They have several models priced right at $10K. Add in $4500 from your "trade" and we are talking a brand new car for under six grand. And before you go dismissing the Korean automaker their quality is very much improved over the old self-disassembling death traps they made in the 80's. (and their primary buyer isn't old enough to remember the eighties anyway)

Regardless, the vast majority of viehicles destroyed under this program are going to be newer models that don't really pollute anyway. Any car newer than 1995 sold in the US is equiped with an ODB II computer that monitors your tailpipe emmisions such that a 96 Accord pollutes about the same as the 2010 version. (Yes Virginia, the computer in your car is spying on you and reporting whether your car pollutes or not).

Thus, I do tend to see this whole thing as some sort of giant national exercise in potlatch. Destroying perfectly serviceable vehicles, most of them newer models that do not pollute much anyway, but just happen to be worth less than $4500 at trade in, is hardly an example of our finest hour as a nation or a people.

Nonetheless, I'm certain it will gain us much prestige throughout the 3rd world. "Look, the Americans are so rich they can intentionally destroy perfectly good cars and trucks on purpose..."

1 comment:

Anonymous said...

People are also trading in their paid off cars for a newer car with car payments. Dealers are letting these folks use the rebate as their down payment.

The main byproduct is people who really have no business taking on additional debt are now buying new cars with lots of bells and whistles they can't really afford.

Sounds like the housing crisis again.

Want a great car with lots of neat gadgets? You will find it at the auto auction in three years as a repossession.