Government Burden To Run Program Increases Cash For Clunkers Cost

We wrote last week that the U.S. Government’s “Cash for Clunkers” was so popular that it burned through its initial one billion dollars in a few days. Congress allocated a further two billion by transferring some of the “Stimulus” funds to this program to keep it going. The program has led to anecdotal reports of increased car sales that may help U.S. and foriegn automakers.

The program provides for either a $4,500 or $3,500 rebate to a customer trading a car in for a new one with better gas mileage. The program requires the traded in car to be destroyed, not re-sold. The idea behind this was two-fold: Stimulate sales as well as increase the fleet gas mileage of cars on the road. It certainly has done both but there may be a down stream decrease in sales as those planning to buy in the next six months or so accelerated that to get the “free” money.

There are other costs related to this program beyond just the rebates. There may be an effect on the used car and parts markets as the traded in ones are kept out of that business. Keeping these cars might have a multiplier affect on the economy as it prevents some people getting a car that may allow a better job or work.

There are other costs related to the program and that is for the government to run it. A former Administrator of the General Services Administration (GSA), Lurita Doan, estimates that the government needs to hire people, set up websites, and process applications to the tune of over $1,500 more per rebate. Depending on how many new workers are hired or paid out of the fund this could be higher. Of course the more rebates processed in a shorter time will lower the cost per one as the costs are spread out over the program.

This is one aspect of any Federal spending that is little discussed. Any program be it food stamps, education funds, or buying an F-22 has built into it some overhead. This may be large or small depending on the size and scope of it. Not all of the money that seems to be designated for something will go to that. At each step some will be spun off to pay for the workers assigned to process the funding. That has always been one of the benefits of contracting to government work — the overhead. It has always been assumed that a contractor has less overhead and more flexibility. Often this is true although it is not always easy to make a direct one-to-one comparison.

There have been some estimates that the program will cost more then this in the end. Edmunds.com is estimating that people are paying higher prices due to the timing. Normally dealers cut prices a great deal at the end of the summer. Factoring in the government money they do not have to do this so people could end up paying more then they normally would.

The biggest criticism of the program like several other recent Federal initiatives such as TARP, the GM and Chrysler bailouts and the stimulus is that the market should be left alone to deal with these problems rather then having the government try to influence it.