Cash for Clunkers Program Benefits

Although most commentators have commended the Cash for Clunkers program, there have been a few notable exceptions such as John McCain who is threatening to filibuster the extension of the program in the US Senate. The acclaim for the program has been in general terms and, since I haven't seen the program benefits quantified, below is my estimate of what the program actually will deliver. You can download the spread sheet used to calculate the benefits and modify the assumptions if you like. The benefits below are based on the initial program funding of $1 billion and you should triple the benefits if the $2b extension is passed by the US Congress.

SUMMARY OF BENEFITS (Remember to triple #'s if program extension passes)

1. Since the US consumes 20 million barrels of oil per DAY, a savings of 1.6 to 3.6 million barrels of oil per YEAR will not significantly reduce dependence on foreign energy imports.
2. The program will generate a one time benefit of about $250 million in increased tax revenues to financially strapped state and local governments.
3. The program will save or add 341,000 jobs.
4. The program will result in additional federal income tax receipts of $3.7 billion per year.
5. The program will add 0.11% to US GDP.
   

In summary, it appears that the program was an outstanding success from a return on investment perspective and will significantly improve the economy but will do little to improve energy independence.


DETAILED BENEFIT ESTIMATES FROM PROGRAM

$250,000,000 Additional sales tax to states & counties
3,567,447 BBLS of oil saved per year @ 19.5 gallons gas per 42 gallon barrel. Remainder of 42 gallons other products and/or lost in process.
1,656,315 BBLS of oil saved per year @ 42 gallons gas per 42 gallon barrel. Actual conversion factor is 19.5 gallons per 42 gallon barrel.
$231,884,058 Annual reduction in payments for oil to foreign countries @ 19.5 gallons of gas per 42 gallon barrel.
$107,660,455 Annual reduction in payments for oil to foreign countries @ 42 gallons of gas per 42 gallon barrel.
$16 Billion Annual increase in GDP
341,450 Number of jobs created or saved as a result of program
$3,680,000,000 Annual increase in IRS income tax receipts

ASSUMPTIONS/VALUES USED TO DERIVE BENEFIT ESTIMATE

250,000 # of new cars purchased in initial Cash for Clunkers program.
8 Avg MPG improvement
15 Avg MPG of clunker
23 Avg MPG of new car
5.00% Avg sales tax rate
$20,000 Avg cost of new car purchased
12,000 Avg miles driven per year from Federal EPA estimates
4 Money Velocity
23.00% Avg Federal Marginal Tax rate from the National Bureau of Economic Research
80.00% Domestic content of new vehicles
$65 Cost of barrel of oil
$46,859 2008 US GDP per capita from IMF

- Sales tax receipts by state and local governments will not result in increased expenditures.
- All consumption resulting from new car purchases will be spent on domestically produced goods and services.
- All consumption resulting from new car purchases will be spent rather than saved.