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This is a question that came into my inbox amid an exchange about the CARS Program:

Is it worth $2000 to the country to increase the MPG of one vehicle by say 10 mpg?

Of course, that is a stove piped question (and somewhat out of context one as that increased MPG, by the way, cost $4.5k to the taxpayer — not $2k).

Repeat with me:

The CARS Program was, first and foremost, a stimulus program. While promoted and advertised, the direct environmental and energy security and traffic safety benefits were secondary and tertiary concerns.

But, join me after the fold for some discussion of this question.

What is the fuel impact?

Now, lets take the rough “avg” improvement of 15 to 25 mpg that initial information is providing re the CARS program and translate it to the more meaningful gallons per 100 miles (gp100m): This cuts from 6.66 to 4 gp100m. Or, for the average 12k miles / year of the average car, this is a reduction from 800 gallons to 480 gallons per year, or a direct financial savings of $800/year at $2.50 / gallon. That direct savings, of course, accrues directly to the car owner rather than to the taxpayer.

Now, about society, lets take this simplistic analysis and look across the entire program. That first $1 billion should mean roughly 250,000 vehicles vehicles / year. At 320 gallons/year savings, on average, we are talking 80 million gallons / year or about 2 million barrels / year or about 1/10th of one day’s oil usage in the United States. On a daily basis, we talking about 5500 barrels/day in reduced demand.

In terms of energy security and reducing the demand for foreign oil, that is just a bit more than a drop in the bucket. And, it is a cost in the range of $200,000 for every barrel of reduced daily oil demand. I have many ideas that are more cost effective in terms of reducing oil demand and improving energy security. (How about a $10 billion program to provide 100% of light passenger vehicles with dashboard real-time feedback systems for free for 100% of 1996 and beyond cars that do not already have them. Dependent on analysis you work with, this would lead to an average 5-10% improvement in fuel effiiciency (the Prius Effect). A 5% effect (which I believe to be low) would mean roughly 400k barrels/day. Thus, for a program of about 10 times the price, we are talking in the range of 50+ times the impact. And, by the way, this would also have some of the Cash for Clunkers’ corrollary benefits. (A small stimulus impact, saftey improvements (due to inducing safer driving, encouraging people into the future to get more fuel efficient vehicles, etc …)

However, let’s remember that this was #1 stimulus:

• That $1 billion sparked roughly $4-5 billion in car sales just for the actual trade-ins.
• Dealers are saying, however, that the program sparked much more traffic and that there are many sales that didn’t involve trade-ins that they credit to this additional traffic. Let’s add another 25% (which many say is low) to account for that. Another $1-1.25 billion.
• Okay, $6 billion in additional sales, translates into about $300 million in local sales & licensing taxes (an indirect Federal payment into local coffers). That $6 billion or so translates, due to multiplier impacts (salaries meaning going out to dinner, waitresses getting tips spent at grocery stores, etc …). Could this be a 1.5 multiplier — or a sparking of $9 billion in economic activity?
• Okay, at the end of the day, how much does the Federal gov’t gain back either directly (via tax revenue) or indirectly (lower benefits to unemployed, for example) due to $9 billion? Robust analysis might suggest that the program will pay for itself.

Now, going back to the question: Is it worth the cost of this program solely on energy/environmental grounds? No, at least not directly.

However, there is an indirect item: what is the lesson / message that automakers, dealers, and people are taking away from this?

I talked, this weekend, with someone who traded in a SUV for Prius. First Prius on his block and first drive-way without a SUV or Minivan. Chatted with the husband (who had complained about downshifting from a big truck prior to the move) who said that they had had 9 neighbors over to check out the new car within the first two days. And, one of them went in and traded in a McSuv for a pseudo-fuel efficient Sedan (moved from 12 mpg to something like 28 (Ford Fusion, non-hybrid)). (And, he was sort of proud of ‘being a leader’ …)  There is a signaling value, along with many other aspects, that could help this be a tipping point toward more efficient car options in dealerships and increasing demand for those options.

Thus, the CARS Program was first and foremost about economic stimulus. While additional analysis is merited (how much did auto shop work decline due to reduced clunkers on the road?), this seems to be a near unqualified success in terms of sparking economic activity.

In direct energy and environmental terms (and safety improvement terms), judged in isolation, the program is very high cost for the benefits. We, however, have yet to see the indirect benefits which might prove more powerful.