Washington Mathematics are Dangerous
Sunday’s are the only days I allow myself to wake up without a clearly outlined plan of attack. The house is quiet until later in the morning and I move between laptop and desktop to research what the world is up to. Sometimes this unstructured approach takes me to potentially strange and awkward thought processes and here is one I need to share with you.
I was reading the very consumer friendly Cash for Clunker Appliances initiative that went into motion a week or so ago and I must admit that anyone who needs to replace their rusty old appliances should have taken advantage of this fabulous offer. (Florida’s budget for this program is already exhausted).
Yet…at he same time I thought about the Cash for Clunker Automobile Program that was offered a while back by a government that does not shy away from using tax dollars on micro give-aways to the detriment of the macro economy.
Even though I always instinctively felt there was something wrong with these Cash for Clunkers stimulus packages, I never found the time to further analyze the numbers versus the objectives. In a time when yesterday’s news is no longer relevant, we don’t seem to want to learn from our mistakes. Well this morning became the victim of my thoughts on Washington and its unbridled need for short term action that supersedes long term fiscal responsibility.
The Cash for Clunkers program was presented as an opportunity to get old, inefficient, environment damaging, gas guzzling vehicles of the American Roads, by offering its owners a sizable cash rebate if they turned their clunkers in for newer more economical and less polluting vehicles. Politically the program was sold on many levels, but most importantly creating a soft landing for a dying car manufacturing industry and a hard push for the environment and the fuel efficiency factor.
When the final numbers came in (and even these are questioned by insiders) the objective to recharge the US automobile manufacturing was sorely missed. From the 690,114 clunkers traded in, the top ten brands were all US made vehicles. However the cars these clunkers were traded in for, were 8 out of 10 Japanese or Korean.
Even if these numbers seem to have been “massaged” before publication as insiders claim, it is clear that Americans didn’t see the US car industry as a particularly viable one.
Oh and by the way, numbers explain that out of the 690,000 vehicles that were part of the exchange, only 125,000 were incremental, meaning sales -over and above the normal- because of the program. The other sales would have happened anyway.
Now the next calculation concerns the second objective of fuel efficiency and energy savings.
The average fuel saved between the clunker and the newbie was calculated at 9.1 mpg by automobile tracking organizations like edmunds.com
• A clunker that travels 12,000 miles a year at 15 mpg uses 800 gallons of gas a year.
• A vehicle that travels 12,000 miles a year at 24 mpg uses 500 gallons a year.
Conclusion, the average Cash for Clunkers transaction will reduce US gasoline consumption by 300 gallons per year per car. The program included 690,000 vehicles, which calculates to 207 million gallons saved per year.
Now this may sound like a large number to some of you, but at 19.5 gallons of 87 octane gasoline produced from a 42 gallon barrel of crude oil, that annual gasoline saving in total volume equates to a bit over 10.6 million barrels of oil or about 10 hours worth of US consumption.
What’s more, 10.6 million barrels of oil at $80 per barrel costs about $848 million dollars, while the government paid out more than $3 billion in tax dollars for the program.(including administrative expenses).
Now before people start writing that I calculate wrong and that there is a more diverse revenue stream coming from a barrel of crude and that I’m allocating the $ 3 billion to a one year car operation, while these new automobiles can operate more efficiently on a longer term basis, potentially saving an amount of $848 million in gasoline cost per year for several years, the numbers are still wrong for any type of tax dollar investment if inflation and fluctuation of oil pricing is introduced to the equation. No matter how you look at it, it’s going to take almost 4 years for those 690,000 cars to break even on the $3 billion in tax dollars invested. And that would have been better spent on small business financing.
My beef is not with the necessity for the Federal Government to spend tax dollars in economic downturns as that is one of the few tools available to turn the economy around, lacking consumer and business spending.
My beef is with the manipulative reasoning behind the clunker programs: saving energy and the environment. Saving the environment is a populist mindset, which cannot be accomplished with hand-outs for good behavior.
A simple exit survey would have revealed that 690,000 Americans would have held on to their clunkers, if it had not been a mandatory condition of money exchange in the program. Most Americans still like their gas guzzlers, their credit spending and oversized McMansions, which is primarily the reason why this recession is not over yet.
My beef is also with the haphazardness of stimulus programs. On average we go through an economic downturn every 7 to 10 years. We have massive computers that can crunch all the figures we need to determine the most successful, less costly stimulus programs in our arsenal by region, state or demographics, based in historic analysis and updated scenarios. I cannot help but think that we have more means and ways available to pick from a line up of choices than ever before. We have bailout and stimulus mechanisms that if activated timely can quickly turn around the effects of mistakes; financially, economically and even socially, at a maximum speed and efficiency.
But we need the political will to apply these measures and mechanisms and that’s when I start wondering in how far all these calculations are skewed or ignored by purely shortsighted and territorial interests.
From an economic point of view, Washington mathematics are scary.
Case in point, while the White House is gearing up to attack the big Financial Institutions with long overdue regulations, the FDIC has per last Friday shut down 57 banks in 2010. The large majority of these banks’ assets are being taken over by other banks, who now get closer to that elite group that is baptized “too large to fail”, mostly at the tax payer’s expense. In the whole of 2007, only 3 banks nationwide were shut down; was the FDIC asleep at the wheel then….?
Oh and another point of mathematics in Washington.
Lately I see this Mr. Whitacre, the CEO of General Motors proudly announcing that GM has paid its bailout money to the government; all $5.8 billion of it! Well the other $46 billion that were needed to prevent GM from faltering were turned into shares of the company. So now we, the people own 60% of GM. Whoopee!
How did GM even get the money to pay back this $5.8 billion, certainly not out of car sales, as the clunker program already showed clearly that no GM model was even among the 10 most wanted new cars.
Here is how: Some of you may remember that fateful Christmas Eve in 2008 when Fox and NBC supersized the panic and fear that overtook the Nation. On that day GMAC became mandated by the Federal Reserve to operate as a retail bank. So did by the way Goldman Sachs, Morgan Stanley and the rest of the thieves. This approval however gave GMAC access to the Fed’s 0-0.25% cheap money pipe line.
GMAC’s website says the following about that occasion:
GMAC is a global financial services company that was founded in 1919. Initially formed to provide automotive finance products and services to General Motors dealers and clients, GMAC has since expanded its business to include mortgage operations, insurance, commercial finance and online banking.
Until 2006, GMAC was a wholly owned subsidiary of GM. On Nov. 30, 2006, GMAC began a new era as an independent finance company when GM sold a 51 percent stake in the company to a group of investors led by Cerberus Capital Management, L.P.
Dec. 24, 2008 was a key turning point in GMAC’s history when it was approved as a bank holding company by the Federal Reserve Board under the Bank Holding Company Act.
Another defining moment for the company was when GMAC entered into an agreement with Chrysler in April 2009 to provide auto finance products and services to Chrysler dealers and customers. This allowed GMAC to leverage its core strength of auto financing and become part of a solution with the U.S. government to restructure the auto industry.
In May 2009, GMAC’s ownership structure was amended again when GM and Cerberus significantly reduced their holdings in GMAC, leading to future diversity in the ownership structure of the company.
Before this date GM owned 49% of GMAC but by December 31, 2009, the US Government – we, the people, – owned 56.4% of GMAC and GM and GM Trust, only 16.6%. Let’s see, having access to the Fed’ Cheap Money Trough and needing to survive in an ever more competitive marketplace, GM through its financial and corporate cultural ties with GMAC, General Motors had a chance to take a deep breath and restructure and reorganize. It seems that they cut deeply with the past and left many victims, employees and retirees on the battlefield.
The GMAC’s website also stated “As of Dec. 31, 2009, GMAC had approximately $172 billion in assets, with 15 million customers worldwide.” Technically this means that the majority owner, the US Government, with 56.4% of the shares, could be held liable to an undisclosed number of foreign policy holders, in the event of a claim, while potentially importing inflation through the collection of premiums and payments in foreign currencies.
And that my dear readers is called satisfying short term mathematical urges defying the old wisdom of “an ounce of prevention is better than a pound of cure”.
The price for “too big to fail” may haunt us for generations to come.