Buy an Economy Car and Save Money on Gas? Not Hardly.

As has already been noted so eloquently by Linda Traynham, the current Cash For Clunkers bill that wended its pathetic way thru what currently passes for the United States Congress and now requires nothing more than Obama’s signature to become law, is designed for exactly one thing.  Or two, if you happen to be a dedicated environmentalist.  Its primary purpose is to jumpstart the semi-nationalized automotive industry in general and Government Motors in particular, while the secondary reason is to destroy as many, large, old, reliable, safe cars as possible.

What our Keystone Kops Kongress (The KKK of the 21st Century.) has done is to forget history and simple economics.

Historically, Americans have a preference for large cars.  Granted, you can always find a group of people who drive nothing but small cars, like Ferrari, Maseratti and Volkswagen, though they have always been in the minority, like those who wear Birkenstocks.  But most of us prefer big and bigger.  Keep in mind that it’s not just because they’re bigger.  There’s far more to it than that.  Consider.  Big cars ride smoother on rough roads and over railroad crossings.  Engines are more powerful and the trunks are generally large enough to hold two weeks worth of luggage or a couple of dead bodies.  And in case you think I’m exaggerating, why do you think gangsters like big cars?

Taking a road trip?  Nothing like a big car for comfort while traveling in luxury for 600 – 800 miles.  Then there’s safety.  Big cars from the good old days, and even the current poor imitations of big cars, are simply safer.  Hit another vehicle…or have one hit you…and you stand a very real chance of walking out of the mess with nothing more than a few strained muscles. I should know.  I’ve both seen it and done it. Try the same stunt in a small car and you have a better than even chance of residing in the nearest hospital for a few weeks and then scheduling your life around physical therapy for the next six months or better.  That’s if you’re lucky.  If you’re unlucky?  Your surviving loved ones will become intimately acquainted with funeral home procedures.  Simple cremation can still run some $3,500, while a very modest traditional funeral will range from four to over ten grand, and that doesn’t include a monument or gravesite.

Our brilliant Kongress has also managed to either forget or totally ignore economics, which is apparently what they do professionally.  It doesn’t take a genius to figure out that you’re not saving money by buying a new car to replace your old one in order to save money on gas.  Don’t believe me?  Then let’s run a few figures based on automotive ads, along with an actual experience that I had.

All the automotive ads tell you that by trading in your old comfortable, roomy gas-guzzler that gets a paltry 15mpg in town for a nice, shiny econobox that gets a spectacular 32mpg on the highway and a very reasonable 20mpg in town, you will save thousands of dollars every year.

Sure you will.

First of all, that sipmobile is going to run you $19,995.00 with nothing down and a very affordable 5-year note.  Then you will need to pay $3,457.00 to cover tax, title and license.  But there is still no down payment.  Of course, that means the little critter’s price has just escalated to $23,452.00.  Even after making the down payment that isn’t a down payment, you’re still on the hook for $333.25 per month for the next 60 months…and that’s at 0% interest.  At today’s (June 19, 2009) price of $2.59 a gallon for regular, that’ll pay for 128 gallons.  Per month. At 20mpg, you’d be able to travel 2,560 miles for the price of that monthly payment.  Your gas-guzzler that gives you 15mpg?  You’d only be able to go 1,920 miles on the same amount of money.  However, throw in the monthly payment and your fuel efficient economy car is costing you $666.50 a month, making your effective fuel cost $5.18 a gallon to travel those same 2,560 miles per month or 26 cents a mile.  Since you have no monthly payment on the gas guzzler, you’re still spending $333.25 to travel 1,920 miles or 17 cents a mile.

“But I can drive a lot farther for the money,” you say, “so I’m still saving money.”  Well, it’s true that you’re driving 33.3% farther on the same amount of gas…or using 25% less gas if you prefer to think of it that way… but your cost per mile tells a different story.  Project the cost of fuel for that gas-guzzler by 33.3% and the resulting price of fuel is $444.22.  Still 1/3 less than the combined monthly payment/fuel cost of your sipmobile to travel the same number of miles.  Now what’s the fuel cost per gallon for the gas guzzler?  $3.45.  And the fuel cost per mile to drive 2,560 miles at 15mpg?  The same 17 cents per mile that it cost to drive 1,920 miles.  As long as you’re making a monthly payment, the cost per mile for your econobox will always be at least 9 cents more than the gas-guzzler.  Why do I say ‘at least’?  Because if you pay any interest at all, your monthly payment will, obviously, go up.  As will your fuel cost per mile.

Odds are that your old gas-guzzler has been paid off for some time, so your only expense is maintenance, insurance and the cost of gas.  Unless you drive 5,000 miles a month AND rebuild the entire car from the front bumper to the rear bumper with new parts, there’s no way you will spend as much money on your gas-guzzler in the next five years as you will that nice, shiny sipmobile.  Additionally, Our beloved old beasts are built to last as well as to survive crashes. Incidentally, insurance on your environmentally friendly economy car will be substantially more than your gas-guzzler.

To give you an idea of how little knowledge exists on this level, you might find an experience I had in the 1970s to be instructive.  One day, a man knocked on my door.  He was looking for scrap cars that he could buy and then sell them to the junkyard to make a few bucks.  He saw my old car in the driveway and wanted to know if I wanted to sell it.  Of course I didn’t.  But in the course of the conversation, he mentioned that a few days earlier he had gotten a car from an elderly couple.  It was a virtually new Buick station wagon, less than a year old.  Garaged at all times and with less than a 100 miles or so on the odometer each month.  According to him, it still had the new car smell.

Believe it or not, the old couple had told him to come and get it…they GAVE it to him…because it used too much gas and they were going to buy an economy car to save money!  If that wasn’t bad enough, he spent the next several days trying to sell that car for $100…and no one was interested.  In the end he sold it, the day before he visited my house, to a scrapyard for $75, whereupon the scrapyard crushed it for scrap metal. I could’ve cried!

What’s the moral of all this?  Just because that nice, new economy car gets 30mpg on the highway, that doesn’t necessarily make it an economy car.  As you’ve read, there are many more factors involved.

Me? I’d rather have a big, old, comfortable, safe car (such as my ’93 Buick Roadmaster Estate Wagon) than one made from tin foil that they’ll have to cut me out of with a pair of scissors if I have a minor accident.

What about you?

Richard Marmo

June 24, 2009

The Daily Reckoning