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Why Cash For (fill in the blank) Does Nothing For Our Economy

14 September 2009 3 Comments

Cash for Clunkers is complete and it was a huge success!  Or so our leaders and experts tell us.  Next up, Cash for Appliances (I’m not kidding).  The problem is that these programs do nothing to help our economy and instead, they are just attempts from our politicians to look like they are doing something to improve the situation.

Moving Demand From One Area To Another

Sure, the Cash for Clunkers program was great for auto manufacturers.  It provided a short term boost.  We can argue that it just moved up demand (which we will later), but regardless, it provided a boost.  The problem is that it just moved demand from one area to another.

Instead of replacing their washing machine, individuals chose to take advantage of the Clunkers program and buy a new car.  Instead of renovating their back porch, they bought a car.  Do you see?  As I always say, every government program will have a winner and a loser.  In this case, auto manufacters were the winners and every other product manufacturer was a loser.  Additionally, this generation was the winner and your children’s generation is the loser, since we continue to subsidize consumption today by borrowing from the future.

I didn’t even mention the situation which I’m sure most of the Cash for Clunkers participants are in, which is that they chose to increase their debt to buy a new car rather than keep a fully functional car and pay down debt.

Moving Demand Forward

In addition to moving demand around from various industries and sectors, Cash For Clunkers also moved demand forward.  People who were going to buy a car later this year merely moved up the purchase to buy a car today.  So, what happens to car sales after the program?  Most likely, they will be in the crapper.

Similarly, what happens when the government removes the tax credit for first time home buyers?  Home sales will likely plummet.  What is the answer then?  Well, to provide more and more stimulus, each dose bigger than the last.  When does it end?  It ends when we have a currency crisis, or when the American public chooses long term prosperity over short term economic boosts by voting out any politician who continues to sacrifice the future of America for the next re-election.

Until that happens, our economy will continue to be propped up by artificial demand, by government moving demand around, by government printing dollars to lend to the same government, by China subsidizing our short term addiction, by…. sigh, I’m tired of this same conversation.

I fear for the future of America.  At least we’re saving the planet (heavy sarcasm)!

3 Comments »

  • Royce said:

    I really enjoyed this column. A Business Week article from just after the program ended also made a similar point:

    http://www.businessweek.com/autos/autobeat/archives/2009/08/cash_for_clunke_12.html

    The BW article quoted an expert who suggested as many as 70% of the sales were simply “moved up” purchases which would’ve happened later in the year, as you suggest.

    If I can ask you to speculate – do you think there was any value in the gov’t trying to get more efficient cars on the road? I also see a parallel between this and your other posts about sustained high unemployment and a delayed recovery… do you think there will be continued short-term initiatives, or do you expect politicians and citizens to start taking the long view?

  • Kevin said:

    Royce:

    It will always be short-term initiatives with our current system. As long as it coincides with the next re-election cycle. Sadly, our leaders focus on re-election and that’s it.

    Is there a value in getting more efficient cars on the road? Yes, there is, but our gov’t can’t afford such a program. We can’t afford anything. if we had surpluses, then maybe it’d make sense.

    Thanks for the comment