The Understated Effects of "Cash For Clunkers" and Other Government Idiocy

[Mr. Fight the Power]

or

Why I Learned To Stop Worrying and Love the Bailout

______________________________________________

All over the media we are learning about how well the stimulus is working. The stock market is rapidly approaching 10,000 again. Bond rates are dropping. Economic contraction was at 1% in the second quarter, drastically improved from the 6.4% of the first quarter. We will soon hear new unemployment figures which will likely be up a tenth of a percent to 9.6%, and this will be lauded as a peak in the unemployment rate (it won't be mentioned that this exceeds the worst scenario used in the stress tests, or that the stimulus was supposed to cap unemployment at 8%, or that underemployment is likely more than double that rate).

Economists, think-tanks, and New York Times columnists will all be pointing out "signs of recovery" and will begin using terms such as "v-shape recovery". In other words, we will be hearing about "recovery" more often than a physical therapy patient.

No better example of the success story of the stimulus than the cash for clunkers deal. Just recently, this successful and popular program just received another two billion dollars, effectively tripling its original outlay. It is impossible to deny that this has been a boon to the auto industry: according to government officials, 180,000 vehicles have been sold as a result.

I am sure anyone who had the misfortune of reading this can see the dark cloud of gloom hanging over my words. You are asking yourself, "Brad, with all of this wonderful information, why should I not think of this as an unqualified success?"

Funny you should ask.

The purpose of this stimulus program and others is to spur consumption by increasing demand. The government, however, cannot created demand within the private sector. It can merely shift demand around in time. With the "Cash for Clunkers" program, we do not see a real increase in demand, rather people are simply shifting priorities and sacrificing other expenditures to purchase their car this year. This simply means that those who would buy a car this year buy a car this year, and those that would buy a car next year buy a car this year. So we have a seen a shifting forward in demand. What happens when this next $2 billion dollars runs out, however? Will we see all of those individuals who shifted their car purchase ahead a year make another vehicle purchase? Surely not. We can expect to see the bubble in car purchasing burst with some very bad effects. At this point, however, I would not be surprised to see ongoing subsidizing of car purchasing extended indefinitely.

Now, there a counter has been offered up to the likelihood of a drop off in car sales, but it also opens an entirely new can of moral worms. We will see if your indignation builds as much as mine as I explain it to you.

Our economic saviors: Fence-sitters.

According to this article, these people have made "Cash for Clunkers" a "hit". Instead of those people who would be purchasing cars out of need in a normal car ownership cycle, we are seeing a car buyer that we would not normally see, for example:

"Mike Ward, an attorney from rural eastern Virginia, had no plans to replace his 1995 Ford Explorer, known to his family as the 'dog car' because they used it to drive their dogs around."

Many people, like Mike, are using the cash for clunkers deal not to replace their primary vehicle, but rather to give them the incentive to replace that third vehicle that they just really don't want to deal with. You see, Mike would not normally have replaced this old vehicle, but repairs were getting expensive, and apparently Mike's dogs were simply not being transported in enough comfort. So Mike put tax-payer dollars to good use:

"Ward drove the 80 miles to a Lexus dealership and bought a midsize SUV for $40,000 after discounts."

That's right. That is the secret to the success of the cash for clunkers deal.
"Dealers say buyers are predominantly older drivers who own more than one vehicle and have a clunker to spare.

'These were not people that we would see normally,' said Jim Paul, co-owner of four Pontiac-GMC-Buick dealerships near Minneapolis, suggesting sales at his showrooms could return to normal when the program expires rather than drop off, as some economists have suggested."


So our wonderful government, as usual, has brought about an economic recovery by subsidizing the wealthy and spurring unnecessary debt spending.


The basics of this are simple. Before the "Cash for Clunkers" deal, there were many people who were wanting to buy new vehicles, but simply would not use them enough to make the expenditure worthwhile. With the governments help, these individuals were able to overlook the costs they would be taking on for owning a car even while they were not using it.



Now we find ourselves in a bad position. Either we have simply taken on a great deal of debt as a nation to postpone the crisis, or we have taken on a great deal of debt as a nation to pay for the wealthy to store a car in their driveway as opposed to a showroom. This particular bailout either did nothing, or paid people to not use cars.


So while we may have seen an increase in spending, it does not follow from a real increase in consumption or demand. It is just useless spending, investing in capital that will show no return.


Increased useful consumption and real demand can only come from increasing real wages. People can only truly purchase and consume more if they are more productive and increase their wages. Real economic recovery would come from a growth in productive capital. We do not see either.

First, real wages are dropping. June was the 9th month in the last ten in which salaries and wages have dropped. June also showed the biggest drop in income in four years.


And as for productive capital, not only are cars now being paid for to go unused by the government, but the government is taking older cars off the road. The real damaging side effect of this deal, depending on your viewpoint, is the fact that this is rapidly driving up the costs of used cars and almost completely shutting off the flow of car donations. This means cars that would actually increase the productive capabilities of this country, by providing reliable primary transportation, are becoming more and more difficult to come by.


This stimulus is a dramatic shifting of vehicles from productive use to unproductive use. This is the way it is with all government stimulus simply because government cannot be productive on its own, it can only shift production.



This stimulus is a dramatic shifting from saving and responsible spending to credit spending. This is the way it is with all government stimulus because government cannot hope to imitate all natural and healthy spending patterns.


This stimulus is a dramatic shifting of wealth from those living off modest incomes to those with incomes to spare. This is the way it is with all government stimulus as the wealthy will always have the resources necessary to exploit government handouts.


Stimulus packages do not save the economy for all people; stimulus packages save the economy for the wealthy and powerful.

[richrf]

Originally Posted by Mr. Fight the Power

The purpose of this stimulus program and others is to spur consumption by increasing demand. The government, however, cannot created demand within the private sector. It can merely shift demand around in time.

Hi,

All type of borrowing, whether it be private or public does the same thing. The gigantic economic disaster that we created came right from the private sector that over lended and over leveraged, just so a few people (the top 1%) could get fabulously wealthy. Now, middle class folks like myself have to pay for the mess they created, just so the economy doesn't collapse. It is a transfer of money from savers to borrowers - borrowers created by the free market system.

Rich

[Mr. Fight the Power]

Originally Posted by richrf

Hi,

All type of borrowing, whether it be private or public does the same thing. The gigantic economic disaster that we created came right from the private sector that over lended and over leveraged, just so a few people (the top 1%) could get fabulously wealthy. Now, middle class folks like myself have to pay for the mess they created, just so the economy doesn't collapse. It is a transfer of money from savers to borrowers - borrowers created by the free market system.

Rich

The savings/debt ratio is primarily a function of interests rates which are managed by the central bank.

The Fed stimulated massive borrowing in the last 10 years by dropping interest rates, and no economic class was innocent of taking on debt that they shouldn't have.

Remember that a big cause of the economic crisis was the massive amount of middle class folks who took on debt that they couldn't handle and began to default on.

And as for the upper 1% getting fabulously wealthy, also remember that the new middle class was living in 250,000 homes and owned two $30,000-$40000 vehicles.

What mechanics of the free market system do you blame?

[richrf]

Originally Posted by Mr. Fight the Power

The savings/debt ratio is primarily a function of interests rates which are managed by the central bank.[

The Fed stimulated massive borrowing in the last 10 years by dropping interest rates, and no economic class was innocent of taking on debt that they shouldn't have.

Remember that a big cause of the economic crisis was the massive amount of middle class folks who took on debt that they couldn't handle and began to default on.

And as for the upper 1% getting fabulously wealthy, also remember that the new middle class was living in 250,000 homes and owned two $30,000-$40000 vehicles.

What mechanics of the free market system do you blame?

The reason we had such a fiasco was because private lenders lent money to people that should never have it and pushed their own leverage (this is totally independent of the Feds), to over 40:1. The reason that they were able to do this was because Moody's and S&P gave these garbage loans a AAA rating so that they can be pawned off overseas as CDOs.

The bankers got their money upfront. They made a zillion. The taxpayers have to bail out the system. For my money, I would love to tax all of these billionaires 90% on the money they made, and get it all back.

BTW, the Feds are not an independent lot. Most of these guys come from Goldman Sachs and alike and they take care of their buddies. Rich people know how to get richer. They buy off politicians. That's what happens in a Free Market. The rich get richer, and they still are.

Rich

[Mr. Fight the Power]

Originally Posted by richrf

They buy off politicians. That's what happens in a Free Market.

Cognitive dissonance. Rethink this and get back to me.

[richrf]

Originally Posted by Mr. Fight the Power

Cognitive dissonance. Rethink this and get back to me.

I rethought it. The free market system necessarily begets a government that seeks to benefit the rich who are reaping the rewards of the system. Something that Adam Smith forgot to take into account. It is a natural consequence.

Rich

[Mr. Fight the Power]

Originally Posted by richrf

I rethought it. The free market system necessarily begets a government that seeks to benefit the rich who are reaping the rewards of the system. Something that Adam Smith forgot to take into account. It is a natural consequence.

Rich

A free market and a government are mutually exclusive concepts.

And Adam Smith was not a strong free marketeer. He supported government intervention in certain situations.

---------- Post added 08-07-2009 at 11:37 AM ----------

This line of conversation is so off-track I'm going to stop.

This is about the bailout programs, not about the causes of the current crisis or the problems of the free market.

[richrf]

Originally Posted by Mr. Fight the Power

A free market and a government are mutually exclusive concepts.

Like everything else in life, it is all intertwined. Limbaugh is a great example of how the wealthy attempt to move political opinion in their favor in order to gain more control.

Rich

[Didymos Thomas]

Originally Posted by Mr. Fight the Power

Stimulus packages do not save the economy for all people; stimulus packages save the economy for the wealthy and powerful.

Right: because insuring that GM does not go under does nothing for the employees of GM who are anything but wealthy and powerful. Doesn't help them at all

[Mr. Fight the Power]

Originally Posted by Didymos Thomas

Right: because insuring that GM does not go under does nothing for the employees of GM who are anything but wealthy and powerful. Doesn't help them at all

Farmers also help their cattle by feeding them.