Government stimulus requires borrowing money. So it can do more harm than good unless spent carefully, focused on two goals:
- Mitigate the suffering caused by the downturn (e.g., Medicaid, unemployment insurnance, food stamps).
- Investment in infrastructure projects that generate tangible future returns. Classic examples are transportation, utilities (water purification, sewage treatment), telecommunications.
(For more about this see Everything you need to know about government stimulus programs (read this – it’s about your money), and in other posts listed below.)
The danger is that every day in the recession becomes Christmas, an opportunity for Congress to borrow and shower money on political powerful groups. The cash for clunkers program offers a sterling example of this madness. Imagine the result if we billed every American household $30 to cover the cost of this program!
On the other hand, perhaps Cash for Clunkers is an act of genius. If so, why stop with cars? Dennis Gartman has a modest proposal to expand this program, published in the 4 August issue of The Gartman Letter.
We are here this morning to propose the newest stimulus program: Dollars for Dry Cleaning; Looking in our closet over the weekend we noticed that several of our white shirts were a bit tatty, and that several of our suits were well worn, and that a number of favourite trousers were frayed at the cuffs.
Noting further that the nation’s textile industry is having a bit of a tough time of it, we are this morning proposing Dollars for Dry Cleaning: a stimulus program that would allow the nation’s men and women to turn in old clothes that are not longer serviceable — a decision which shall be administered by the newly constituted Clothes Destruction Czar — and for those clothes to be given a rebate from Washington that can then be used to buy new suits, new shirts and new trousers. Presto, the nation’s clothing and textile’s industries are restored to health; unemployment is reduced; good and wonderfully serviceable headlines for the Administration are produced Prêt-à-Porter.
But why stop there? What about Dollars for Drivers?
Our old Taylor Made driver is behind the times. It’s getting a bit old; the face is a bit worn; it needs a new grip. And we are certain that the golf industry is suffering a setback in the current economic environment and could use a bit of stimulus. So why can’t we all turn in our old drivers for shiny new ones, be given a rebate for the old, size challenged one to be used to buy the newest of golf technology, with faroff Washington paying for it? Come’on; we really, really, really want a new driver, and shouldn’t Washington shoulder some of the money for it? Ain’t it reasonable? Ain’t it economic wisdom?
And what about our collection of old vinyl records? Aren’t they out of date and shouldn’t we be allowed to replace them with a new IPod. Shouldn’t tax payers be willing and ready to grant us a stimulus program to replace our old records with new technology, and wouldn’t Apple do well with this sort of new program, and wouldn’t the new age musicians fare better. So, sure, shouldn’t we be allowed to turn in our records for new technology under the Money for Music stimulus program? Makes sense, right?
And why stop there? Why should the nation’s policemen and women suffer the indignity of eating day-old donuts? Let’s have a bakery stimulus program to turn in day-old donuts for nice, fresh ones: Dollars for Donuts. That would stimulate the baking industry; it would increase the off-take of wheat and cooking oil helping the farm community along the way. The nation’s police forces would be well served. Where’s the downside? We see none. Dollars for Donuts it is then.
How about Gold for Grass? Shouldn’t the government want us all to have nice lawns? Wouldn’t the lawn care industry do well if Washington gave us money to tear out our poor, crabgrass laden lawns and replant them with new genetically engineered seeds, requiring new equipment, and putting legal and illegal labour back to work in the process?
We heard that things are so bad that even the legalized prostitution industry in Las Vegas is under pressure. So why don’t the Ladies of the Evening demand a “stimulus” program of their own: Pennies for… Well, ya’ll get the idea, right?.
And what about our old car? Shouldn’t the government be willing to pay us to bring in some old junker, give us taxpayer money to do so and then give us a tax incentive to buy a new car in order to help Detroit escape from the myriad errors of its own ways? Wouldn’t that make economic sense? Oh, wait, they’ve already done that! Golly, these guys are good, ain’t they?
Afterword
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To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
Posts about the recession:
- The most important story in this week’s newspapers, 22 May 2008 — GAO estimates the government’s liabilitis: $57 trillion.
- Essential steps to surviving the current crisis, 23 September 2008 — analysis
- The coming collapse in business spending – made visible today, 15 October 2008
- Miscelaneous news and thoughts about the financial crisis, 16 October 2008
- More reasons why the government will be taking over allocation of America’s capital, 27 October 2008
- The US economy must go to Defcon 1, 13 November 2008
- A certain casualty of the recession: the US Government’s solvency, 25 November 2008
- Why has the worst recession since the 1930’s had such a mild effect on America?, 14 July 2009
Posts about stimulus programs:
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- A solution to our financial crisis, 25 September 2008
- The last opportunity for effective action before disaster strikes, 3 October 2008 — How to stabilize the financial system.
- Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
- Dr. Bush, stabilize the economy – stat!, 7 October 2008
- New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
- Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
- Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009
Or as Steven Levitt (“Is Somebody Lying About “Cash for Clunkers’?“, blogging at the NY Times, 3 Aug 2009) points out, the math doesn’t seem right. In good time, 2006, the average number of cars sold in a week was 125,000. For the “Cash for Clunkers” program to have used up the money ($4,000 per car), dealers would have had to have sold 250,000 cars. Very unlikely.
On a purely empirical level, I have a friend who is actively looking to buy a new car and should have qualified, however the dealers she talked to are not pushing the program because they do not know when, how or from whom they get the money.
This was just one person’s experience. It will be interesting to find out if other people have similar experiences or if there were people who did buy cars under the program.
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Fabius Maximus replies: As so often the case with Levitt, he’s wrong. The program started 4 weeks ago (1 July). Also, its not that they money was gone, but the Government was afraid that the torrent of sales and their slow processing system would mean that many sales would be made after the money was exhausted. So they stopped early.
For a serious look at the numbers I recommend the comments in Brad Delong’s post (Delong’s are wrong).
I’d like “Bucks for Bikes” – I haven’t had a bicycle for 30 years, but if a substantial part of the price was added to the national debt now I would gladly add the rest to my own credit card tab, and this would save gas, and improve my health, and reduce anthropogenic global warming.
Cash for Clunkers must be expanded to Cash for Civics. Yes, a used civic will still get you 30-35 MPG if you drive it right. But we tend to be young brash males and we drive them pretty hard – we could conceivably get the mileage under 18mpg. We used civic owners are a proud group, we will not be ignored!
And the government thinks it can handle health care! I don’t think so!
Isn’t CfC basicly based on a similar German idea. Granted if taken to extremes it would be folly but take this post from Economist’s View.
We are talking about subsidized private comsumption but that still is a form of government comsumption. Something to keep the economic wheels going until infrastructure projects start up.
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Fabius Maximus replies: But it is not targeted at those in greatest need (goal #1), and generates no long-term economic return (goal #2, helping us payback the borrowed funds). Chinn writes from a Keynesian viewpoint, assuming that counter-cyclically deficits are paid back during booms. We’ve never done that, and now the debt is assuming potentially lethal levels. Ignoring this factor is insane.
The beaut of this scheme in the UK is that most of the new cars are imports .
I think one of the problems is that we think politicians and their advisors are some kind of special clever , organised beings , whereas actually they are in a lower intelligence quantrile or would not want the job . Most of their partners work nowadays , so for example , wifey isnt there to greet Defence Minister , did you remember to pick up some milk , darling , and post the cheque for those helicopters ?
It’s even worse. The program had two ostensible goals: A, help the environment by reducing emissions, particularly CO2. B, stimulate the economy.
Goal A: Most environmental policy groups have always recommended not buying a new car just for the mileage benefits, since the production of a new car produces greater negative impact than the positive impact of the reduced emissions (and there are environmental impacts other than CO2, though you wouldn’t know it these days)So with respect to goal “A” of the CfC program it’s counter-productive.
On to goal “B”. Since the traded in-vehicles are being permanently disabled before the end of their useful service life, this is removing real wealth from the economy. If this is good fiscal stimulus then why not scale it up? Just have the government pay detroit to fill a container ship with cars, then sink the whole thing to the bottom of the ocean and repeat the process until we’re all rich . . . (of course, from an economic standpoint this is the effect of military spending as well).
It seems to me that the C4C program has two major goals:
1. Providing another “green shoot” to show that the consumer that they are in better shape than their credit card statement says they are so they will start spending again.
2. Goosing the auto industry now that the Federal government has such a large stake in it. If Chrysler and GM don’t have a good quarter in the near future they are going to essentially become high-paying jobs programs rather than the investment in our future they are touted to be. If the Feds were to write the program the way they’d really like it to read, people engaging in the program would only be able to buy cars from Ford, GM, and Chrysler. But that’s too obviously discriminatory so they are running the program as a general stimulus and hoping that the US car makers benefit enough to make it worth their while.
It will be very interesting to see which companies are best positioned to take advantage of the program.
FM comment is key. We have a failed economic system, built on debt since we accepted OPEC. After 1989 there was no need for anyone to keep lending to us. But they did and we doubled down. While we remain the leading manufacturing nation, in the last decade our leading export was DEBT, in the form of worthless mortgage packages! The treasury, the banks, the Congress they are all in it. The so-called stimulus package, the various other inititives pushed by the idiots continuing to run our country is to restore this failed system. They are printing money that could lead to a real depression, personally think it will. We are responsible for own demise. Has not helped we have a ludicrous national security policy, in the hands of rank amateurs. Possibly Nixon and Kissenger, the last two who could even think about foreign policy coherently, gave it a bad name. Since then, we have had a succession of idiots except for George Schultz who was essentially powerless.