Browsing the archives for the Economic Stimulus tag.



Cash for Clunkers or Cuckoo for Cocoa Puffs???

Economic Stimulus, Economy, Infrastructure, Politics, Public Policy

Jesse

Recently, the most popular topic on the news outside of Jackson custody battles and estate issues is the Cash for Clunkers program, also cleverly (?) known as the CARS (Car Allowance Rebate System). The program is relatively simple based on its website: www.cars.gov and includes just five simple steps to keep dealers in business, minimize the exposure of underperforming dealers and cars from UV rays on dealership lots across the United States, and get gas-guzzling dinosaurs off the streets in favor of cars with better fuel efficiency. The biggest issue is that the CARS program is a 5-step program to keep more dealers from tanking when the real focus of any current and future economic policy should be a 12-step program to help the economy recover.

One thing to ponder is the basic economics and environmental logic of the situation. If you have a good, working car whose only flaw is its MPG, does it make sense to scrap it to take advantage of this program? Additionally, scrapping these cars might reduce the dependence on natural resources, but will the scrap industry properly dispose of all the additional transmission fluid, oil, gas, windshield wiper fluid, auto components like old brakes made of asbestos and other things that may be worse than gassing up? Finally, unless an incinerator is environmentally-friendly, there’s a good chance that we might be better off without a mad dash of clunkers to the scrapyard.

More importantly, from a free-market economy perspective, the numbers from the last 10 years show that the Big Three have lost significant market share from a demand perspective, but few dealerships perished until recently from a supply perspective. Based on data from the National Automobile Dealers Association, the Big Three’s combined market share was nearly 72% in 1997 and dropped to 52% by 2007, the most recent year with full data available. Interestingly enough, over this same period of time, advertising costs per dealership doubled from an average of $300 per car sold to $600 per car sold. Additionally, the average dealership has been losing money since 2006. So, dealerships were losing market share, losing money, spending more money on advertising, and cars weren’t moving off of lots.

Moving from cars that don’t move, at least not off of dealership lots, to the people who must sell them, the average dealership employs approximately 50 people per dealership. So, for each dealership that closes, 50 people lose their jobs, some right away, and some at a point in the near future. More importantly, dealership employees are classified in the retail sector of the economy, which has been hit significantly with losses for the last several fiscal reporting quarters. This reality begs the question…When will we have a Green for Jeans program that will subsidize the cost of new jeans when I turn in my old jeans? This way we can prop up the rest of the ailing retail industry, including The Gap, Abercrombie & Fitch, Macy’s, and all the other retail stores on life support.

Perhaps most important is the fact that the program only exacerbates the situation that got the nation into this mess…the American consumer’s insatiable appetite to buy. Only part of the current economic crisis is related to the cyclical nature of the economy; the other part of the mess is the impact of failed financial policies across the board, including consumer debt. If a dealership provides a rebate of $4,000 for a new car, and the government’s CARS program adds in another rebate of $3,500 to $4,500 that the dealer may or may not pass on to the consumer, where does the additional money come from? If the consumer does not have the cash, the consumer must take out an auto loan, thus adding more debt on top of an already impressive mountain of debt currently drowning the economy. If we just keep buying stuff regardless of the future implications, then at least the current implication is that we will buy less gas due to more fuel-efficient cars.

But, if those cars are only driving us to jobs that no longer exist, then we’re on a road to nowhere, which the Talking Heads (the group) seem to understand but not the Talking Heads I see on my TV. In July of 2009, the economic numbers from the Bureau of Labor Statistics show that for each current job opening, there are roughly 6 people applying for that job. This information comes from the Job Openings and Labor Turnover Survey, which carries the ironic acronym of JOLTS. So, CARS might save some dealerships from closure and stabilize this number, but if these dealerships have been underperforming for years, aren’t we doing our economy a disservice by throwing more money at the problem and generating more debt for American consumers who are already maxed out? Moreover, by the end of September, half a million people will lose their unemployment benefits and this number could top one million by the end of December. Given those numbers, are old cars that are not fuel-efficient really the problem facing the nation today?

Whether this program creates more problems than it is worth won’t be known until we get out of the current mess, which many economists say we’re already headed toward a recovery. I am not an economic expert, but I do know that policies geared towards underperforming auto dealerships is likely not the best policy to stabilize a shaky economy. If everything works out, I promise to be relatively quiet and we can all drive happily ever after, even if we still won’t have any idea where we’re headed.

Adam

Jesse, I’m happy to see some conservatives showing concern for those Americans who have newly entered the unemployment world. I agree that the spending that has gone on for so long is one of the central issues of our current economic crisis.

Obviously, there are a few points that I hold a different opinion though. The first difference, and more important, is that I have never thought of the CARS program as a program strictly focused on propping up failing auto dealerships. The program’s most important goal was to get inefficient cars off the road and provide an incentive to the consumer to buy a vehicle that was more efficient (and very possibly more efficient than the car they would have preferred to buy).

So, rather than forcing consumers to buy more fuel-efficient vehicles through taxation (which is what I favor as a policy), the government provided incentives to effect the market. This market manipulation is the form so many conservatives have favored in the past across varying industries. A major difference this time is the level of the market that was reached. It effected small dealerships and consumers the most, not extremely large corporations.

The program brings two positives. One, it keeps people working at dealerships (no matter how inefficient they are). Two, it moves a large number of Americans to purchase fuel-efficient cars at a time where fuel costs are not the motivation. This short-term and long-term outcome are what the goal of so much of the economic stimulus package was about. Are we helping a person get a job for their life if they are working on laying tracks for public transit or building a new bridge on the interstate system? No. We are temporarily putting someone to work during an economic downturn, and at the same time making an important investment in the nation’s infrastructure.

A more fuel-efficient car will not save the environment over night or get our country off of foreign sources of oil, but it is a good first step in bringing positive change to both of those serious problems.

Government intervention is useful at times, and this time I feel it did help. Now, next on the agenda, updating the federal gasoline tax!

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Can You Stimulate Me Economically?

Barack Obama, Economic Policy, Economic Stimulus, Economy, Infrastructure, Obama, Politics, President Obama, Public Policy
Adam    

I heard a crazy thing the other day; things are not going in the right direction for our economy. Actually, I think I heard that a couple of years ago. You remember those days don’t you? There was a housing bubble still, sub-prime mortgages were parts of conversations, and the positions on the wars in Iraq and Afghanistan would decide the next U.S. President.

Today, we have a President-Elect whose stance on the wars most likely did not help him get elected.  The call for change of the way things have been going brought him to victory. Now, what change is going to take place is a couple of months away from being realized. One issue that is absolutely necessary is an economic stimulus package to go into effect as soon as possible.

The potential second economic stimulus package has been in the news for a couple of months now.  There are opinions flowing at both ends of the discussion. That being stated, I thought it was important for me to throw my thoughts out there.

First, checks being handed out to citizens should not happen again. That was like my cup of coffee at 1:00 pm after a late night…I’m still going to crash.

Second, Federal spending on infrastructure is necessary and has always been necessary. Its not spending for the sake of giving money back to the poor. Its an investment in the future.  I racked up a lot of student loans, which was an investment in my future prosperity. I didn’t go out and buy a bunch of stuff with credit, which I would say is not an investment.

These two scenarios are the way I see the two sides of the argument over the economic stimulus.

The current number most commonly being suggested is $150-$200 billion in economic stimulus. This should go heavily towards infrastructure investment. Liberals and conservatives are calling for this type of Federal spending. But why so little?

The United States’ GDP for 2009 is projected to be at $15 trillion. The package being talked about would only amount to roughly 1% of GDP. This past week China unveiled an economic stimulus package in the amount of $586 billion, 16% of their GDP. 

Some economists (liberal) are calling for more spending to make up the gap in output. Paul Krugman thinks the stimulus package should be 4% of GDP, or $600 billion. Similarly, Robert Reich states “government may have to spend $600 or $700 billion next year to reverse the downward cycle we’re in.

Now, to assuage any fears that the federal government is going to throw money at anyone who asks for it, there are actual needs for funds. The American Society of Civil Engineers puts the needed expenditures over the next 5 years to bring the nation’s infrastructure up to good condition at $1.6 trillion. This number is what is needed for “improvements”. What about the new investments that are needed for the world economic leader to continue to grow throughout the 21st Century?

We need infrastructure improvements, we need new infrastructure investment, we need economic stimulus, and we need jobs. All of these needs can be met with a strong economic stimulus package. The money needs to be spent at some point, so why not have the government spend that money when everyone else is hoarding their own money?

 

 

Robert

There is one basic flaw in your plan, Adam:  America is broke and it is time to start acting like it.  No one is talking about where this $200 billion dollars is going to come from.  “Oh, just skim it off the top of the GDP.”  It is important to realize that that money is going to have to come from somewhere and it will not be from the Defense budget (sorry, liberals!)  Who is going to fork it over?

The bottom line is that the last thing we need right now is for the government to meddle with the free market.  Their manipulating is what got us into this problem in the first place.  Though I may have slept through most of my economics courses, I know that basic supply and demand is the ultimate balancer of prices.  All that the government’s proposed stimulus package is going to do is continue to artificially inflate the economy.  Well, my friend Peter Schiff* and I have a better idea: bleed the pig.  It is time for us to let things get bad.  The economy is absolutely decimated and the only way that it is going to get better is if we let things occur naturally.  Save some money.  Tighten our belts.  Why is everyone looking at this like it is a bad thing?  It is a chance for America to get out the filth that has been poisoning the economy for so long.  We have got to go back to the fundamentals of our founding fathers: hard work, dedication, and savings.  This is how we are going to save the United States of America. 

The last thing we need right now is for the government to pump a bunch of cash into America’s infrastructure.  You do not buy new shoes right after you lose your job; You make do with the shoes you have until you are in a comfortable enough position to get a new pair or until your old pair is completely destroyed.  Same goes for the infrastructure.  Let the market dictate when the roads are improved, not the government.  There is no overnight fix and until the government is willing to stand aside and let nature run its course, Americans are going to continue to suffer. 

 

*Disclaimer: I am in no way an acquaintance of Peter Schiff.  He is the ultra successful CEO of Euro Pacific Capital, as well as a best-selling author and I am writing for a blog that even my mom won’t read.

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