Exploring the CARS Program: Who Does it Benefit?

[TheStatutoryApe]

Source?

I already linked articles regarding this earlier in this very thread.

Edit:
http://www.politicsdaily.com/2009/0...taxpayers-foot-the-bill-for-guzzler-upgrades/
http://money.cnn.com/2009/07/29/autos/clunker_tips/?postversion=2009073013

Note: I believe I misread one of the articles. You may not have to trade a category 3 for another truck but you can and there are no fuel efficiency rules for them since they are not rated by the EPA.

 

[bleedblue1234]

Dough for Dumps?


After having given away billions faster than even the optimists had anticipated, it was announced today that the federal government's "Cash for Clunkers" program is coming to an early end. But, based on the standards of economic analysis which prevail in Washington, Wall Street and academia, the program must be considered a master stroke of public policy. These experts will tell you that by mandating that citizens destroy older (but still working) vehicles to receive $4,500 toward the purchase of a new car, the program not only revved up the economy by encouraging Americans to borrow more, but it may have, perhaps, made some great strides in saving the planet by reducing carbon emissions.

With this solid win-win now on the books, the time has come to put the strategy to work in other areas. For instance, the government could use these lessons learned to help the moribund housing sector. I propose the "Dough for Dumps" stimulus program. Here's how it would work:

Homeowners struggling to make payments on environmentally inefficient homes can apply for government aid to destroy their old homes and receive guaranteed loans to buy newly constructed houses, provided they are furnished with the latest "green" advancements in energy systems and building materials. As with the "Cash for Clunkers" program, this plan would solve many problems at once.

First, it will help put a floor under falling home prices by reducing the glut of houses currently on the market. The best way to stop prices from falling, and thereby reduce the foreclosure wave, is to reduce supply.

Left alone, the market would do this by lowering prices, which would bring more buyers into the market. But this approach falls on the back of homeowners whose only crime was to overpay for a house. A more socially equitable method would be for all taxpayers to shoulder the burden through a government bulldozing program.

In addition to contracting the supply of homes, the program would also stimulate the economy by providing funds to hire environmentally savvy builders and contractors (not to mention the workers needed to demolish the old homes). The resulting demand would help to reduce unemployment, especially in the housing sector. Government incentives and subsidies could also give an important boost to the developers and manufacturers of "green" windows, solar heating systems, furnaces and water systems.

Once this program has rejuvenated the real estate market, citizens should also be encouraged to burn their old furniture and clothing, thereby sparking demand for new goods from our nation's struggling retailers. When you think about it, the possibilities are endless.

If these proposals seem ridiculous, it is because they are. But they are no less ridiculous than the "Cash for Clunkers" program that inspired them. All are examples of the "broken window" fallacy of economics, which argues that economic activity can be stimulated by the need to replace something that has been destroyed.

Unfortunately, many of our "best" economists subscribe to the notion. But society gains nothing from redundant activities. Digging holes just to fill them up does employ workers, but the work offers no benefit to anyone not receiving the wage. Absent government incentives, such a job would create no profit and could only exist as a result of a subsidy from someone else. Such work also prevents workers from accomplishing tasks that create real wealth and actually benefit society.

In the case of "Cash for Clunkers," the government provided an incentive for citizens to destroy otherwise working assets, fully owned by their users, in exchange for a smattering of "green" tech and a lot more debt. Could anyone look at our country now and determine that our problems stem from a lack of new cars? Given our level of economic output, it is likely that we already have too many cars. On the other hand, it should be obvious to anyone that American consumers are already burdened by too much debt. The program distorts the market by giving car owners a powerful incentive to take out new loans for cars they may not need.

The environmental benefits of the program are much more difficult to quantify and extremely unlikely to overcome the waste inherent in the wanton destruction of working assets. On a practical level, the premature shelving of working cars will add extra pressures to our waste management capacity, and create emissions and pollution through the compaction/incineration processes that accompanies disposal. On an abstract level, this program punishes every consumer who sought to be ahead of the curve in environmental responsibility by using their own resources to upgrade a clunker. Some may think twice before making such a move without government money on the table.

More fundamentally however is the question of making wise decisions in a recession. Given the fragility of our finances, we should use our resources wisely, pay down our debt, replenish our depleted savings, and make investments in time and energy that offer a tangible benefit. The "Cash for Clunkers" program is the exact opposite of what we need and a glaring example of the lack of economic understanding currently on tap in Washington.

 

[mheslep]

This comes in from an interesting corner, the Germans. Interesting in that they and others declined to follow the US down so large a stimulus path, despite US prodding (initially). This German economist say's the fiscal multiplier from traditional government deficit spending under these circumstances is, well, there is none.

http://www.voxeu.org/index.php?q=node/3949
Volker Wieland
Professor for Monetary Theory and Policy in the House of Finance at Goethe University of Frankfurt and Director of the Center for Financial Studies

...Our findings confirm the earlier analysis with models of the US economy. Once you allow for a significant role of forward-looking behaviour by households and firms, there is no multiplier. The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending. This holds in particular for the three New Keynesian models developed by economists at the ECB, the IMF and the EU Commission (see Smets and Wouters 2003, Laxton and Pesenti 2003, and Ratto, Roeger and in’t Veld 2009)...

(Hat tip to Prof Mankiw)

So the CARS program according to this theory stimulated some new car sales in August 2009, got some of the worst gas hogs off the road, but nothing more economically.

 

[mgb_phys]

So the CARS program according to this theory stimulated some new car sales in August 2009, got some of the worst gas hogs off the road, but nothing more economically.

It depends - the report says;
"The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending"

So people who think that the government will somehow have to pay for this in the future - which means they will have to pay for it - hung onto their money. The others went 'ooh free money' and borrowed to buy a new car.

 

[mheslep]

It depends - the report says;
"The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending"

So people who think that the government will somehow have to pay for this in the future - which means they will have to pay for it - hung onto their money. The others went 'ooh free money' and borrowed to buy a new car.

The applies equally to everyone, car purchase or no. The CARS people can also fall into the same 'expectors' category, by cutting back other future spending to balance out the car payment they've now incurred. Then there is no net stimulative effect if net spending remains flat.

 

[Ivan Seeking]

So the CARS program according to this theory stimulated some new car sales in August 2009, got some of the worst gas hogs off the road, but nothing more economically.

Again you ignore the reduction in lost wealth by reducing demand for imported oil. That is where we find the real multiplier for the CARS program.

 

[mgb_phys]

The CARS people can also fall into the same 'expectors' category, by cutting back other future spending to balance out the car payment they've now incurred. Then there is no net stimulative effect if net spending remains flat.

But there's no need to cut back on anything - interest rates on credit cards are really low, so you can just put the payments on the credit card. If it becomes a problem the house is worth $500,000 - it's just a temporary glitch in the market.

And if the borrowing becomes a problem - well you can always have another bailout ;-)

 

[mheslep]

Again you ignore the reduction in lost wealth by reducing demand for imported oil. That is where we find the real multiplier for the CARS program.

I hope CARS reduces imported oil, but that's not a fiscal multiplier effect as addressed by the above.

A parallel example to clarify: say the government funds a new/repaired bridge. The first possible benefit, outlined by the fiscal multiplier theory, addresses the possibility that the bridge money flows into bridge company pockets, then into employee and supplier pockets, and so on. Along the way the theory is that more total spending occurs than was originally spent by the government. (The economist Wieland above says this is unlikely). The second possible benefit obtained by the bridge is improved infrastructure (that parallels the possible lowered demand for oil in CARS), i.e, it enables greater transportation efficiency (or not - they can also be useless boondoggles - bridges to nowhere). The point is that fiscal stimulus and infrastructure improvement are two different things.

 

[mheslep]

But there's no need to cut back on anything - interest rates on credit cards are really low, so you can just put the payments on the credit card. If it becomes a problem the house is worth $500,000 - it's just a temporary glitch in the market...

In your case, good for you. Reread the source. At least some respected macroeconomic models say people will expect increasing tax rates and interest rates in the future due to the present large increases in government deficit spending. In anticipation of that, those models predict people will cut back on spending and investment now.