Monday, August 10, 2009

Comments for Clunkers

Great comment by Akiva on a previous post, which sums up many of the problems with the stimulus in general, and the "Cash for Clunkers" program in particular:
If an economic program is done correctly, the money generates a multiplier effect. If it's done adequately, just the effect of the money one time. If poorly, then the money doesn't even provide it's value.

Good Example: I buy a new car. Dealer takes my deposit and orders and ad campaign. Ad company pays local graphic designer for the ad and printing company to print them. A bunch of worker types are hired to go put the ad up on all the billboards in town. When the day is done, everyone with money in their pocket goes out for a beer at the local bar. Bar owner's business picks up, he orders more beer...etc. My order generated car jobs, ad jobs, and paid workmen. They spent the increased income at bars and restaurants, which caused those facilities to hire more and order more. The money goes round and you get as much as 5x the original economic impact.

Adequate Example: I buy a new car. Dealer knows times are tough so he puts all the money in the bank. Further, because he's worried about sales, he doesn't order a replacement car for the lot - decreasing his inventory. When he goes home at the end of the day, he doesn't buy a beer because he's worried about staying in business, he's saving everything. The money passes through once - it doesn't even generate additional car manufacturing jobs.

Bad Example: Everyone is offered $5,000 for their middle-age low gas mileage cars. They run fast to buy a new car. Dealer puts money in the bank, because times are tough he's not advertising or ordering replacement cars for his inventory. Because people were coming in with low gas mileage cars, they buy a Toyota Prius (high end), Honda Civic (middle end) or Hyundai Elantra (low end). The cars are made out of the US, so the car jobs - if any - help Korea and Japan and not the US. The cars traded in are taken and destroyed, so the used car inventory falls and used car prices go up. Now Mary on Welfare who gets a job offer for a 3 month road paving job (from stimulus money) can't afford to buy a $2,000 car to get there as that car is now $3,500.

In the last scenario, the dealer gets his profit, but the manufacturer profit and jobs go overseas. Used car prices go up further depressing opportunities for unemployed. The money only has a 25% local impact!

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