There are a couple of economists that I follow regularly that I tend to align with. This happens to be one of them. Brian writes an article for a company called First Trust Portfolios and has been featured on CNBC, etc. etc. etc. Give it a read and let me know your thoughts...
Congress is the Clunker
Auto sales spiked 16% in July and likely rose again in August. Much of the increase is due to the “cash for clunkers” program, where the federal government gives car buyers up to $4,500 to trade in older, lower miles per gallon, vehicles for brand new autos with better fuel efficiency.
Given the increase in sales, it’s not hard to see why so many people like the program. Everyone who had a clunker that they knew they would be replacing in the next couple of years is happy that the government is now subsidizing them for a purchase they would have been making anyhow. And of course, the car dealers like the sales volume, while auto makers and their workers enjoy the ramp-up in production to maintain, or even replenish, inventories.
Trouble is, almost all the gain in sales simply transfers sales across time. Some car buyers who were walking showrooms in May and June decided to postpone their purchases so they could get a government check. In addition, some sales that would have been spread out over the rest of this year and 2010, were brought forward in time.
Meanwhile, other workers and businesses that make a living maintaining older cars and trucks are suffering. Take a news story in this week’s Fairfax County Times, a weekly local paper in northern Virginia. Just before the clunkers program was announced, Bill Wiygul put $1 million into expanding his family’s four-shop car repair operation. Business had been booming as more frugal car owners were squeezing their vehicles for every last drop of value. Now Mr. Wiygul is losing customers. Another nearby repair shop claims business is down 25%.
The basic problem with cash for clunkers is that it uses the old “broken windows” theory of economic activity. Everyone who lives in a hurricane zone knows that typically people are never busier than right after a major storm. Roofs need to be replaced, while damage to vegetation, glass, power lines, boats, etc., all require overtime to repair. All that activity gets counted in GDP.
But everyone also knows the storm was a bad thing, destroying property that was built at a cost in the first place. Sure, everyone is as busy as a beaver, but they’re just busy replacing what they had, not actually improving their standard of living.
Every clunker that gets traded in has to be wrecked: its engine has to be destroyed with chemicals and then the car gets crushed. In a way, it’s no different than if a storm came along and ruined each of these cars and then the government gave the owner a check to go out and buy a new one, as long as the new one is more fuel efficient.
Sure, the auto industry is busier for the time being, but every extra dollar getting spent has to be paid for, through a combination of higher taxes on the more productive segments of our economy as well as less spending on other businesses that provide worthwhile services without asking for a handout.
Ironically, the auto industry was primed for a revival over the next two years with or without government help. Cars and trucks were selling below the pace of scrappage earlier this year. This was unsustainable. Now, with the economy bouncing back, and unemployment at or near a peak, we suspect that car sales will begin to build. Look for auto sales to slump slightly (and temporarily), once the clunkers law lapses, but then start to move up substantially, and without government help, later this year.
Brian S. Wesbury - Chief EconomistRobert Stein, CFA - Senior Economist
Congress is the Clunker
Auto sales spiked 16% in July and likely rose again in August. Much of the increase is due to the “cash for clunkers” program, where the federal government gives car buyers up to $4,500 to trade in older, lower miles per gallon, vehicles for brand new autos with better fuel efficiency.
Given the increase in sales, it’s not hard to see why so many people like the program. Everyone who had a clunker that they knew they would be replacing in the next couple of years is happy that the government is now subsidizing them for a purchase they would have been making anyhow. And of course, the car dealers like the sales volume, while auto makers and their workers enjoy the ramp-up in production to maintain, or even replenish, inventories.
Trouble is, almost all the gain in sales simply transfers sales across time. Some car buyers who were walking showrooms in May and June decided to postpone their purchases so they could get a government check. In addition, some sales that would have been spread out over the rest of this year and 2010, were brought forward in time.
Meanwhile, other workers and businesses that make a living maintaining older cars and trucks are suffering. Take a news story in this week’s Fairfax County Times, a weekly local paper in northern Virginia. Just before the clunkers program was announced, Bill Wiygul put $1 million into expanding his family’s four-shop car repair operation. Business had been booming as more frugal car owners were squeezing their vehicles for every last drop of value. Now Mr. Wiygul is losing customers. Another nearby repair shop claims business is down 25%.
The basic problem with cash for clunkers is that it uses the old “broken windows” theory of economic activity. Everyone who lives in a hurricane zone knows that typically people are never busier than right after a major storm. Roofs need to be replaced, while damage to vegetation, glass, power lines, boats, etc., all require overtime to repair. All that activity gets counted in GDP.
But everyone also knows the storm was a bad thing, destroying property that was built at a cost in the first place. Sure, everyone is as busy as a beaver, but they’re just busy replacing what they had, not actually improving their standard of living.
Every clunker that gets traded in has to be wrecked: its engine has to be destroyed with chemicals and then the car gets crushed. In a way, it’s no different than if a storm came along and ruined each of these cars and then the government gave the owner a check to go out and buy a new one, as long as the new one is more fuel efficient.
Sure, the auto industry is busier for the time being, but every extra dollar getting spent has to be paid for, through a combination of higher taxes on the more productive segments of our economy as well as less spending on other businesses that provide worthwhile services without asking for a handout.
Ironically, the auto industry was primed for a revival over the next two years with or without government help. Cars and trucks were selling below the pace of scrappage earlier this year. This was unsustainable. Now, with the economy bouncing back, and unemployment at or near a peak, we suspect that car sales will begin to build. Look for auto sales to slump slightly (and temporarily), once the clunkers law lapses, but then start to move up substantially, and without government help, later this year.
Brian S. Wesbury - Chief EconomistRobert Stein, CFA - Senior Economist
"...transfer of sales across time..."
ReplyDeleteIsn't this how it always is? Unless we're making the pie bigger, we're always transfering a burden somewhere--whether it's to someone who's NOT getting our dollars, or to the future.
Mr. Wesbury suggests quite strongly that people would have bought cars anyway in the next couple of years. Perhaps. But new cars? More energy-efficient models? I'm not sure how he knows this.
"...the economy bouncing back, and unemployment at or near a peak..."
Huh?
Yes, we can always let "the market" take care of us, if we don't mind waiting...days...months...years...decades...
That's a lot of "economist's" in his title!
1. SP500 October 10th, 2007 (1562) to March 9th, 2009 (676) = -57%
ReplyDelete2. SP500 March 9th, 2009 (676) to August 25th, 2009 (1028) = +52%
Markets do correct...
I'm happy to know those were just 'market corrections' and not something bigger and more structural.
ReplyDelete