Dear Friends,
It seems to me that the US and the world economy would be better served by a general tax refund than any targeted “Cash for clunker” scheme. When the US was in the recession of 2001 the Bush administration, with the help of the divided legislature, decided to give a general tax refund. I remember it to be around $600.00 for a family, or something like that. The thing costed around $500 million. The US GDP was increased during the time the scheme was done and the economy came out of recession.
The main argument against the general population getting a tax “refund” is that many people would save the money or pay down debt. I maintain that doing both double the effect of each dollar. When credit is paid down the borrower has more credit to use to buy some big ticket item in the future. The creditor has money to re-lend back into the economy. The economy gets a double whammy for each dollar spent. So to say that paying down debt would be a waste of the money is absurd.
Saving a “refund” would give banks more solvency. After all, wasn’t the problem that banks were insolvent? That is what the two TARP schemes, that costed $2 trillion, were for. When people save money the banks have more money to lend back into the economy. When there is a general trend for people to save the banks are put in a comfortable position to lend. The economy gets another double whammy. The saver has more personal wealth, giving them more confidence, to spend money. The bank has a better looking ledger and is in a position to lend into the economy. Again doubling the economic impact of a “refund”.
The Cash for clunkers scheme has generated a lot of auto sales. I haven’t seen any hard figures yet on how many were sold but the number seems substantial. Wrecking yards are busy with business from it and are looking forward to a good inventory of used car parts. I have also heard that struggling auto dealership are staying afloat due to this timely legislation. It has been such a success that the government wants to throw another 2 billion dollars into it.
I will be very curious what the GDP increase will be from this $3 billion dollar scheme to move the economy (and sell cars). As to selling cars the program has been a resounding success. The effect on the economy both during the time the scheme is in effect and after the scheme finishes is still in question. I suspect the effects will be small and short in duration.
The money the government is printing and borrowing from itself for this scheme is being spent on a product that has been manufactured already. The reduced inventory will generate some restocking but the car manufacturers are wary of over stocking. Cutting down expenses is still job one. So the addition to GDP will be lessened. The money is being spent immediately so the impact is immediate. The long term impact to the economy will be in the driving down of used car parts prices. I predict will be another small scale economic “crisis” that will happen in a few months. Too large an inventory of used car parts will drive the price too low for the dealers in used car parts to have room for a profit. They will be crying to the government to fix this problem too.
So the Cash for clunkers scheme is on track to cost six times as much as Bush’s “tax rebate”. Do you think the effect on the US GDP will be six times Bush‘s “rebate” ?
