News Who Benefits from the CARS Program?

[russ_watters]

One marketing gimick begets another!

 

[bleedblue1234]

https://www.youtube.com/watch?v=<object width="425" height="344"><param name="movie" value="http://www.youtube-nocookie.com/v/VES_eCM1R78&hl=en&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube-nocookie.com/v/VES_eCM1R78&hl=en&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>

Go to 7:20

 

[Ivan Seeking]

https://www.youtube.com/watch?v=<object width="425" height="344"><param name="movie" value="http://www.youtube-nocookie.com/v/VES_eCM1R78&hl=en&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube-nocookie.com/v/VES_eCM1R78&hl=en&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>

Go to 7:20

He ignores:

Payback perhaps 2 or 3 times in GDP
Payback in health benefits by reducing emissions
Payback in reduced reliance on foreign suppliers for energy
Payback in reducing the danger to existing drivers of fuel efficient vehicles, by taking more of the monster SUVs and monster trucks off the road.
Payback later for poor people who will have greater access to more fuel-efficient vehicles.
Payback over not just the remaining life of the gas hog traded in, but also over the entire life of each new small car that would have been another gas guzzling SUV or truck, were it not for the cash for clunkers program.

Given that this is a money maker and not a money loser, he ignores the tremendous stimulus to the economy provided by a quick injection of several billion dollars. He ignores the pressure that this helps to put on auto makers to produce more fuel-efficient cars that can compete. He ignores the cost of maintaining old vehicles, lost productivity due to transportation problems, as well as the fact that the most important thing to get the economy moving again is to increase consumer spending. The fact is that most of these cars probably wouldn't have lasted much more than five years, and those that would have would be increasingly offensive to everyone as they began to belch smoke, guzzle even more gas, and put everyone on the road in jeopardy as the vehicles grow unsafe and unreliable. He also assumes that people who can't afford to buy a car are buying one when they don't need to, when in fact there are many people who need to buy couldn't, but now can because of the inflated value of their old car. Also, there is nothing more beautiful than an SUV in a car crusher. Now the beasts can be recycled and the materials put to productive use.

The cash for Clunkers program is a win win win, which is why it is probably the most successful government program of its kind seen in this country any time in the last forty years. The biggest problem is that it was so successful that the payment system has been overwhelmed. Obama said today that they have hired three or four times the number of people planned while trying to respond to the incredible demand for payment, from auto dealers all over the country. The only thing wrong with this program is that it has been too successful for the paperwork stream.

 

[mheslep]

He ignores:

Payback perhaps 2 or 3 times in GDP...

Where are you getting this?

 

[bleedblue1234]

Payback perhaps 2 or 3 times in GDP

where are you getting this from?

Payback in health benefits by reducing emissions

again subjective, and what scientific study has been done about this, much less how much emissions are being reduced (most scientists say an extremely small percentage)

Payback in reduced reliance on foreign suppliers for energy

ok... but we are not buying all electric vehicles, and also we are buying foreign cars (to some effect). And you forgot to add in the fact that we are paying for these new cars through financing from abroad and at a cost of a debt riddled consumer... (that can't afford to buy a car)...

Payback in reducing the danger to existing drivers of fuel efficient vehicles, by taking more of the monster SUVs and monster trucks off the road.

Again, statistics please and why can't we phase them out over a lengthy period of time rather than permanently destroying capital and perfectly drivable vehicles...

Payback later for poor people who will have greater access to more fuel-efficient vehicles.

again if they cannot afford to buy a car, they shouldn't ... its economic suicide in the long term... for them and for society...

Payback over not just the remaining life of the gas hog traded in, but also over the entire life of each new small car that would have been another gas guzzling SUV or truck, were it not for the cash for clunkers program.

Again the small gain vs. the enormous cost to the consumer and the government...

Given that this is a money maker and not a money loser

again I don't see how this can be true. we are destroying our own capital that is owned by a society free and outright, it is absolutely ludicrous to think it is more cost-effective to destroy our own cars and buy cars on credit... you have a false interpretation of how the system works...

he ignores the tremendous stimulus to the economy provided by a quick injection of several billion dollars

you ignore the cost of the artificial demand spike and the cost of funneling capital from productive areas of the economy to consumer spending on cars that don't need to be purchased, several economists have said that this will reduce overall economic activity because people now have a new car payment to take care of, and we need to be saving in the first place... we need to save our money to rebuild productive parts of this economy...

He ignores the pressure that this helps to put on auto makers to produce more fuel-efficient cars that can compete

maybe so, but if it is economical to produce cars that aren't fuel efficient and that people will still purchase, then that is what car makers should do... if the government got out of the way a long time ago and did not subsidize oil through inflation and all of this other mess of things, we would not be in this problem...

He ignores the cost of maintaining old vehicles, lost productivity due to transportation problems, as well as the fact that the most important thing to get the economy moving again is to increase consumer spending

again you see consumer spending as healthy, when infact we need to model much of what china has done and save and rebuild our industries and financial sectors... while we should not and cannot seize spending, we need to reallocate capital to producers rather than consuming vehicles...

Transporting problems?

what about the cost of melting down the vehicles... and the cost of debt to the overall economy... consumers will have less money to spend on other expenses that they may need..

The fact is that most of these cars probably wouldn't have lasted much more than five years

So... that's five years of usable driving period that is wasted and a usable product that is destroyed (again I don't know where you are getting these facts)...

and those that would have would be increasingly offensive to everyone as they began to belch smoke, guzzle even more gas, and put everyone on the road in jeopardy as the vehicles grow unsafe and unreliable.

again complete BS and liberal BS... an old car that passes all emissions tests is certified... why should we destroy it if it runs?

He also assumes that people who can't afford to buy a car are buying one when they don't need to, when in fact there are many people who need to buy couldn't, but now can because of the inflated value of their old car. Also, there is nothing more beautiful than an SUV in a car crusher. Now the beasts can be recycled and the materials put to productive use.

Huh? destroying capital is a good thing? where do you live? mars... we are wasting perfectly good capital that took labor, energy, and time to produce, and exchanging it at a cost for scrap...

The cash for Clunkers program is a win win win, which is why it is probably the most successful government program of its kind seen in this country any time in the last forty years.

uh huh... ya... whatever you say bosss...

The biggest problem is that it was so successful that the payment system has been overwhelmed. Obama said today that they have hired three or four times the number of people planned while trying to respond to the incredible demand for payment, from auto dealers all over the country. The only thing wrong with this program is that it has been too successful for the paperwork stream.

again people hired at a cost to taxpayers and a reallocation of capital that is artificial, once the program ends the demand will cease and we will be faced with issues of mis-allocated capital and more government spending... which we certainly do not need...

Thanks come again...

 

[mheslep]

Also, there is nothing more beautiful than an SUV in a car crusher. Now the beasts can be recycled and the materials put to productive use.

such as making more SUVs. Don't forget the top ten replacement purchases include two small SUVs (Escape and Patriot) and two trucks (F150 and Silverado)

From Edmunds (via CNN):

1 Ford Escape (4WD SUV hybrid)
2 Ford Focus (sedan)
3 Jeep Patriot (4WD SUV)
4 Dodge Caliber (4WD)
5 Ford F-150 (4WD Truck)
6 Honda Civic (sedan)
7 Chevrolet Silverado (4WD Truck)
8 Chevrolet Cobalt
9 Toyota Corolla (sedan)
10 Ford Fusion (4WD hybrid)

http://money.cnn.com/2009/08/07/autos/cash_for_clunkers_sales/index.htm

 

[russ_watters]

Payback perhaps 2 or 3 times in GDP.

Ivan, you're misusing the word "payback". Payback is a measure of return on investment. It means putting $10 in and getting $20 or $30 back (and usually also includes a timeframe for 1:1 payback). With the CARS program, you are probably saying that since the government puts in $4500 and the buyers put in $9000-$13,500, that that's a "payback" of 2-3x. But that's not payback, that's just a multiplier. The incentive is intended to multiply its own effect. I guess you could say it's "pay" without the "back". But that's an important difference:

The money starts off free, which in a payback calculation is zero payback (infinite ROI), but that's because it is borrowed money. The ROI drops over time, though, as the money accrues interest and has to be paid back. Whether the stimulus of the money going around in circles will outweigh the loss due to interest and unavailability of the money for future spending is not an easy question to answer. Adding in the fact that capital is being destroyed implies strongly to me, though, that it can't be anything but a loser. In other words, the final "pay" into the GDP isn't going to be 2x to 3x, it is going to be 0x or less.

Certainly, though, all of the benefit is front-loaded, coming over last month and next month and all of the cost comes later. That is, of course, one of the primary complaints of most people who oppose the idea. It will give a 1 quarter boost to the GDP and then lower the gdp for the next 5 years. As with most of his stimulus plans, if he succeeds in actually spending the money, he'll pull us out of the recession sooner than we would have gotten out on our own (perhaps a month or two sooner), but he'll keep the GDP down and unemployment up for the next decade or more. I'm not a big fan of trying for a 6 month improvement at the expense of the next 10 years.

 

[Al68]

The cash for Clunkers program is a win win win, which is why it is probably the most successful government program of its kind seen in this country any time in the last forty years. The biggest problem is that it was so successful that the payment system has been overwhelmed. Obama said today that they have hired three or four times the number of people planned while trying to respond to the incredible demand for payment, from auto dealers all over the country. The only thing wrong with this program is that it has been too successful for the paperwork stream.

If we judge success by how well the program did at giving taxpayer money away and destroying wealth, sure it's a success. Gee, more people wanted to take the loot than we thought when we offered it, big success.

 

[russ_watters]

Didn't you know, Al67, popularity*=success!

So I think the government should start dropping bundles of hundred dollar bills from helicopters at sporting events. That would be so much more successful, not to mention efficient: it's fast and there's no paperwork!

*Popularity with the people being handed the money.

 

[mheslep]

Ivan, you're misusing the word "payback". Payback is a measure of return on investment. It means putting $10 in and getting $20 or $30 back (and usually also includes a timeframe for 1:1 payback). With the CARS program, you are probably saying that since the government puts in $4500 and the buyers put in $9000-$13,500, that that's a "payback" of 2-3x. But that's not payback, that's just a multiplier. The incentive is intended to multiply its own effect. I guess you could say it's "pay" without the "back". But that's an important difference:

The money starts off free, which in a payback calculation is zero payback (infinite ROI), but that's because it is borrowed money. The ROI drops over time, though, as the money accrues interest and has to be paid back. Whether the stimulus of the money going around in circles will outweigh the loss due to interest and unavailability of the money for future spending is not an easy question to answer. Adding in the fact that capital is being destroyed implies strongly to me, though, that it can't be anything but a loser. In other words, the final "pay" into the GDP isn't going to be 2x to 3x, it is going to be 0x or less.

Certainly, though, all of the benefit is front-loaded, coming over last month and next month and all of the cost comes later. That is, of course, one of the primary complaints of most people who oppose the idea. It will give a 1 quarter boost to the GDP and then lower the gdp for the next 5 years. As with most of his stimulus plans, if he succeeds in actually spending the money, he'll pull us out of the recession sooner than we would have gotten out on our own (perhaps a month or two sooner), but he'll keep the GDP down and unemployment up for the next decade or more. I'm not a big fan of trying for a 6 month improvement at the expense of the next 10 years.

Yes this is best described as a multiplier effect, if there is one, and not a payback. I suspect since Ivan mentioned GDP he's alluding to the http://en.wikipedia.org/wiki/Fiscal_multiplier" Nobody claims 2 or 3x multipliers.

 

[TheStatutoryApe]

Payback in reducing the danger to existing drivers of fuel efficient vehicles, by taking more of the monster SUVs and monster trucks off the road.

Does it? SUVs are perfectly acceptable replacements under the rules of the Cash for Clunkers program. If you trade in an SUV the improvment in fuel efficiency required of the replacement is much smaller and if your SUV happens to be a super large 'class 3 vehicle' you can only trade it in for another SUV and it only needs to have a one mile to the gallon improvement in fuel efficiency.

Payback later for poor people who will have greater access to more fuel-efficient vehicles.

You mean maybe lower middle class people? Most actual poor people buy used so that they don't have to worry about car payments and severely hiked insurance rates. Cash for Clunkers means a whole crap load of used vehicles that will not be on the market, nor will their parts be available for fixing the old cars of the actual poor people who still could not have afforded to buy a new car even with the free money, AND the actual poor people will still be unable to afford to buy themselves new cars.

Payback over not just the remaining life of the gas hog traded in, but also over the entire life of each new small car that would have been another gas guzzling SUV or truck, were it not for the cash for clunkers program.

See above. Many of those trade ins just became newer slightly less gas guzzling trucks and SUVs.


No more kool aid for you Ivan!

 

[CRGreathouse]

So I think the government should start dropping bundles of hundred dollar bills from helicopters at sporting events. That would be so much more successful, not to mention efficient: it's fast and there's no paperwork!

Exactly! You'll only have to drop $250,000 per stadium, but the people will pay a total of $2.5 million to go to the game. And if you drop big bills (and encourage businesses to not have enough change!) you'll get a multiplier effect because people will pick up a $500 bill and put in money of their own to round out the purchase.`

 

[CRGreathouse]

If you trade in an SUV the improvment in fuel efficiency required of the replacement is much smaller and if your SUV happens to be a super large 'class 3 vehicle' you can only trade it in for another SUV and it only needs to have a one mile to the gallon improvement in fuel efficiency.

Source?

 

[Jimmy Snyder]

I suppose that if I had a clunker with a trade-in value of $4501, I would not take advantage of this program in any case. If I had a clunker with a trade-in value of $4499, then I might consider it, but I wouldn't buy a car for the sole purpose of cadging a dollar off some other poor taxpayer, I would have to actually need the car I was buying. If I had a clunker with a trade-in value of $1, then I essentially have a ticket worth $4499, but only if I use it. If I have need of a car, I've hit the jackpot. On the other hand, if I don't need a car I still might find some way to monetize the clunker. Perhaps I can sell the new car for $3000 less than I paid for it and pocket $1499. Bottom line, I am unlikely to take advantage of this program unless I need a car, and am willing to buy a new one. Has anyone calculated the effect of this program on sales in the coming months. How much has the demand from that period been scrunched up into these past few weeks? Has there been any real increase in demand for new cars as a result of this program?

 

[russ_watters]

Exactly! You'll only have to drop $250,000 per stadium, but the people will pay a total of $2.5 million to go to the game. And if you drop big bills (and encourage businesses to not have enough change!) you'll get a multiplier effect because people will pick up a $500 bill and put in money of their own to round out the purchase.`

Of course, just like with the clunkers which would eventually get phased out anyway (people do eventually replace their cars), Phillies and Eagles games are already sold out...

 

[russ_watters]

I suppose that if I had a clunker with a trade-in value of $4501, I would not take advantage of this program in any case. If I had a clunker with a trade-in value of $4499, then I might consider it, but I wouldn't buy a car for the sole purpose of cadging a dollar off some other poor taxpayer, I would have to actually need the car I was buying. If I had a clunker with a trade-in value of $1, then I essentially have a ticket worth $4499, but only if I use it. If I have need of a car, I've hit the jackpot. On the other hand, if I don't need a car I still might find some way to monetize the clunker. Perhaps I can sell the new car for $3000 less than I paid for it and pocket $1499. Bottom line, I am unlikely to take advantage of this program unless I need a car, and am willing to buy a new one. Has anyone calculated the effect of this program on sales in the coming months. How much has the demand from that period been scrunched up into these past few weeks? Has there been any real increase in demand for new cars as a result of this program?

Not sure if anyone has calculated the effect (don't worry - it won't take long to see it), but plenty of people have pointed out that it is likely the effect is more a shifting of car sales than an actual increase in car sales.

 

[mheslep]

Sales are definitely up from January's lows, but it is impossible to isolate the cause given the recession.
http://online.wsj.com/article/SB124931253429401705-email.htmlhttp://online.wsj.com/article/SB124931253429401705.html#project%3DAUTOS90218%26articleTabs%3Dinteractive

...The closely watched annualized selling pace rose to 11.24 million vehicles, a significant jump from June's 9.69 million rate. But it was down from the year-ago pace of 12.5 million sales, and still far short of the 16 million annual level once considered normal.

GM and Chrysler Group LLC suffered their smallest sales declines of the year. GM sales fell 19.4% to 188,156 vehicles, while Chrysler's fell 9.4% to 88,900. Toyota Motor Corp. said sales slipped 11% to 174,872 vehicles, and estimated that clunkers deals boosted sales by 30,000 to 32,000 vehicles.

Ford, meanwhile, said its July light-vehicle sales rose 2.4% from a year ago to 164,795 -- the company's first year-over-year gain in 20 months.

 

[OmCheeto]

Has anyone calculated the effect of this program on sales in the coming months. How much has the demand from that period been scrunched up into these past few weeks? Has there been any real increase in demand for new cars as a result of this program?

I'd say that it was just a matter of time before last years potential buyers went shopping.

For the full year of 2008, all of the Big Six automakers reported sales declines. In total, the industry sold 13.2 million vehicles for an 18 percent drop from 2007's 16.1 million. http://www.autoobserver.com/2009/01/2008-us-auto-sales-are-worst-since-1992.html"

I don't think it is something one can calculate without knowing the thoughts and bank balances of 300 million people. They simply held on to their old cars for 6 years instead of 5. I don't see that the 3 million car sales deficit needs to be evened out with a 3 million car sales surplus.

I think that the only thing we need is for auto sales rates to stabilize at their previous level.

 

[bleedblue1234]

snip

I think that the only thing we need is for auto sales rates to stabilize at their previous level.

I hope this is a joke.

To get auto sales at previous levels we would have to have a MASSIVE infusion of brand new capital and new money sloshing around, and people would have to be insane to go on the same spending binge that threw the economy off of a cliff.

The real baseline demand for vehicles isn't there anymore... we don't have excess foreign dollars sloshing around the country, we can't use our houses as ATM's... the demand levels are crashing to what they should have been all along. People are buying cars only when they actually need to purchase them, not when the next late model Lexus rolls off the factory line... and that is how it should be, especially with the current fiscal situation of everyone in this country, government included.

You live in a dream world...

 

[OmCheeto]

I hope this is a joke.

Nope.

To get auto sales at previous levels we would have to have a MASSIVE infusion of brand new capital and new money sloshing around, and people would have to be insane to go on the same spending binge that threw the economy off of a cliff.

I disagree.

The real baseline demand for vehicles isn't there anymore...

?

we don't have excess foreign dollars sloshing around the country, we can't use our houses as ATM's...

Ha ha! You got me there. I bought my house for $22k, and now 20 years later, I owe $40k!
It was fun while it lasted though. Thank god it's still worth $150k, or I'd be screwed if I lost my job.

the demand levels are crashing to what they should have been all along. People are buying cars only when they actually need to purchase them, not when the next late model Lexus rolls off the factory line...

I kind of agree with you here also. I average 50 years between new car purchases.

and that is how it should be, especially with the current fiscal situation of everyone in this country, government included.

Actually, 'everyone' is a bit of an exaggeration. I'm actually doing quite well.

You live in a dream world...

Now that, is the only fact that I have ever noticed to roll off the ends of your fingers.

 

[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.