8/20/2009

Regarding Government "Stimulus"

I put stimulus in quotes because its a horrible misnomer and in fact is a major drain on the economy as opposed to ever offering any real stimulus. The most recent example is indicative of the single greatest and underlying error made in virtually all aspects of government stimulus programs. Which is to ignore Henry Hazlitt's one lesson and not look at the effects on all groups for both the short and long term, but simply focusing on the immediate effects of a policy on one specific group.

President Barack Obama and administration officials declared the program a success Thursday, saying it has revitalized the ailing auto industry and finally brought reluctant car buyers back to dealership lots. Originally a $1 billion program, Cash for Clunkers was boosted to $3 billion in early August after heavy customer demand nearly depleted its funds in just one week.

Transportation Secretary Ray LaHood said the program has been "a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work." He said the department was "working toward an orderly wind down of this very popular program."


Now please let me know if you disagree with my understanding of this program and its alleged stimulus effects. The car industry is producing more cars than there is demand for. As a result of a lack of demand, the car industry must reduce its production to better align it to satisfy the actual demand for cars. This of course entails shutting down inefficient showrooms, laying off workers, and all the unfortunate negative events that come with a reduction in any industry. Stopping there, and not tracing things further, the government, and apparently the layman, view this as a net negative. People are getting laid off - this is bad! Of course, if we trace it further we realize that to attempt to prop up through artificial means (government deficit spending in this case) the inflated demand for cars to an inaccurately high level we are simply delaying this eventual reallocation of resources. While also either devaluing our currency through inflation, adding to the national debt, or both! If instead we allow this healthy and necessary liquidation of resources to occur, we free them up to be used in a productive and efficient manner to produce goods or services that there is legitimate demand for.

Which to be clear, is to say, allow them to create goods people want, instead of artificially allowing them to overproduce goods that there is not legitimate demand, or at least less demand for, than alternative goods.

In addition we are also increasing our debt while we are at it, both for the Federal Government (which is really the taxpayer as the government's debt will eventually paid for by us through either direct taxation or indirect taxation of inflation), and newly created personal debt for the marginal buyers of these cars whom could not afford to buy them without government assistance.

Viewed in this light, one immediately realizes that while if we look only at one specific group in the immediate term, (being the car industry) we see a stimulus. Yet once we broaden our view to encompass the economy as a whole as well as the long term effects, we see that far from providing legitimate stimulus we are in fact amplifying the original problems and aggressively preventing the necessary and healthy corrections that would otherwise occur in a truly unhampered free market.

1 comment:

  1. as you've written in emails to me, but i didnt see mentioned here, is that this program is needlessly destroying valuable working products (automobiles that work) simply to replace them with newer models. one article i read somewhere (which admittedly i did not fact check, so it could be inaccurate), said that the new replacement cars were often no more CO2 friendly - i.e. a lot of people were going out and buying hummers through the program. if that's true, thats crazy, as i thought, one of the main goals of the program was to help lower CO2 emissions. lastly, another unintended and UNSEEN, consequence of people spending money on new cars they DID NOT NEED (i.e. more debt financed luxury goods) is (1) the decrease of people just saving their $ - (which is direly needed) or conversely, if people are going to spend that money, then (2) spending on other industries that may need it. That money spent on new cars is not being spend on dinners out or
    > entertainment, or new appliances, clothes, etc I.e. propping up an industry (Cars) hurts directly hurts other industries.

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