Cash for clunkers, a final comment for now

I've seen lots of objections to the Cash for Clunkers program based upon the fact that all the program does is shift consumption intertemporally, it doesn't actually create sales that wouldn't have occurred anyway.

But that is not, in and of itself, a valid objection. Shaving the peaks in output and consumption to fill the valleys stabilizes the economy. When the economy is in recession, creating brand new things that wouldn't have existed otherwise to lift the economy back toward full employment is preferred, but generally there aren't enough opportunities along these lines to give the economy the help it needs. In the cases where we cannot create enough new output and consumption to bring the economy back to health, moving consumption from a time when the economy is overheated to a time when it is underperforming helps by bringing both time periods closer to the long-run trend.

Now, Cash for Clunkers is not the the best way to shift consumption from the future to the present, or anywhere close since the intertemporal shifting is generally only for a month or two rather than from good times to bad, so this should not be interpreted as a defense of the program on this basis. But that doesn't mean the idea of intertemporal shifting is inherently flawed.

There seems to be an idea that policy must create something new, that simply rearranging consumption intertemporally is of no value. But there is value in avoiding large cyclical swings in the economy, i.e. value in stability, and when we have the opportunity to shave the peak of housing and other booms - times when the overheating is dangerous as it could result in bubbles, inflation, and other problems - and then use the "shavings" to fill the troughs of recessions, we should do so.

Now, I don't think I was the only one to make the argument, but when you Google "cash for clunkers intertemporal substitution" I am at the top of the list.  So I guess I should respond.

Mark characterizes the intertemporal substitution argument thusly:  "it doesn't actually create sales that wouldn't have occurred anyway."

While that is certainly true, I took it a bit farther, particularly in my second post.  My point is that it might not even affect production much at all since the dealers were overstocked with inventory anyway.  The production took place before CARS, and it is unclear (unlikely in my estimation) that CARS will meaningfully stimulate production afterward.  The increase in consumption and the decrease in inventories create basically no effect on GDP.  In a world without CARS, the dealers would have had to slash prices at the end of the model year (which is fast approaching).  As I said before, the dealers benefit, but it is unclear if anyone else does.  (Ironically, the dealers are having problems getting paid, but that's a story for another day.)

Mark then says, "But that is not, in and of itself, a valid objection. Shaving the peaks in output and consumption to fill the valleys stabilizes the economy."

I don't know.  If the program shifts consumption but not production, maybe it is a valid objection.  Don't you think?  Plus, there's the link in my first post that seems to have been overlooked.

I didn't quote from the article because I thought that people would read it, get the point, and see the connection.  But here it is in case you missed it.  The article is about the tech slowdown post Y2K, Internet boom, etc.

That has left many equipment and chip makers with much of the stuff they built in 2000. Motorola's Burgess figures that by and large, chip makers booked two years' worth of sales last year. The market for communications and networking chips grew 37% in 2000. But Burgess says "we got 12% last year that we shouldn't have had" because those sales were simply moved up from 2001. The result will be a decline in sales this year and continued slow growth next year. (emphasis mine)

The beauty of that article is that it was written after the fact, not speculating about what would happen.  Yes, I am speculating here, but I think I've got a pretty good script to work from.  I would not bet the farm on CARS providing a "stabilizing" force in the auto industry or beyond, and as noted in my second post, I don't think Detroit is either.

Again I ask, if the production has already occurred and would have occurred without CARS (and those workers were paid for that production before being laid off when demand slumped), then who benefits from the shift in consumption besides the dealers (who may have had to sell these cars at a huge discount without CARS)?  Remember, I don't dispute the fact that the dealers benefit.  And there is a (small) multiplier effect from that perhaps, but surely there are more effective ways to stimulate demand, aren't there?

Maybe Mark secretly agrees that there are better ways...

Now, Cash for Clunkers is not the the best way to shift consumption from the future to the present, or anywhere close since the intertemporal shifting is generally only for a month or two rather than from good times to bad, so this should not be interpreted as a defense of the program on this basis. But that doesn't mean the idea of intertemporal shifting is inherently flawed.

There seems to be an idea that policy must create something new, that simply rearranging consumption intertemporally is of no value. ...

I think Mark misses the point that effective stabilization policy does in fact intertermporally shift output--which should shift consumption as well because they are contemporaneously correlated.  And in fact, just about any policy is an attempt to intertemporally shift output.  Monetary policy surely is.  But an intertemporal shift in consumption and inventories alone (which this quote from Mark seems to acknowledge this is) really is of little value in the aggregate.

Of course, maybe Mark wasn't referring to my posts at all since there wasn't a link.

Just to be clear, my real issue with the "Cash for Clunkers" program is the same as the reasons that I oppose the income tax rebates brought to us by President Bush and the gas tax holidays embraced by politicians of all stripes.

These policies have almost no real stimulative impact.  Consumers don't benefit much from gas tax holidays.  And income tax rebates mostly get saved.  I will repeat what I said during the gas tax holiday debates:

My criteria for good public policy is that it be well out of the neighborhood of "pointless."

I apply this criteria without regard to the political party that advances the policy, and I encourage you to do the same.

Basically I get really irritated when any politician from any party tries to score points with a policy that is bound to be popular for obvious reasons even though it produces little or no real positive effect.  It irritates me that so many people can't see through the smoke and mirrors.  It irritates me that politically popular but nearly pointless policies crowd out other policies that are less politically popular but could produce far better results.

I've been irritated a lot in the last 10 years, and I don't see it getting better anytime soon--regardless of which party is in the big chair.