I'll keep this simple.
Consider a market for a good that most people purchase once every few years. Suppose that the purchasing decisions of consumers is somewhat influenced by cyclical and seasonal swings in the overall economy, but that no other large external factors synchronize the buying habits of many people at once.
Now suppose that an external factor (such as a government policy) caused many people who would have purchased cars in the next few years to make those purchases now.
Intertemporal substitution, anyone?
And the implications for demand in that industry in the years that follow these synchronized purchases would be...?
Oh, right, this happened once before.
That is all.
Consider a market for a good that most people purchase once every few years. Suppose that the purchasing decisions of consumers is somewhat influenced by cyclical and seasonal swings in the overall economy, but that no other large external factors synchronize the buying habits of many people at once.
Now suppose that an external factor (such as a government policy) caused many people who would have purchased cars in the next few years to make those purchases now.
Intertemporal substitution, anyone?
And the implications for demand in that industry in the years that follow these synchronized purchases would be...?
Oh, right, this happened once before.
That is all.
Well, pretty much... Adda and Cooper have several papers on car scrap subsidies. See my latest entry on a link, I'd rather not spam links in comments. What they find:
"We find that these policies do stimulate the automobile sector in the short run but, through the induced changes in the cross sectional distribution of car ages, create the basis for subsequent low activity. Further, while these policies increase government revenues in the short run, revenues in the long run are lower relative to a baseline without intervention."
Good catch! As soon as you mentioned it, I remembered reading that paper (a long time ago). Cooper presented it at a seminar I attended back in my grad school days.
Which is just what one would want to see from such a program, more production in the short term to boost the economy and less in the long term to dampen inflation.
More production in the short-run will boost the economy and get the country out of the recession much faster. The demand in that industry in the years that follow these synchronized purchases would be somewhat lower. However, the net effect of the program is going to be positive.
Then why stop with cars?