Debt for Clunkers

It seems that if you are an economist, you can contort your mind into believing that spending causes wealth. Once you have accomplished this task, everything else seems to flow fairly easily. Pretty soon, you start to believe that governments should increase spending during recessions to boost the economy, and maybe eventually that we can spend our way out of bankruptcy.

So you can imagine that economists almost universally accept the notion that the “Cash for Clunkers” program is a great idea. After all, what could go wrong? People are encouraged to spend money, and since these economists conflate spending and prosperity, we can see that their framework dictates increased prosperity resulting from spending. In fact, “Cash for Clunkers” is just about the only government stimulus that has had an immediate and visible impact, so we can expect more such programs in the future.

Of course, the dubious results of the program haven’t seemed to bother economists very much. For example, as consumers spend money, they are tending to turn in paid off cars and take out loans on new cars – further pushing them towards unsustainable debt. Moreover, wealth is being destroyed in the program as the old cars must be ruined. You would think that even economists might be able pick up that the program leads to impoverishment, not wealth – no sign of that yet. And to object on the grounds that the program is simply social engineering and vast manipulation of the populace which furthers an internationalist agenda, would, in 2009, be trite.

But there is another strange result that has cropped up. Although the government spending program was supposed to stimulate consumer spending, no one thought ahead and figured out that it might not actually stimulate aggregate spending. In other words, consumers spent more money buying cars because of the government incentive, but this wasn’t necessarily money that wouldn’t have been spent – it just wouldn’t have been spent on cars:

Investors were taken aback by the Commerce Department’s report that U.S. retail sales fell 0.1% in July, as opposed to expectations sales would gain 0.8%. …

“All the cash-for-clunkers [program] did was steal sales from other retailers. We’d argue that even more damage was done, as consumers who did turn in their clunkers likely surrendered assets with at least some residual value for debt and an equity stake in a sharply deteriorating asset,” said T.J. Marta, chief market strategist, Marta on the Markets LLC.

MarketWatch

The economists thought that the Cash for Clunkers was a win-win. However, retail spending was diverted to buying cars, so the government failed to stimulate anything anyway. Consumers did take advantage of the program, but ended up taking on a lot of debt and a “sharply deteriorating asset”.

The economists and politicians need to learn that consumers aren’t stupid. When given incentives, they can be manipulated – but the results are rarely expected. This, in fact, is one of the principle problems of the study of economics. It is seen as science, but when it has devolved into nothing more than a series of steps to predict human behavior, it is at best, an artform.

Maybe someday we’ll all learn that an economist is a sharply deteriorating asset.