More from Roy Fickling in response to a debate that centers on promoting economic growth verses a more fair and even distribution of wealth. For a bit about Roy’s experience see The Great Debate Part I
You ask, “By the way, how long does it take for the trickle to trickle down to the point where millions of jobs are created or brought back home (HA!HA!).”
Answer: In Reagan’s case, about 1 month before the recovery began in earnest after the 20% tax cut effectively on Jan 1, 1983. GDP growth went from negative in Q4 1982 to about 5% in Q1 1983 and up to around 9% in Q2 1983, continuing an unprecedented pace until Bush 41’s tax increases.
A more important question: “how long does it take before government stimulus programs begin producing jobs?” Answer: No one knows, because it has never happened. Never. Ever. You see, Keynes was absolutely correct that there is a money multiplier when the government spends money. The actual multiplier is debatable. Tabloid economists like Krugman claim it is somewhere north of 3. Conservative economist agree that it is closer to 1.1. The problem is that government spending works like a T account. Sure, when Uncle Sam spends a buck (or drops it from a helicopter), some portion of that dollar is spent. Depending on where the helicopter drops the money, it might be spent on the lottery, a new car, a house, a TV, etc. When that dollar is spent, the business that sold the rims now has a portion of that dollar to spend on something himself, and so on, and so on. The problem is that the same buck is taken from someone else in the same economy with an inverse multiplier. In a perfect world, every dollar spent by the government is netted out by the dollar it took from someone else in the same economy. When Uncle Sam took that dollar from Henry, that was a dollar less that he had to spend. The difference is that we are fairly certain that the dollar Uncle Sam took was from a productive source. After all, it was taken in the form of income taxes (a tax on production, not consumption). What we don’t know with any certainty is whether the dollar that is given to someone is going to be spent on productive activity. It might be spent on a new computer, but it is equally likely to be spent on crack. It is amazing to me that despite the fact that there has never ever ever been an example of Keynesian spending increasing GDP for more than 1 quarter, governments all over the world keep trying it. The examples are endless. Roosevelt tried it, Johnson tried it, Nixon tried it, Carter tried it, Bush tried it, Blair tried it, the Netherlands tried it, Greece tried it, Japan tried it for 10 years for heaven sakes. It hasn’t worked yet. Geez, even Europe has given up on government “stimulus”.
Henry is right. Short term tax incentives don’t work. I sit on the board of a biopharmaceutical company headquartered in SF. I promise you that we will not spend an extra dime on R&D because of a short-term tax incentive. We will spend money on R&D because we think it will produce profits in the future. In my company, I will not hire a single new employee because of a “new hire tax incentive”. Not one. I will hire a new employee when I believe the marginal work product of that employee will produce enough revenue to justify the hire. At our car dealership, we enjoyed an incredible two months during “cash for clunkers” the following dismal months more than offset the temporary gain. By the way, do you know that for every $4,000 the government paid for the clunkers, it actually cost taxpayers $24,000? Now that is government efficiency at its finest! At my real estate company, we enjoyed nice sales increases during the “home buyers incentive program” only to be followed by the worst two months since records were kept.
It was easy to predict that the Cash for Clunkers would only drive up sales very temporarily as the expense of future sales. Recent results have verified the sharp dropoff in auto sales when the program ended.
It was also easy to predict a backlash from consumers over the nationalization of GM and Chrysler. This bailout was a self fulfilling failure. GM and Chrysler were down far more than other car companies. GM was down 45%, Chrysler was down 42% and Ford was down a mere 6%.
Yes this is only correlation but the stories of consumers avoiding the nationalized car companies are becoming common, even if they are rarely covered by the press.
While the very expensive bailout may have seemed attractive in the short term, it may have succeeded in destroying so much customer loyalty that it will prove disastrous in the long run. GM would have been better served to have reorganized through an orderly and LEGAL bankruptcy.
The editors of National Review note the destructive aspects of the cash-for-clunkers program in “Uncreative Destruction”. read it here.
If there is one absolute rule in economics it is that everything has a cost. What were ‘clunkers’ to the program were the kinds of cars poor people drove for years. Poor people do not buy new cars- even with a generous credit.
Removing these clunkers from the market will likely raise the price of used cars that the poorer rely on. We would also expect a decline in the number of used cars that are donated to charity. As far as stimulating the auto industry, it is a heroin like fix that will wear off; leaving empty showrooms when the program ends. By stimulating the purchase of new cars, the money spent is money not spent on new clothes, books, fishing gear, health food, gym memberships, blenders, dining out, cameras, computers, shoes, video games, vacations, body lotion, fountain pens, stainless grilles, wine, bathroom remodeling, cigars, lottery tickets, concerts, guitars….. I think you get the idea.
A dollar spent on new cars is a dollar not spent on something else. There is no stimulus. I repeat- “no stimulus”. In fact by destroying the old cars there is a net destructive effect on our economy.
This administration is committed to spending our way to prosperity and it simply doesn’t work. Prosperity comes from stimulating production, and almost every policy this administration pushes destroys production. Business people understand that the spending stimulus must end and they will be left with substantially higher taxes and the vast uncertainty of the cap and trade, health reform and strong pro union legislation. No one will invest in production in this environment except the crony capitalists lining the pockets of the Washington elite. And these capitalist whores generate very few jobs compared to the small business people who are on hold until some common sense is restored.
The cash for clunkers is a clear example of the economic fallacy known as Bastiat’s fallacy. We see the results of the expenditure- a sharply increase in auto sales- but we ignore the real cost of the program because we do not see it. That $4500 spent on turning in your clunker was $4500 not spent on something else like … let’s say… health insurance, education, debt reduction, solar panels, wind mills, home improvements… you get the point. There is no net economic gain. Spending does not create wealth, yet our economic policy contends that it does.
These clunkers would have been removed from the national fleet eventually; we only speeded up the process a few years. So even the environmental impact is minimal.
It is also interesting that of the top five cars benefitting from the program there is not one Chrysler or GM product in there. Ford was one of them, Toyota had three models and Honda had one. Originally the foreign owned cars were excluded, but this was changed.
Auto buyers have long learned to forestall purchases to take advantage of promotions and discounts. This flurry of activity will likely come at the expense of next year’s sales.
