Stimulating vs. Distorting the Market


There is a difference between stimulating a market and distorting a market. The Obama administration has routinely done the latter and that is why America’s taxpayers have been forced to endure trillions of dollars in new debt with no visible signs of a recovery. It is the essence of why tax cuts always work and additional government spending always fails.

Let’s leave aside the billions that President Obama spent rewarding political allies like the public employee unions, ACORN, the university crowd, and the green power advocates. Those parts of the stimulus package that nominally flowed to the private sector were based on the ill-considered notion that the government is capable of choosing the winners and losers in a competitive market.

For instance, the Obama administration offered an $8,000 tax credit for first time homebuyers. Did it increase the number of homes purchased? No. Did it accelerate the decision making by some consumers? Yes. Was there a dramatic fall off in the number of home sales following expiration of the tax credit? Yes. Allan Greenblatt wrote in the September 1, 2010, on-line edition of National Public Radio (NPR):

“Many housing experts say that’s just as well. The credit has been popular and appeared to goose sales until its April 30 expiration date. But economists argue that its main effect was not to increase the total number of sales, but simply to change their timing. People rushed to sign contracts in time to qualify for the tax break, leaving the market in the doldrums ever since.”


Even the consistently liberal NPR gets it.

The same results occurred with the so-called “cash-for-clunkers” program. A September 1, 2010 article by Chris Isidore for CNN Money.com, noted:

“The nation’s top automakers reported disappointing sales Wednesday, resulting in the worst August for industry wide auto sales in 27 years.

“According to sales tracker, Autodata, U.S. new vehicle sales fell just short of 1 million vehicles, a drop of 21% from a year ago, which included Cash for Clunkers. The federal program produced a sugar rush of sales by dangling an incentive of up to $4,500 in cash for buyers who traded in older gas guzzlers for more efficient models.

“Industry sales also fell 5% from July levels. August sales typically outpace July, as deals become available for older models ahead of the fall introduction of new model year cars. August sales would equate to an annual sales pace of about 11.5 million vehicles.”

Again, the “stimulus” only shifted the timing of the purchases but did not stimulate the overall market. And, as usual with government programs, there has been a significant impact from unintended consequences. Several studies have indicated that there was a decrease in the number of vehicles donated to charities with the resulting decline in funds available to those charities from subsequent sales. In Monday’s Oregonian, George Will notes:

“The used car market is an important mechanism for redistributing wealth to low-income persons: The price of a car drops when it is driven out of the dealership, but much of its transportation value remains when it enters the used car market. Unfortunately for low-income people, the average price of a 3-year-old automobile has increased more than 10 percent since last summer. This is largely because the Car Allowance Rebate System, aka “Cash for Clunkers,” which ended in late August 2009, cut the supply of used cars.

“Cash for Clunkers provided up to $4,500 to persons who traded in a car in order to purchase a new car with better gas mileage, but stipulated that the used car had to be scrapped. The Boston Globe’s Jeff Jacoby reports that a study by Edmunds.com shows that all but 125,000 of the 700,000 cars sold during the clunkers program would have been bought even if no subsidy had been available. If this is so, each incremental sale cost taxpayers $24,000.”

While some spending distorted the market by accelerating the timing but not increasing the overall demand, another part of the spending sought to create artificial demand for a product that the market has consistently declined to support – electric cars. General Motors (now routinely referred to as Government Motors) has been the beneficiary of much of the government spending and as a result has highlighted the production of its Volt. Edward Niedemeyer noted in the New York Times with regard to the Volt:

“Quantifying just how much taxpayer money will have been wasted on the hastily developed Volt is no easy feat. Start with the $50 billion bailout (without which none of this would have been necessary), add $240 million in Energy Department grants doled out to G.M. last summer, $150 million in federal money to the Volt’s Korean battery supplier, up to $1.5 billion in tax breaks for purchasers and other consumer incentives, and some significant portion of the $14 billion loan G.M. got in 2008 for ‘retooling’ its plants, and you’ve got some idea of how much taxpayer cash is built into every Volt.”

And yet the Volt is priced $26,000 more than its gas powered version and $8,000 more than its prime competitor, the Nissan Leaf.

In each instance the decision was antithetical to a free market and ignored the demands of consumers – government substituting its judgment for individuals. The result has been continuation of the worst economic decline since the Great Depression, continuing high unemployment and massive accumulation of debt.

In contrast, Pres. John F. Kennedy, Pres. Ronald Reagan, and Pres. George W. Bush enacted broad-based tax cuts and, in doing so, increased the availability of discretionary money to consumers generally. Consumers thereafter made their own choices in a free market and the result was an improved economic climate, extraordinary job creation and even a significant reduction of the national debt under Pres. Bill Clinton who had the good sense to ignore the tax and spend impulses of his party and enjoy the prosperity of the Reagan tax cuts.

So where do you want to be? Funding the economically unsustainable decisions of career politicians or relying on the recurring and demonstrable benefits of the choices of consumers in a free market?

Post to Twitter Post to Facebook Post to LinkedIn Post to Reddit

Posted by at 06:00 | Posted in Measure 37 | 6 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Bob Clark

    It’s very telling now after Bama and the Dems have done all these loopie experiments in targeted spending, they are turning to advocating an extension of the Bush tax cuts. If they would’ve extended the Bush tax cuts earlier this year this may have already boosted business and investor confidence, and we wouldn’t have had the very slow second quarter economic growth which caused employment and unemployment to stall. Moreover, a simpler health care reform package in the form of something akin to food stamps, health care stamps, for the very very poor with strict means testing, would have removed the costly burden of uncertainty of the current package from both small and big business. Finally, reining in an over active EPA and FCC would also allow domestic businesses to be confident in their ability to compete globally. These latter two steps are largely cost free, using no federal dollars.

  • Rupert in Springfield

    >It’s very telling now after Bama and the Dems have done all these loopie experiments in targeted spending, they are turning to advocating an extension of the Bush tax cuts.

    Im not sure if it’s telling or if it is just plain hilarious.

    Remember way back when the Bush tax credits were supposedly only for the very rich? What ever happened to that talk? Now Democrats want us to believe that they have been real big on the Bush tax cuts for the poor and middle class all along.

    Hogwash – We diddled around for a solid year on a health care plan the public didnt support and hindered economic recovery by prolonging market uncertainty by leaving extension of the Bush tax cuts until the last minute.

    The other major mistake the administration made was in putting 75% of stimulus spending off until 2010 instead of getting out the money in 2009. Virtually every economist pointed this out from the out at the time. Did Obama listen? Nope, he wanted a campaign slush fund for 2010, thus the delay in spending. Even that plan doesn’t seem to be working out to well for him.

  • valley p

    “that is why America’s taxpayers have been forced to endure trillions of dollars in new debt with no visible signs of a recovery. ”

    No visible signs? Lets see….stocks are up over 2000 points since he came into office. GDP has been growing for the past 9 months. Corporate profits are at near record highs. Bailed out auto companies are profitable and hiring. TARP loans are being paid back. And the budget deficit is now shrinking. Consumer spending and confidence are also up.

    I’d say these are objective signs of recovery.

    “For instance, the Obama administration offered an $8,000 tax credit for first time homebuyers. Did it increase the number of homes purchased?”

    “Goosing the sales” over the short term was exactly the purpose of both the housing credit and the cash for clunkers. When you are in an economic hole because people are hoarding cash and delaying purchases, you want programs that give people an extra incentive to let go of some of that cash and get it circulating again. Waiting until later is not a good idea because later might be much much later, especially if prices start to drop and people wait for the next price drop and the next, a classic deflationary cycle that is real hard to break. See 1930s, Great depression.

    Its back to economics class for you Larry.

  • Steve Plunk

    I guess from the public sector point of view there never was a real recession. The stock market and GDP increases won’t pay the bills of the unemployed. That’s the real problem, unemployment.

    Only some TARP loans are being paid back, the budget deficit is criminally huge, consumer confidence is still very low and business confidence will only improve if things work out on Nov. 2. The basic fact is the economy is still in the tank and our Democratic leadership is making things worse.

    Like I said, only the public sector can claim any recovery with all the stimulus money that has propped them up. Those marginal road projects and other questionable stimulus will yield little return on investment and eventually they will follow the private sector into the real recession.

    Progressive policies punish the productive class and reward government largess. It ruins confidence as it retards the engines of our economy. Engines that should be given recognition for giving us the standard of living we have become accustomed to. While they produce the government continues to act like an ever growing parasite sucking more resources away.

    • Ron Marquez

      …..”That’s the real problem, unemployment.”…..

      And the unemployed have little if any money for discretionary spending. Less demand for products, less reason for job creation.

      …..”Those marginal road projects and other questionable stimulus will yield little return on investment and eventually they will follow the private sector into the real recession.”…..

      Seems very likely unless the private sector starts to create jobs and the private sector consumer starts to spend. Is the real recession yet to come ?

    • valley p

      “I guess from the public sector point of view there never was a real recession. ”

      Leave aside that there is no single “public sector point of view.” Teachers have been laid off, government workers at most levels have been furloughed, and more work is piled on fewer desks. The public sector is definitely experiencing the Great Recession.

      “Only some TARP loans are being paid back”

      As of last April, the estimated net negative on TARP was $86 billion. In other words, taking what has already been paid back plus what is expected to be paid back, the taxpayers will be out $86B. That is a lot of money, but is less than 1 year of the Iraq war, less then 2 years cost of Medicare Part D (passed by Republicans) and far less in real dollars than the S&L bailout of the 1980s, done by Reagan and Bush 1. Since April, both the auto and AIG bailouts look like they will pay back net positive as well, so in the end there may be zero cost to TARP. Zero.

      Here is the funny thing. 3 Republican presidents in a row, presided over the largest private sector bailouts in history, and the Tea Party blames Obama for socialism. I don’t know whether to laugh or cry some days.

      “Like I said, only the public sector can claim any recovery with all the stimulus money that has propped them up”

      What about private sector bridge builders, road pavers, and other contractors? What about your own trucks hitting fewer potholes? What about all the private retail businesses that rely on purchases from people spending their Stimulus tax cuts? What about all of us who received tax cuts, which were 1/3 of the stimulus cost? What about the auto companies and their workers? What about the bankers and financial industry? What about companies that have seen their stock value increase?

      Its another “What have the Romans ever done for us” moment isn’t it Steve?

Stay Tuned...

Stay up to date with the latest political news and commentary from Oregon Catalyst through daily email updates:

Prefer another subscription option? Subscribe to our RSS Feed, become a fan on Facebook, or follow us on Twitter.

Twitter Facebook

No Thanks (close this box)