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?

Oregon Catalyst