The Program Only an Idiot Could Love

All the hype about the cash for clunkers program, that it’s “the best economic stimulus we’ve undertaken yet” are based on the estimate that consumer spending drives 60-70% of all economic activity in the US, if not the world. So any tiny impetus for consumer spending, even a mere $3 billion worth, will have an enormous impact, far greater than the hundreds of billions of dollars approved in the Economic Stimulus Spending Act. Or so the reasoning goes.

The bulk of the money in the Economic Stimulus Spending Act was approved for “shovel-ready” infrastructure projects. Unfortunately, many of those projects are still waiting for the first shovel of dirt to be turned over. Time’s a-wasting. The construction season will be over soon, and it’s becoming clear that most of those projects wont’ get underway until next spring.

Hence the excitement over the cash for clunker program. A tiny blip of consumer spending! Let us rejoice!

But not so fast. The Federal Reserve and the Commerce Department reported last week that, in June, consumer borrowing fell for a fifth straight month. The US public is using its cash to pay down its debts, not to spend. Economists expected a decline of $4.1 billion in consumer credit in June; the actual total was $10.3 billion, almost double the May decline of $5.4 billion. Credit card use in June dropped by $5.3 billion, the tenth monthly decline in a row, a record for the US economy.

Americans are paying down their debts, which is making the US economy suffer. Nevertheless, we could argue that this is a good sign for individual US households, except for one sobering fact: total personal debt still lingers at $2.503 trillion (not counting mortgage debt and home improvement loans). We all have a long way to go to pay off our credit cards, student loans, and auto loans.

Which is why cash for clunkers may be a good deal for the US economy (at least in the short term), but it’s a very bad one for US households, which don’t need to take on new auto loans right now—no matter how nice it is to get a government rebate check. This is yet another way that the Republicans’ anti-tax mantra has damaged the American psyche; we will do anything to get something back from the IRS, even if it kills us.

And let’s not forget the cost to society and the environment to junk all those clunkers (a requirement of the program) instead of keeping the perfectly good ones running and recycling the real clunkers for parts. Meanwhile the auto industry is gearing up to use dwindling resources to make new cars to fulfill the demand created by the cash for clunkers program.

Replacing a 1999 17-mpg pickup truck with a new 2009 model that gets 18-mpg makes no sense whatsoever. That $3 billion in taxpayer money could have been spent much more efficiently if the government had randomly handed out $4,500 checks. Or given the money to state and local governments to plug their budget holes, to prevent layoffs in state and county governments, to provide homeless services, to fund more transit services (which would truly help the environment), to pay teacher salaries, or to prevent billions in government service cuts all over the country.

Cash for clunkers? What idiot came up with that one? Probably someone who was taking money from the auto industry, the only real beneficiary of the program.

By the way, both of Washington state’s senators, Maria Cantwell and Patty Murray, voted in favor of the program. They need to explain why.

[Source: “U.S. Consumers Reduce Debt for Fifth Month in a Row,” Jeff Bater, The Wall Street Journal, 8/8/09.]