The Hidden Payoff from Cash for Clunkers

The final scorecard is out on the cash for clunkers program: In return for taking on $2.88 billion in additional debt, Uncle Sam helped the auto industry sell 690,000 new vehicles. Whether this was a winning trade is debatable -- as this MoneyWatch story points out, and this post, How Would We Figure Out Whether Cash For Clunkers Makes Sense? by economist Brad DeLong. But as a morale builder, it was hard to fault.

Economists note that almost all transactions that happened under Cash for Clunkers would eventually have happened anyway. Maybe the program converted some used-car sales into new-car sales, which means a little more use for the car makers' factory capacity and a few more laid off autoworkers put back to work. And as White House economic adviser Brian Deese puts it in this WSJ interview, there may be some stimulus value to drawing some sales from the future when (we hope) the economy won't need juicing, into the present, when it desperately does. But all that is at least equally offset by the increased budget deficit, the destruction of usable cars, and the heavier debt burden on new car owners.

For my money, though, the uncounted benefit of the program has been its effect on the intangible economic force John Maynard Keynes calls "animal spirits." For weeks, the news and blogosphere have been loaded with images of busy car salespeople explaining that they were selling out of the Ford Focus (when did you think you'd hear that?). Car shoppers appeared on camera with an acquisitive gleam in their eyes that has been in hiding since 2007. And we were treated to the vision of a federal stimulus program that actually seemed to be working. If you wanted to persuade consumers that the economy really is starting to recover, you couldn't buy more convincing advertising.

Animal spirits, by their nature, aren't easily measured. But Tuesday's consumer confidence survey results did register a far greater rebound in optimism than economists expected. (The survey was taken in early to mid-August, when it was becoming clear that Cash for Clunkers would burn through another $2 billion, easy.) Interestingly, consumers say they believe that the economy is still in terrible shape. But their faith in the future has risen to levels not seen since before the recession began. Faith doesn't easily yield to a cost-benefit analysis, but It's hard to overstate its economic importance, as Nobel prize-winning economist George Akerlof points out in this MoneyWatch.com video.

Obviously, Cash for Clunkers didn't account entirely for the jump in consumer confidence, and there's no guarantee that it won't fade again, especially if unemployment refuses to fall. And while confidence can't cause a recovery, a recovery can't happen without it. So to the extent that the clunkers program gave Americans a reason to believe that things can eventually return to normal and to have some faith that government has a handle on recovery, it was a pretty good investment.

Continue reading on CBS MoneyWatch.com

Follow Eric Schurenberg on Twitter: www.twitter.com/EditorBNET

Comments

[MisesFan]

Yikes... Quoting Keynes "animal spirits" comment is poor analysis in my opinion. Artificially creating booms or bubbles even if they were or are 'mini-bubbles' such as the CFC program will only lead to a further bust. Stimulating more consumption is the exact opposite of what is needed to get out of a depression. Instead of consumption, savings is required, so that future production can take place.

Capital consumption that occurs when government initiates these programs can not be recouped. Those businesses who are productive and are making profits have now lost investment capital. In its place, Americans have bought autos -increasing their debt - unfathomable given the vicious job market.

Think of this way, I buy my auto now with the stimulus or I invest my money in a company that is going to be able to produce very cool solid state hard drives at a lower cost in the future. Now, I have to forgo my current consumption, but the rate of return that I think this new company will bring me is worth it. When the government messes with the free market like this, it skews my tendency to consume now - hey I might not be able to get a new car with this kind of deal down the road, so I better get it now.

Of course, the government cannot visualize the unseen effect - those cool new SSD devices are going to be later to market and at higher prices.

[Saidas]

Eventually? The economy needs stimulus now...not eventually.

I know I know, the CFC program was just a feel good measure with no real benefit, but I'm just saying.