Thursday, November 19, 2009

A Stimulus That Could Save Money

New York Times article "A Stimulus That Could Save Money" (November 17th, 2009) misses the forest for the trees.

The one highly visible success of the stimulus program has been the cash-for-clunkers program. It induced a boom in vehicle sales this summer that clearly would not have happened otherwise.

Presumably, the article is referring to the large increase in car sales during the Summer of 2009. Cars are a durable good, last around a decade, and cost around $28,000. With an average rebate of $4100, a 14% average price decrease, we should expect individuals who were going to replace next year to intertemporally displace their purchases to the Summer of 2009.

But this is just shifting purchases and is by no stretch of the imagination expansionary in the long run--what we gain now in sales is taken out of sales in the future. It was foolish to draw sales nearer to today at the expense of tomorrow in a negative sum game--far from a success.

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