Rational Capitalist on Facebook

Friday, October 30, 2009

Update: "Stimulus" Can Not Work and Reality is Still What It Is

In previous posts [1, 2], I explained why it is logically impossible for government "stimulus" programs to generate real economic growth. In short, a dollar spent by the government is a dollar that will not be spent by someone else. The government is not a productive enterprise. It obtains funds through taxation, borrowing, or indirectly through the inflation of the money supply and simply redistributes these funds to others. "Stimulus" spending is at best a zero sum game and, in fact, profoundly destructive as it distorts capital markets and replaces productive spending, such as saving and investment, with consumption.

To help illustrate this point, here is an interesting chart from Clusterstock that shows the effect of the federal government's "cash for clunkers" program. The chart shows that a significant portion of the currently reported GDP is a result of this program:
according to the BEA the spike you see [in the chart] added 1.66% to the U.S. GDP growth figure reported. Thus without it, GDP growth would have been only 1.89% (3.5% - 1.66%) in Q3.
However, they correctly point out that all the program did was rob from future demand. In other words, individuals that would have purchased cars next quarter, purchased them now. Therefore, although current GDP is up, future GDP will be correspondingly down.

Next quarter, we won't just be returning to business as usual for auto output. Don't forget that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into Q3. Thus Q4 is likely to be very weak since many people who planned to buy a car in Q4 probably took advantage of Clunkers and bought in Q3.

Next quarter, not only are we unlikely to get Q3's boost, but motor vehicle output data could subtract from GDP as well.

Another interesting CNN article reports that auto sales analysts at Edmunds.com performed a study which shows that the government actually spent $24,000 per car - not the $4,500 per car that was the headline per car subsidy. Why? Because many of these people would have bought new cars anyway at some point in 2009. They calculate that only 125,000 of the cars sold under the program were cars that would not have ultimately been purchased with the subsidy. Therefore, the government's expenditure of $3.0 Billion divided by 125,000 cars works out to $24,000 per car.

Thanks government. Good work!


mtnrunner2 said...

They are such liars. Stimulus packages are the economist's equivalent of a perpetual motion machine, except more power supposedly comes out than was put in.

Steve D said...


They're just moving pieces around and like a bad chess player slowly losing ground with each move.


An apt analogy - I also like to bring in the Law of Conservation of Energy in these types of discussions. The problem is with physics it's simple and immediately obvious but economics is much more complex and effects are usually delayed. In this case most of the bad effects of the cash for clunkers program will not show up until Q4.

This is kind of like using electricity to power your car, and claiming it's not powered by combustion - where do you think the electricity comes from?


GDW said...

I like how the Obama administration, on Friday, announced that the stimulus created "640,329" jobs.

They have an exact figure? Really?

What that does, instead of saying "approximately 650 thousand", is it makes Obama look like *he* has finally discovered the secret that will make central-planning work. This time, our savior has figured it out. This time, central-planning won't degenerate into a wasteful morass of corruption, petty graft, and inefficiency. Our savior, finally, knows how to redistribute money so that the maximum amount of value is squeezed out of every penny. He's just like all of those finnicky, nit-picking, exacting, enormously productive capitalists who just don't want the government's competition.