One of the serious problems with Keynesian “stimulus” spending, is that it sends the entirely wrong signals to businesses. Case in point:
Gleeful automakers are reacting to the cash-for-clunkers-driven spike in car demand with increased production plans for the third and fourth quarters.
That comes even as one leading industry researcher says the rebate program’s appeal is waning and there are few signs a broad recovery has begun.
If automakers are premature in their plans they will end up in a cycle seen many times before: ramping up production and leaving dealers with lots of inventory that then requires profit-killing rebates to unload.
The recession, what Austrian economics teaches us is liquidation phase, the actual real recovery, is when the mainvestments and bad decisions get cleared, freeing resources to more productive ventures. Right now, after all the years of disastrous monetary and fiscal policy which brought on this crisis, the solution is sadly more disastrous monetary and fiscal policy.
This is a perfect example, one which I’ve often tried to explain.
First, there is no such thing as lack of demand. The simple truth is that demand is unlimited. That is the entire concept of scarcity (which unless you win a nobel prize and write for the NY Times) exists everywhere, always. It is the simple and unavoidable condition of unlimited wants versus limited resources. In fact, what Keynesians would call insufficient demand is in reality insufficient demand at the current price. This is an extremely important difference.
Of course, that boondoggle of C4C spurred new car purchases. In essence, the price was lower. And, cars happen to be an elastic item, i.e. very price sensitive. So, a $4500 reduction in price, which on a $25,000 car is almost 20% off, would result in a greater than 20% increase in sales. Don’t know exactly how many more cars have been sold than otherwise would have. But the program ran out of cash far sooner than expected and had need more than twice the original amount in additional funds. $1 billion quickly evaporated and another $2 billion was needed. Hmmm..shocking indeed.
During a liquidation period, firms must lower prices to clear out unsold inventories. Disastrous policies such as C4C, don’t require them to do so. They can’t know (although in one sense, a C4C trade in should have tipped them off) whether the new purchase was due to “stimulus” money or a normal consumer purchase. Thus, the artificial signal is sent, the producer is rewarded for bad decision, and worse, continues to make the bad decisions.
It is destructive in that those resources which should have gone towards newer, better uses will be directed towards the current, poorer ones. Another broken window. Well, actually two. The trade-ins are set for destruction.
Topping off all this is that this program simply encourages people to take on more debt. So, the solution to a debt driven bubble that burst is…more debt.