In this case Paul is the auto industry, as if they haven’t gotten enough help from American taxpayers, and Peter is the retail industry and, of course, the American taxpayer:
“Retail sales outside of autos turned in a disappointing performance in July, underscoring concerns about the timing and durability of a recovery from the worst recession since World War II.The Commerce Department said Thursday that retail sales fell 0.1 percent last month. Economists had expected a gain of 0.7 percent.
While autos, helped by the start of the Cash for Clunkers program, showed a 2.4 percent jump — the biggest in six months — there was widespread weakness elsewhere. Gasoline stations, department stores, electronics outlets and furniture stores all reported declines.
The July dip was the first setback following two months of modest sales gains. Excluding autos, sales fell 0.6 percent, worse than the 0.1 percent rise economists had forecast.”
We shouldn’t be too surprised this happened. When the government makes decisions like this, we face trade offs and unintended consequences. Especially during a recession, people who buy new cars will (hopefully) be mindful of their budgets and make spending cuts elsewhere (if necessary) to afford new vehicle payments.
Germany experienced similar circumstances where a €1.5bn ($2.1 billion) program blossomed into something that could cost three times as much. And while it looks to have the effect of stimulating the economy, it may not have as big an impact on stimulating Germany’s economy as expected. It may have instead simply shifted spending: “Retailers, for instance, say the bonus is shifting spending patterns rather than creating demand. Higher February car sales coincided with falling turnover at consumer electronics stores. Stefan Genth, managing director of the HDE retailers’ federation, slammed the bonus last week, saying it was ‘sucking out spending’ from the retail sector.”
Although coined the first successful stimulus, the program is shifting spending rather than increasing it. And it’s sucking the money out of charities that rely on used car donations:
“The damage has not been insignificant. According to the Associated Press, a Texas-based charity estimates that the cash for clunkers program has already cost it $75,000 in missed vehicle donations. Unfortunately, instead of being sold for charity funds or turned over to needy families, formerly donation-worthy cars will be sent to the crusher with seized engines, per the program’s stringent guidelines.”
Because of the government’s market-distorting effort, we could be at a point in the future where supply significantly outpaces demand:
“It’s a delicate balancing act for automakers. Build too few cars and dealers are stuck turning away customers. Build too many, and they have to slash prices to get rid of inventory — the same situation many in the industry were stuck with earlier this year.”
It’s like that episode of Saved by the Bell when the gang produces “buddy bands” and they become a hot commodity until everyone sees Mr. Belding wearing one. On point, in walks Slater with boxes of 500 more buddy bands. With any luck, automakers will use a little more caution than fictional high school students when expanding the production as the initial rush for the cash part of the program is over: