Cash for Clunkers Gimmick? Former Obama Adviser Wouldn’t Do It Again

Mike Brownfield /

It sounds like a former Obama Administration official is changing his tune on two of the President’s early stimulus efforts. Austan Goolsbee, former chairman of President Obama’s Council of Economic Advisers, says that in retrospect he would not have supported the Cash for Clunkers program or the home buyer tax credit. Politico reports:

“Because we didn’t know if [economic recovery was] going to be short or long,” the Obama administration tried measures to address both scenarios, Goolsbee explained on MSNBC’s “Morning Joe.”

“If you look at Cash for Clunkers or the first home buyer tax credit, they were geared to trying to shift [recovery] from 2010 into 2009. Given it’s taken this long [to recover], I don’t think you would do that short-run stuff,” Goolsbee added.

But hold on, don’t give Goolsbee too much credit. Though he recants the “short-run” measures, he said he still supports the President’s overall stimulus program, despite the fact that the U.S. economy is still a stagnant swamp of slow growth. For Keynesian economists, old habits die hard. Much of the economy’s poor performance, though, has to do with the Obama Administration’s reliance on short-term gimmicks like Cash for Clunkers and the home buyer’s tax credit to give it a boost.

Take Cash for Clunkers as an example. Flash back to Detroit, June 2009. General Motors and Chrysler won big bailouts from the federal government, but auto sales were down 34 percent from the prior year. At the urging of the United Auto Workers and the auto industry, President Barack Obama signed Cash for Clunkers into law his “Cash for Clunkers” program — —a plan designed to incentivize new car sales and give the Detroit Three a boost. The plan provided $3,500–$4,500 rebates to consumers who purchased more fuel-efficient cars and traded in their old vehicles, which dealerships then destroyed.

Guess what? It didn’t work. In September 2010, a study was released showing that the program boosted auto sales by 360,000 during the two months it was in place. But NPR reported that “in the seven months that followed, sales were down by 360,000 compared to what they would have been without the program.” In short, the program didn’t encourage people to buy new cars—it only encouraged future buyers to make their purchases sooner.

The home owner’s tax credit didn’t fare any better. In an interview with Newsmax, Heritage’s J.D. Foster explained that it weakened the housing sector by introducing uncertainty into the marketplace:

“One of the things the real estate market needed is to figure out what the correct prices are for houses in different communities. You bring the tax credit in and bump up consumption, home purchase incentives do work. But what you do is slow the process of price discovery.

 

“Then the tax credit expires,” says Foster. “Buyers and sellers don’t know what the prices in communities ought to be. So, transactions don’t happen, because you can’t come to an agreement.”

Despite its record of failure with these specific short-term measures and with the stimulus as a whole, the Obama Administration is calling for even more of the same kinds of gimmicks to create new jobs in America. It hasn’t worked before—as even Goolsbee seems to acknowledge—and it’s not going to work in the future. In their new paper, “Avoiding America’s Lost Decades,” Heritage’s Derek Scissors and J.D. Foster explain what’s needed to help restore growth to the U.S. economy:

Though much damage has already been done, the American economy is still fundamentally flexible and resilient. What is needed is to jettison the convenient fantasy that deficit spending stimulates the economy and instead adopt a more benign attitude that, for the sake of recovery, Washington should “first, do less harm,” which means:

 

Click here to read more of “Avoiding America’s Lost Decades.”

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