James Doran says the instant success of America’s car scrappage scheme merely highlights the failures of the rest of Obama’s $787 billion economic stimulus package
America’s tortured love affair with the gas-guzzler is finally drawing to a close thanks to the Obama administration’s so-called ‘Cash for Clunkers’ scheme. By promising anyone with a clapped-out old motor as much as $4,500 so long as they spend the rebate on a shiny new fuel-efficient model, Obama has managed to do what a doubling of the price of petrol could not.
Cash for Clunkers was such a success when it launched in July that the initial $1 billion of taxpayers’ money devoted to the scheme ran out in a matter of days and a further $2 billion was hurriedly made available before Congress broke up for the holidays. In a little less than two weeks, so US government data shows, the programme led to the sale of 245,384 new vehicles. Administration officials estimate the new money will last into early September and could prompt an additional 500,000 car sales. America’s embattled car dealers, meanwhile, are actually running out of cars to sell. Auto sales data for July looked better than any month for several years, with Ford chalking up its first year-on-year sales increase since November 2007.
But Cash for Clunkers is far more than a nifty plan to boost car sales and give the laggardly US environmental movement a shot in the arm. The old-for-new scheme is the only truly visible success to emerge from the $787 billion economic stimulus package that was rushed through Congress in February. At a cost of just $3 billion, or 0.4 per cent of the total package, Cash for Clunkers has delivered value in spades. And so it should: the scheme meets all three of the sacred tenets of successful economic stimulus laid down by Larry Summers, director of Obama’s National Economic Council. To be effective, Summers said repeatedly last year, economic stimulus from the federal government must be ‘timely, temporary and targeted’. Cash for Clunkers was rolled out in record time and renewed almost overnight when the money ran out, so it was timely indeed. It will also be temporary: there are only so many ‘clunkers’ out there to cash in. And it was certainly targeted towards one of the most depressed sectors in the American economy.
As a bonus, the scheme has also helped oil the wheels of the broken-down credit market. One of the biggest obstacles for Americans to buy new cars these days is the lack of available credit and the dramatic tightening of credit rules that exclude all but the most cash-rich customers. Put $4,500 in the hand of a would-be car buyer, however, and you instantly help him qualify for credit.
The programme also offers consumers the choice of participating or not. This is not some mandatory scheme dictated from on high: nobody is forced to go out and buy a car. But should they want to, and meet the criteria, the government is prepared to help.
Unfortunately, the same cannot be said for the remaining $784 billion of stimulus money. ‘The rest of the stimulus violates all three of Summers’s rules,’ says Vincent Reinhart, a former Federal Reserve official who is now a scholar at the American Enterprise Institute.
As part of its promise to ensure the stimulus programme is conducted properly, the White House has set up a website (www.recovery.gov) where disbursements of federal cash are charted on a weekly basis. There is a nice graph with coloured lines, all pointing north, to show just how much money is being pumped into Obama’s ‘shovel-ready’ projects. On first glance it looks like more than $200 billion of the $787 billion has already been spent — but, so the graph’s key explains, this money has so far merely been ‘made available’. Another line shows actual cash paid out as of 31 July: $73 billion.
It is perhaps no surprise that the wheels of federal government move slowly, but to have paid out less than one tenth of the stimulus fund in six months is far from the timeliness Summers insisted was necessary. Much of the relatively small amount that has actually left the Treasury coffers has been devoted to assisting states to pay unemployment benefits to the millions who have lost their jobs this year, and to offer extra support for health insurance schemes. This is not the kind of targeting Summers had in mind: widening welfare budgets, while helpful to those out of work, does little to assist the wider economy.
The latest US unemployment data was hailed as a sign that the beginnings of a recovery are starting to emerge. The jobless rate dipped in July from a peak of 9.5 per cent to 9.4 per cent. While this is indeed a welcome sign, the rate is still far above the 8 per cent that Obama’s advisers claimed the country would not breach if the stimulus package was passed. GDP data has also been more favourable of late, with the economy showing a contraction of just 1 per cent in the second quarter of the year compared with 6.4 per cent in the first. This, too, is cause for celebration, but it has absolutely nothing to do with the $787 billion stimulus package. Consider the $73 billion the scheme has actually paid out in relation to the $14 trillion size of the US economy: in reality it is no more than a small drop in a vast ocean.
When Congress returns next month one of the first items it must consider is an emergency increase of the Federal debt limit, which will be breached sometime between October and December, thanks largely to the Treasury’s need to hold $787 billion of stimulus money in readiness, even if it pays it out at such a glacial rate. Such a measure would be worth passing if the cash was actually helping America’s economic plight, but sadly so far it is not. Instead, it will be clunking around the system for years to come, long after the last gas-guzzler has been driven off the road.
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