Politicians like to keep up appearances even if it means doing something for the sake of appearing to be doing something.
Buoyed by what it perceives as the success of its Cash for Clunkers program, the Obama administration is poised to continue with its stimulus plan this fall — this time for high-efficiency appliances. Consumers will receive a $200 rebate from Uncle Sam (aka you and me) when they buy dishwashers, washing machines and refrigerators. No trade-ins are required. The $300 million plan is part of the $787 billion stimulus package approved by Congress.
Like the Cash for Clunkers program, the high-efficiency appliance program is expected to stimulate consumer spending. But all of this is merely a short-term hogwash. In a Wall Street Journal article titled “Clunkers Response a Lesson in Spurring Spending,” (Aug. 25, 2009) journalist Sudeep Reddy quotes Citigroup economist Steven Wieting:
“I think it’s pretty clear that if you gave someone a free shopping certificate, they will spend it. Whether they have permanent economic effects is a different story.”
What’s next for auto companies, now that the Clunkers scheme has ended? The sudden and short-lived spurt in demand will subside, leaving Ford and General Motors exactly where they started—struggling to sell cars.
But that’s not the only problem. Remember how we got into this economic mess in the first place? Overspending, right? The consequence of a flawed monetary policy and shortsighted government intervention.
Back in 2008, I interviewed economist Howard Baetjer Jr. of Towson University for a newspaper article. He said:
“The Community Reinvestment Act pressurized banks to make mortgage loans to people with questionable credit worthiness; the percentage of foreclosures was much higher in this group. Banks that made affordable housing loans were coddled by Congress. Over time, banks began to slacken lending standards to not just sub-prime but even prime borrowers.” (The Indian Express, North American Editions, Dec. 26, 2008).
If Fannie Mae and Freddie Mac were not there to buy up mortgages, the housing bubble created by this segment would never have occurred, Baetjer pointed out.
The tax credit of up to $8,000, which is extended to first-time homebuyers for purchases between January and December 2009, will again induce a segment of consumers to over-extend themselves. That’s the problem when the government decides that people must buy homes, cars, and appliances to stimulate the economy. There will be a significant group of consumers who will bite off more than they can chew. Besides, by encouraging spending in some sectors, the government is taking away money that might have been spent in other sectors. Should Uncle Sam be picking favorites?
In his Aug. 25, 2009 Cash for Clunkers story in the WSJ, Reddy quotes Erik Hurst, an economist at the University of Chicago, on the impending appliances stimulus package:
“The people who will most likely respond to this are the people who need appliances, and they were probably going to buy appliances anyway. If all you’ve done is move that from tomorrow to today, then the economy is going to lag even more tomorrow.”
Speaking of tomorrow, the Office of Management and Budget anticipates that the economy will contract by 2.8% this year, versus its previous forecast of a decline of 1.2%. The projected recovery is expected to be less pronounced than prior estimates. (WSJ, “White House Raises Long-Term Deficit Forecast,” Deborah Solomon, Aug. 25, 2009).
So much for even short-term benefits from government stimulus.
Let’s turn to the long-term. Hear that giant sucking sound? It’s Uncle Sam vacuuming our wallets for $9000000000000.05. By the next 10 years, the U.S. deficit will climb to $9 trillion, $2 trillion more than the Obama administration’s earlier estimates.
How will buying washing machines help the economy if all we’re doing is spending our money today instead of spending it tomorrow?
Sujata Srinivasan is a Connecticut-based business journalist, writing and editing for publications in the U.S. and India. Key editorial positions held include: Editor of Connecticut Business Magazine, correspondent and interim chief of bureau at CNBC India-TV 18 in Chennai, senior financial editor at Innova Solutions (now Ness Technologies), freelance editor at the Connecticut Economic Resource Center, Inc. and at present, the editor of CT Indian Life, a journal for the Indian-American community in the state that chronicles life in the diaspora. Clips at 
“How will buying washing machines help the economy if all we’re doing is spending our money today instead of spending it tomorrow?”
Because it’ll make the fuzzybunnies feel good – never mind the “unintended consequences,” the Entitlement-minded are in the throes of an orgy – who are we to deny them their instant gratification?
@ Krista, hey thanks for posting on Twitter.
@ Rev. Shaffer, I don’t blame the fuzzybunnies for wanting universal healthcare, universal education, universal poverty eradication, universal jobs, universal houses — ah, how b-e-a-u-t-i-f-u-l is that!? The unpleasant reality is who’s going to pay for all this stuff? No free lunch, sadly. The fuzzybunnies can do their good stuff — and we all need to, I believe — through charities and voluntary organizations. But to incur mounting government deficit at the expense of hardworking taxpayers for the benefit of some is just wrong.
@ Thanks very much, Dreamer. You’re absolutely right — we need to create products that are of value to the rest of the world. The U.S. has thus far been a global leader in innovation, science, technology and entrepreneurship — we need to regain that position, high up in the value chain. That’s the only way we can create jobs and expand markets both here at home and worldwide.
Nice article, Sujata. A spending economy has never made sense to me, especially since the boom caused by the spending economy after WWII was fueled by the baby boom and people moving to the suburbs. Plus, weren’t most items sold in the U.S. made entirely in the U.S. back then? We need to become a country that makes and sells products to other countries, not one that buys them from others.
“What’s next for auto companies, now that the Clunkers scheme has ended? The sudden and short-lived spurt in demand will subside, leaving Ford and General Motors exactly where they started—struggling to sell cars.”
Don’t forget about the small, independent used car dealers and garage workers who have been kicked in the teeth by this CfC deal, too! Yanking these used cars off the market made business dry up for them, but hey, the GM/Ford Corps and UAW goons take precidence over the small business folks.
@ Jimbo, that’s true. So are customers who needed $1,000-ish cars, taken off the market.