CFCing toward a better economy?

by: a siegel

Mon Aug 03, 2009 at 08:50

CFC, Cash For Clunkers (the Car Allowance Rebate System (CARS) Program), certainly is in the news. Almost no one expected the massive surge of interest in the program such that, within a week, the program required more funding. Now, in the debate about how to stimulate the economy, there has been a divide between those focused on Wall Street (and some form of trickle-down economic theory) and those who argue for focusing on Main Street, getting cash into people's hands to spark retail economic activity that will be respent in the local economy and, eventually, trickle up to Wall Street.

Does this make sense to continue? What are the actual results? What should (could) be improved?

Depression Economics: What a Bank Run Looks Like in the Auto Industry

by: Matt Stoller

Tue Nov 18, 2008 at 09:31

Still, this problem is really sad and really difficult.  While Wall Street got a $700B bailout, the auto industry is looking for a bridge loan because auto sales just crashed in October from a run rate of around 16 million vehicles to 10 million vehicles.  That's not something that can really be managed away in a short period of time, it's the equivalent of demobilizing a small war.  That's overhang of factories, management, people, capital, and expertise of six million vehicles a year.  The auto industry reaches into every community in America, with car dealerships, supply chains, and parts makers sustaining millions of jobs a year.  Beyond that, as Wes Clark notes, there's the national security element of electrifying our armed forces, a project the auto industry is moving forward.

Yes, the auto industry has been badly managed, and labor has fought against reasonable environmental regulations.  And the management doesn't really 'deserve' a bailout.  But what's going on here is not a normal market failure; auto companies have done done surveys which show that consumers will not buy from companies in bankruptcy, and GM is going to be in chapter 7 not chapter 11, which means full liquidation.  People won't buy from a company that looks like it'll go bankrupt, but a company without customers will go bankrupt.  That's a feedback loop we don't want to see, because liquidation of the auto industry will probably cause a depression.  Millions of retirees with pensions and health care will lose it, consumers with domestic cars will lose benefits associated with those cars, the secondary car market will be destroyed, and consumers will lose confidence about all major consumer purchase.

In other words, the auto industry, and really the entire economy, is in the midst of the same dynamics that take hold in a bank run.  I just read Paul Krugman's The Return of Depression Economics, and this is the scenario that he draws out in economies system-wide.  The temptation here from policy-makers is to cut the baby in half, which is the wrong strategy.  Either the government should decide to defend the auto industry at all costs, and tell consumers their car purchases are safe, or the government should let the auto industry die.  A bridge loan must be accompanied by a government guarantee,because without it the industry is just in limbo and the underlying confidence problem remains.