The Effects of the Clunker Bill Stimulus Package, Research Paper Example

Compare and Contrast the Effects of the Clunker Bill Stimulus Package and the Effects of Increasing Tariffs on our Economy

The increasing of tariffs is not the key to pulling America out the hole from this advertent economic crisis we are currently promulgated with. Though there is some evidentiary documentation that points to the reduction of tariffs as a major contributor to the global economy crisis. “The reduction of tariffs has contributed to decreasing the prices of goods all over the world and has primarily been the reason for growth of our global economy over the past sixty years.” (Ophoven, 2010). You might think prima facie that trade agreements have brought financial benefits to many nations but the mere truth is that the majority of the money gained has been spent by consumer spending and government based programs. What actually occurred is that “cheap money was made available to poorer nations in exchange for work hence the United States lost millions of jobs in the manufacturing section thus enjoyed the benefits of an increased standard of living.” (Ophoven, 2010). What actually happened are the politicians signed the jobs away and are now upset about their poorly single-minded decisions! With the implementation of free trade agreements consumers jobs shifted from one nation to another. Trade agreements bring lower prices to the economy but they also allow others to benefit from the reaps of labor in other countries. This is why the foundation of capitalism is based on free labor and consumer choices. On the other hand, there is a dependence on foreign nations for jobs which increase the trade deficit.

With that being said, the money that was filtered through other nations and gained by the development of the global economy cannot rightfully so be quickly undone. Rich and poor nations both spent the money they gained with the trade agreements. We are now faced with the deficit that has been caused through the manufacturing sector and the government is attempting to undo the damage by increasing taxes and regulations. If one country’s economy fails they will all fail at this point and time. Any one of the three nations so interdependent intertwined could essentially bring down the whole global economy. It is for this reason the politicians want to raise the tariffs before all the economies create their own demise. One good occasion of the increase of tariffs would bring the U.S. economy’s spending habits down. That would not be a bad situation to postulate. However this might take another “fifty years to undo the catastrophe with the global trade expansion” which would result in a large drop of standard of living for all Americans even possibly leading to the starvation of people.

The bigger picture to look at is if the politicians were to increase the tariffs which would only temporarily protect U.S. jobs the end result would be bankrupting the companies. Obama postulates protectionism policies for the union jobs but that will only result in the collapse of unions if the government continues to print money to support the economy. Because of the deep severity the country is in regards to economic downfall, tariffs will not help out the country fast enough. More job losses and wage reductions are inevitable at this point and time.

The most common problem with raising tariffs is that it will eventually lead to a recession and a depression. “Increasing tariffs will send the dollar into a free fall. The reason for this is because the United States is one of the only nations where you can sell your stuff here. When you increase tariffs on imported goods you take that advantage away. The demand for the dollar will drop and lower the dollar’s price.” (Stewart, 2007). The United States is already in an inflated state and increasing tariffs will also increase prices. Over the past six months exports has been one of our bright sides to the economy. We will further devalue our currency if we increase inflation by the implementation of tariffs. If the United States chooses to increase tariffs so will the international competitive countries do the same. There will start a trade war which will hamper the economy even more. Everyone will then expect the Federal Reserve to help them out of the even more deficit. An even worse situation is that by increasing tariffs the U.S. is sending out a signal that they are reversing a long standing policy of accepting goods into this country.

Now let’s take a look at the effects of the “Clunker Bill” Stimulus Package on the United States. Cash for Clunkers was a remarkable success for the struggling American car dealers but was it a success for the American economy? It did take some of the environmentally unsafe vehicles off the road but was it an economic success for America? White House economic advisor Larry Summers says a stimulus plans should be “timely, targeted and temporary. It should also be speedy, substantial and sustained.” (“Cash for Clunkers Lasting Impact”). The only part that has not been met is the “sustained” part. The government attempted to purchase economic advancement through the use of borrowed taxpayer’s money. The real degree of measurement of its success would be to see how many people weren’t even thinking of buying a car actually purchased a car. That is real economic growth! NADA economist Taylor states that forty percent of the cars purchased under the Clunker Bill were from people who were not previously considering purchasing a new car. “If we use Taylor’s estimate, about 250,000 extra cars were purchased (40 percent of 625,000). And if each cost $29,000, those sales generated about $7.3 billion in revenue in the space of a few weeks. That’s a pretty good return on $2.6 billion in government spending.” (“Cash for Clunkers Lasting Impact”). It is not deemed unwary that those that purchased needed an extra prodding since the purchase of a new car is not a small financial investment; and that is alright for the economic success of our economy.

The American International Automobile Dealers Association referred to the Cash for Clunkers program as “sprinkling a little waters and the flowers begin to revive.” (Murphy, 2009). Over three billion dollars was poured into the program by August 6, 2010. Some economists say the program was not successful because consumers would have been purchasing new cars anyway. With this in mind true demand has not been created, only moved up a few weeks. It appears three to four months of actual activity was crammed into a short few weeks. Some say those that spent money on new cars are short to spend on other areas of the economy now. “Retailers state cashmere has been hard hit by the Clunker for Cars promotion.” (Murphy, 2009). Jeffery Miron a Harvard economist vehemently states we did not create a demand for these cars. What he instead believes is that we have reduced the demand from all other areas in the economy and transferred it to those who took advantage of the program.

The purpose of the Cash for Clunkers program was to “shift expenditures by households, businesses and governments from future periods when the economy is likely to be stronger to the present when the economy has an abundance of unemployed resources that can be put to work at low net economic cost.” (Romer & Carroll, 2010). Many critics simply articulated people would have purchased cars in the upcoming cars anyway. But how true is that for the majority of the sales and purchases under the incentive program? We have already mentioned previously statistically over 40% of those consumers that took advantage of the incentive were not planning on purchasing a new car; rather they were going to use their old vehicle until it “pooped out”. Other economic aggregate specialist formulated a more accurate analysis that a far more percentage of the car sales were pulled from a more distant future purchase hence representing a plus to the aggregate demand at the right time when the economy needed the boost.

The blue line on the chart below recognizes and represents a really fine time for reckoning for the U.S. Economy. “The ‘short-term pull-forward’ view was perhaps most vigorously articulated by automotive industry websiteEdmunds.com.  In late October, Edmunds.com made a widely-reported forecast for the pace of sales in the last quarter of the year:  According to Edmunds, light motor vehicle sales in November and December would be only about 10.5 million at an annual rate (the dashed blue line in the figure).  Edmunds furthermore argued that, had the CARS program not existed, the pace of sales would have been higher, about 10.8 million, during those two months (the dashed red line in the figure).” (Romer & Carroll, 2010). One good attribute that happened because of the Clunker Program is that sales just three months after the program have increased nationally overall at 10.7 million annual units the normal annual rate. Of course this is a projection that is set in place by economic forecasters such as Edmunds of the Bureau of Economic Analysis. The average person that purchases a new vehicle as related to the Clunker Program incentive actually stated they would have waited another 2.7 years on average to make such a large purchase. The act of stimulating spending by the average person that can afford a new vehicle is the best countercyclical fiscal policy that an economy such as the present United States could have accomplished to initiate more consumer spending.

References

Ophoven, C. (2010) Tariffs Will Make the Global Economic Lapse Much Worse: Part One Retrieved October 23, 2010 from, http://www.pennyjobs.com/pp/public/Articles.aspx?aid=519

Stewart, H. (2007) Increasing Tariffs Will Destroy the Economy Retrieved October 23, 2010 from, http://www.huffingtonpost.com/hale-stewart/increasing-tariffs-will-d_b_74066.html

Cash for Clunkers Lasting Impact Retrieved October 23, 2010 from, http://www.newsweek.com/2009/08/24/cash-for-clunkers-lasting-impact.html

Murphy, C. (2009) Did ‘Cash For Clunkers’ Work? Retrieved October 23, 2010 from, http://moneywatch.bnet.com/economic-news/article/cash-for-clunkers-did-it-work/333886/

Romer, C. and Carroll C. Did “Cash-For-Clunkers’ Work as Intended? Retrieved October 25, 2010 from, http://www.whitehouse.gov/blog/2010/04/05/did-cash-clunkers-work-intended