The appliance version of ‘cash for clunkers’ came and went in Minnesota within about 24 hours last week. Much of the news coverage was negative, focusing on administrative glitches and disappointed rebate-seekers who were unable to get through overloaded switchboards or Web sites until the money was gone.
But little has been said about whether the entire program has been positive for our economy or society or not.
Making that determination about a one-shot program like this isn’t easy, especially when states are implementing the $300 million federal program on their own timetables and they have some discretion about how the money is doled out.
But we can at least talk about how economists approach the problem. They would try to quantify the benefits of the program and compare them to the costs. For society to be better off, the benefits must exceed the cost. Ideally, they should exceed the costs by a margin greater than if the same funds were spent on something else.
The benefits depend, of course, on the degree to which the program achieves its goals. But there may be other benefits — and costs — not anticipated by its advocates.
One announced goal is to replace existing high-energy consumption appliances with new, more efficient ones. To the extent a rebate program changes the price of a new appliance relative to keeping an old one, there will be some reduction in energy use that would not otherwise have taken place. Assigning a value to this, however, is difficult and highly subjective.
As with the cash for clunkers program, one has to separate transactions that would not have been made without the rebate from ones likely to have been made anyway by people for whom the subsidy is gravy.
Both programs were publicized enough that people considering a new vehicle or appliance in the near future were aware of the opportunity. Some who might have bought a refrigerator or dryer on their own over the past few months delayed their purchase to try to catch the rebate. Others who might have bought later in the year may have moved up their purchases for the same reason.
So the net increase in appliances sold and the net number of old ones taken out of service is not necessarily as great as the total number of rebates distributed. Given the program’s small scale — about one dollar per person in the country — it probably will be hard to detect any marked increase in appliance sales for the year even if sales for the month the rebate is in effect do show an increase.
Some argue the program also would increase employment in appliance manufacturing or in the chain from factory to customer. Such employment effects are limited by the fact that many appliances are imported.
However, if the program actually does increase overall sales for the year by, say, a million units, there will be increased business for truckers, increased revenue for retailers and higher commission income for salespeople. And that will get spent on all sorts of goods and services, which adds up to increased business activity.
Some of that money will be saved, short-circuiting some of this “spending multiplier” effect. But such savings would improve household balance sheets as the needed deleveraging goes on.
Funds for the appliance subsidy come from the Obama administration’s $787 billion stimulus package. Providing some degree of Keynesian fiscal stimulus is an understood goal. Many people evaluate this program and the rest of the bill purely on its direct employment effects and find it wanting. The administration fell into a trap of its own devising when it sold the stimulus package as a make-work program.
But Keynesian economists never argued the beneficial effects of increased government spending in a recession were limited to employment in the programs directly funded by the outlays. Rather, increased spending would boost overall “aggregate demand” for all sorts of goods and services, buoying output across the economy as a whole.
To the extent Keynesians are right, spending $300 million on appliance purchase subsidies will have roughly the same stimulus effect as putting $300 million into household pockets via reduced federal tax withholdings, a major but largely unappreciated facet of Obama’s package.
It does cost more, however, to administer a one-time $300 million rebate program than to reduce withholding taxes or even to send out “tax rebates” the way the Bush administration’s stimulus did in 2008.
And then there are those angry people who wanted to take advantage of the program but were unable to get through before all funds were allotted. Their grumbling is an understandable and common feature of government subsidies that are not entitlements like food stamps or Social Security.
Not everyone who meets the criteria to get a housing subsidy actually gets one. Nor do all the households eligible for the WIC child nutrition program get benefits. As for the appliance subsidies, Congress appropriates a discrete amount of money that gets doled out according to some rules.
Some people are lucky, and others are not. Life is unfair.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.