Tuesday, September 1, 2009
The Cash for Clunkers program sure gave a boost to auto sales (note: the data in the graph is a seasonally adjusted annualized rate)! I'm not going to get into the details of how much of the increase in sales in August was due to the clunkers program; that's not my field of expertise and there are lots of people out there who know how to run the numbers. My contribution to the issue will be to say this: a) there is no shortage of money in the world, since undoubtedly a significant portion of these sales was financed, b) there is no shortage of demand in the world, since there were hundreds of thousands of people who jumped at the chance to get free money from the government, and c) the laws of economics are still viable: by reducing the price of cars, the government's cash giveaway resulted in a huge increase in sales. There's a corollary to this in the housing market: as housing prices have fallen dramatically in many areas of the country, sales activity has soared.
Thus the power of the free market to fix things: if prices adjust to meet new realities (whether by government subsidy or not), demand responds. There is apparently an excess of commercial real estate on the market today, but at lower prices that excess could evaporate in short order. A restaurant might not be profitable given yesterday's rent, but it can become profitable if that rent goes down by enough. Prices can fix all kinds of problems; that's the miracle of free markets. Some people may not be happy when they are forced to sell their goods or services at a lower price, but it's obvious that the buyer is happy with that lower price. When prices adjust to clear a distressed market, economic activity resumes.
Posted by Scott Grannis at 7:26 PM