Thursday, August 13, 2009

Retail Sales Consumption

There is an economic news report today that retail sales fell 0.1% in July even as the cash for clunkers (CFC) program was in full gear. This was below the already low expectations and surprising to most economists. Why should it be?

If people are incentivized to buy a car wouldn't you think they would have to offset that expense somewhere else? Unless you expect people to buy a new car and stock up on that new HDTV set they've always wanted in the same month. Who needs to have a budget constraint?

This illustrates the short-sightedness of government policy with the CFC program. Retail sales went down in the short term as people shifted the basket in terms of what they bought in July. The government will also find that people will shift their basket over a longer time horizon when auto sales plummet in the late Fall and into the Winter. Why would they do this? Because people with an interest in buying cars are likely to be doing so now. This will likely also happen in home sales when the $8K first-time buyers credit expires in November. You can expect to see home buying retreat late into the Winter and into next year because $8K is a nice chunk of change.

The Obama economists are essentially playing games with incentives motivated by the stuff they learned in microeconomics classes. The idea is that you try to alter behavior and shift the demand curves out by making goods relatively less expensive. These micro-econ models run up against the problem that they aren't taking into account any longer term timeframe due to the fact that the increase in temporary purchasing power will cause the demand curve to shift back in a short period of time. So long as we have good Q3 growth who cares, right?

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