Success of ‘Clunkers’ is basic economics

Richard Pratt, Las Vegas

Friday, Aug. 14, 2009 | 2:05 a.m.

What an excellent letter to the editor by Terry E. Peele in Wednesday’s Las Vegas Sun, “Economy needed the push ‘Clunkers’ gave it.” Finally, a reader who understands Economics 101. Mr. Peele’s letter explains perfectly, in plain English, the multiplier effect of spending.

A lot of people focus on the $4,500 the government is spending on the “Cash for Clunkers” program, but it is the $20,000 or so that the consumer is spending that will stimulate the economy. Conservatively speaking, that $20,000 will generate $40,000 of economic activity (assuming a multiplier of two).

As for the $4,500 of taxpayer money that the government is spending, don’t worry. The government will get that and much more back in taxes that the car dealer, the car salesman, the butcher, the baker and the candlestick maker will pay on salaries and profits the $40,000 will generate. And then the whole process starts over, because now the butcher, the baker and the candlestick maker will have enough money to go out and buy their own cars.

For the cynics out there who say the same thing could be accomplished by letting “Joe” spend the money instead of letting the government decide how to spend the money, you’re right. But the whole reason we are in a recession is that “Joe” is not spending his money at the butcher, the baker and the candlestick maker. He is hoarding his money because he fears he may lose his job. And, ironically, he probably will because by not spending his money, the butcher, the baker and the candlestick maker cannot buy “Joe’s” company’s products or services. So we have a negative multiplier.

As Mr. Peele points out, we all benefit from the “Cash for Clunkers” program. Just think of all the sales tax that Nevada collected from this program. But then, cynics will say Nevada doesn’t need more taxes. Go figure.