Another Clunker

It’s like “Cash for Clunkers,” only for consumers.

You may remember that brilliant piece of Congressional economic planning, where an effort was made to boost auto sales by creating an incentive for consumers to trade in their old, environmentally suspect clunkers for new, higher mileage models.

“Cash for Clunkers” did, indeed, boost auto sales. Until the program stopped, at which time sales plummeted. Side effects included rising auto prices, a $3 billion cost to taxpayers and a negative impact on the environment, since many of the 690,000 vehicles traded in were shredded, not recycled.

Today’s equivalent is the tax increase that took place Jan. 1 to avoid the fiscal cliff.

Exuberance was abundant when economic data for December showed a rise in personal savings. Yet the exuberance turned out to be irrational; much like the initial glee over rising sales during “Cash for Clunkers.”

In turns out that consumers, unlike Congress, didn’t wait until the clock was about to strike midnight to do something about the fiscal cliff and the pending tax increases. They pulled forward wages and bonuses, so they would be taxed at 2012 rates. Public companies paid dividends early, too, to skirt the dividend tax increase that virtually everyone saw coming.

The resulting spike in income pushed the U.S. savings rate to its highest level in three years. But it didn’t last.

Anyone who is not an economic advisor to the President or Congress could guess what happened next: taxes increased and savings rates plummeted.

With a 2% boost in the payroll tax, as well as other major tax increases on those with a high net worth, personal income in January dropped 3.6% – its biggest drop in 20 years. Personal savings, meanwhile dropped from 6.4% to 2.4% of income, the lowest level since before the Great Recession began.

Note to President Obama and members of Congress: Economic recovery is driven by consumer spending. For consumers to spend, they must have money. Right now, they don’t.

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