Private-Public Stimulus
Waiting for Congress to pass the much-needed economic stimulus bill is beginning to look like waiting for Godot. Fortunately for the U.S. economy, two large private industries -- automobiles and homebuilding -- have stepped up to provide the stimulus that the government has thus far failed to deliver. There is a great irony here. A clear function of government -- combating recessions -- is being performed by the private sector. But there's actually a double irony, for government policies have been instrumental in enabling each of these industries to accomplish what it has.</br></br>The auto industry's contribution has been more spectacular but will be less durable. Right after the terrorist attacks, industry executives saw some pretty bad-looking handwriting on the wall and reacted quickly -- in what they perceived to be their companies' best interest. They offered buyers 0 percent financing, a head-turning discount that filled the nation's showrooms and produced record sales just when the economy most needed the additional spending. Thank you, Detroit.</br></br>I don't pretend to know whether 0 percent financing made good business sense for GM, Ford and Daimler-Chrysler. After all, it's costly -- the auto finance companies that lend you money at no interest do not get their funds for free. But it did succeed in driving auto sales to record highs while other categories of consumer spending were slumping, which is quite a feat.</br></br>The 0 percent financing programs thus amounted to a kind of "privatized" stimulus policy -- wonderfully timed, well-targeted and effective. Would that Congress had done so well. But notice that the Federal Reserve's aggressive interest-rate cuts made it all possible. If short-term interest rates were as high today as they were in January, free auto loans would probably have been too expensive for Detroit. I doubt that people at the Fed were thinking about 0 percent financing when they started cutting interest rates back in January. But monetary policy sometimes works in unexpected ways.</br></br>The story in housing may be less dramatic, but it is much longer lasting. As the economy weakened before the terrorist attacks, observers marveled at how well the housing sector was holding up. This industry acted as a pillar of strength supporting the U.S. economy in at least two ways. First, homes continued to be built in large numbers even while much of the rest of the economy slipped. Second, millions of American households obtained immediate cash by refinancing their mortgages at lower rates; they then spent some of this money on consumer goods.