And in other news

Some things just lend themselves to smart ass responses:

• New York Jets fans are demanding that Mark Sanchez be immediately inducted into the hall of fame.  Sure he hasn't really done anything yet, but he takes a nice picture and seems to be much less of a jerk than the last guy.
• Apparently Angela Merkel was also considered as short listed for the Nobel Peace Prize.  The fact that she has only bought one bankrupt car company probably counted against her.

Analyzing a Clunker

Megan McCardle has pointed out that the 'successful' cash for clunkers program has resulted in a rather nasty hangover for automakers. Her argument is that:

Cash for Clunkers moved a bunch of auto sales forward, causing people who thought they might replace their car in the next year or two to rush into the showrooms.

This is a true but incomplete explanation. The Cash for Clunkers sales likely came from several sources:

1. Once the program was announced many buyers likely postponed purchases until they could take advantage of the subsidy. So sales in the period immediately prior to the start of the program were artificially lowered.
2. As Megan points out, people who intended to buy a car in the next year or so likely brought forward their purchase in order to take advantage of the subsidy. So sales in the period after the end of the program were (and will continue to be) artificially low.
3. People who were weighing up possible purchases opted to buy a car, as opposed to say new appliances or a trip to Disneyland, in order to take advantage of the subsidy. So higher car sales were balanced in part by lower sales in other parts of the economy.
4. People who might otherwise have saved or paid down debt opted to purchase a car in order to take advantage of the subsidy.

Sales resulting from explanations 1 and 2 were simply a direct wealth transfer from future taxpayers to car buyers. There wasn't any real impact on the number of cars sold, just the timing, so the car companies aren't really better off. Any stimulative effect on economy would be the result of car buyers choosing to spend rather than save their subsidy windfall.

By contrast, sales resulting from explanation 3 were rather more insidious. In addition, to the wealth transfer from future taxpayers to car buyers these sales also include a wealth transfer from non-car companies to their automotive brethren. In other words, politically favored companies got some increased sales at the expense of those with less political pull.

Overall, these sales don't represent any increase in aggregate demand. Again, any stimulative effect on economy would be the result of car buyers choosing to spend rather than save their subsidy windfall.

The subset of sales driven by explanation 4 was the most economically useful. Additional cars sold without an offsetting loss of sales in other parts of the economy actually represent an increase in aggregate demand.

So the utility of the program as a Keynesian stimulus depends on the proportion of sales driven by explanation 4 and the extent to which the windfalls enjoyed by car buyers driven by explanations 1, 2 and 3 were spent rather than saved. It is possible, even likely, that the effective stimulus was substantially less than the $3 billion plus the program cost.

Taking a broader view, this program suffers from the same problem that dogs most stimulus initiatives. A small fraction of the economy will experience direct benefits. The remainder of the economy will simply see future costs in the form of higher taxes, interest rates and inflation, and a more politicized economy. For this reason, stimulus efforts that aren't linked to future productivity improvements are, at best, a questionable idea.

Lula Over Obama

In the high profile lobbying contest to win hosting rights to the 2016 Olympics Brazil's President Luiz Inacio Lula da Silva has completely shellacked President Obama.

In the grand scheme of things the location of the 2016 Olympics isn't of great importance. In fact, Chicago is probably better off for having lost. However, Obama's involvement in Chicago's bid displays in microcosm one of the key problems with the Obama presidency.

Having stood aloof from the selection process, the president swooped in at the last minute, made a pretty speech and expected to swing the vote.

By contrast, the rather more effective President Lula da Silva was far more engaged. He apparently understood that the result would be decided well before the TV cameras were turned on. Lula was so confident he had the votes that he supposedly pressed the Obamas to go to Copenhagen.

President Obama's approach to the Olympic selection process mirrors his approach to the far more important issues being decided on Capitol Hill. Stand aloof from the messy politics and trust that golden voice to swing the necessary votes.

It appears that we have an applause line President. He looks great on TV and gives a great speech. These are fine qualities in a politician, but fall well short of what is require to make an effective leader. When it comes to shaping legislation and winning diplomatic fights he is doing about as well as you would expect for a guy with a whole half term of Senate experience.