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.

'94 Nostelgia

Brad DeLong has written a pretty interesting piece on his reminiscences of the health care battles of the mid nineties. As Mr DeLong tells it, there was never any hope of getting a Democratic plan through the Senate. Key Democratic Senators weren't going to let a "hick from Arkansas" push through health reform. Even a reform they might otherwise support (charming).

All hope actually rested on an eventual compromise coauthored with Bob Dole. Apparently, this plan was sabotaged by "Gingrich and company", who allegedly made opposition to any Clinton health plan a condition of supporting Mr Dole's presidential aspirations. The moral according to Mr DeLong is:

I have drawn what I think are appropriate lessons from it. First, Democratic senators do themselves no good either in the next world or in this when they block sensible initiatives from Democratic presidents. (But what lessons are Democrats Landrieu, Nelson, and Lincoln drawing?) Second, Republican senators do themselves no good either in this world or in the next when they block sensible initiatives from Democratic presidents. (But what lessons are Republicans Grassley, Voinovich, and Hatch drawing?)

I don't know how accurate Mr DeLong's recollections are, however his conclusions are a little iffy.

On the subject of Democratic Senators Mr DeLong may have at least half a point. All elected Democrat's have a vested interest in making the President appear successful. Perceptions of how the President is doing will inevitably hang over every race in the coming mid-term elections. On the other hand, getting the President's bills passed is hardly a guarantee of electoral success. The Democrats may well have lost control of Congress in 1994 even if they had passed health care reform.

Regardless, the situation in 2010 will be very different from 1994. The 1994 election was a decisive swing against a decades long Democratic majority that resulted in Republicans picking up many marginal or even liberal leaning seats. The 2010 election will probably be more like 1996, 1998 and 2000 when the Democrats picked up seats as the Republican tide ebbed. This time around disgust with the Bush administration resulted in a Democratic flood in 2008. With the focus of anti-Republican feeling long gone, this tide too will begin ebb. The marginal Democrats who survive 2010 may well be the ones who recognize that the President is rather more liberal than their constituents and vote accordingly.

On the subject of Republican Senators, my guess is that they are drawing conclusions exactly opposite to what Mr DeLong would prefer. By Mr DeLong's own admission, the real political winners in the health care struggles of the early nineties were the Republicans who led the charge against 'Hillarycare'.