8/28/09 6:08 PMMy Side of an LA Times Debate with Ed Leamer, Part II

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August 21, 2009

My Side of an LA Times Debate with Ed Leamer, Part II

Part II:

Dust-Up: Cash for clunkers -- a clunker? -- latimes.com: Brad DeLong and Edward E. Leamer

agree that the program, though effective in the short term, represents a missed opportunity.

What good are we doing by destroying the clunkers? Point: Brad DeLong

I find it hard to imagine that you and I will find much to disagree on today, Ed. Yes, there are lots of

unemployed autoworkers who will be doing nothing if we don't boost auto demand. Yes, it would be

good if we had a set of policies that actually gave people the right incentives to buy the right kind of

car and drive the right amount -- policies that make people feel in their wallets the cost of global

warming and the cost of the fact that because their cars are on I-5, everybody else has to go slower.

I suspect that you and I could immediately get behind a plan to tax gasoline more, issue bonds now

to be amortized by the gasoline tax far into the future and return the money to consumers by using

the funds from the bonds to give cash back to people who buy high-mileage cars. That would provide

a good short-run Keynesian stimulus to get autoworkers back to work; it would also be a good long-

run environmental policy. Since it would be budget-neutral (or budget-positive), spend money now

and lock in the tax increases to pay off the bonds later, it would be a win-win-win.

But that's not what "cash for clunkers" is. We are destroying the clunkers, which could be very useful

things in Africa or the poorer parts of Latin America or Asia; it would be cheap to load the cars onto

some of the idle container ships off Long Beach and send them off. What we're doing instead is

simply a waste. John Maynard Keynes wrote that if you couldn't think of anything else to do, bury

money in holes in the ground so people have an incentive to hire the unemployed to dig it up. That's

much worse than having the government spend money on things that are useful. But it seems better

than "cash for clunkers," which looks to me like the equivalent of breaking windows so we can then

put people to work fixing them.

8/28/09 6:08 PMMy Side of an LA Times Debate with Ed Leamer, Part II

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put people to work fixing them.

Here I do think that a genuine opportunity has been lost. I don't think that "cash for clunkers" is

positively harmful; the destruction of the clunkers isn't costing us very much, and that cost is

probably offset by the benefit of lowering unemployment a little bit. The program is certainly well-

targeted at Michigan, which needs all the help it can get. The blip in car sales is real, and it will serve

as a Keynesian stimulus: People will be rehired sooner to rebuild the auto inventories that have been

drawn down, and they will then have higher incomes and spend more. The places where they shop

will have more sales and hire people who will then have higher incomes, and so on.

But we could have done so much better, as far as environmentally friendly stimulus proposals are

concerned. It really does make me cry.

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Brad DeLong on August 21, 2009 at 04:53 PM in Economics, Economics: Fiscal Policy | Permalink

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No, Brad. Despite my lack of qualifications I'm going to disagree with you on this one. While better policy options

were available (as with most of what Obama has done IMHO), this is NOT "broken windows" because the asset

replacement has increased productive value over like-for-like replacement. Cash for clunkers is the (near-exact)

equivalent of taking out single-glazed windows to replace them with double-glazed. Not the best investment

available in terms of cost-benefit or energy efficiency, but better than nothing. Sending inefficient cars to the third

world is the policy equivalent of selling your used refrigerator so that the cost of externalities (like the reduced

generation margin in CA) continue to be borne by others because your share of those externalities is more than

offset by the $75 bucks some college sophomore will give you for it. Suggesting clever ways to disincentivize the

imposition of those externalities is only useful if implementation might actually happen and doesn't work against

other aims.

I ran some back of the envelope numbers (no doubt wrong), but I know you've got the tools to do it correctly in a

jiffy, and my numbers (looking at avoided fuel consumption and repair costs) suggest that direct costs (ignoring

externalities) of chopping off the last 60K miles of "productive" life for these low mpg clunkers is actually negative

(society saves resources without even considering externalities). We actually are pulling the majority of 5 years

worth of consumables forward into a single quarter.

Most clunkers appear to have negative utility from a societal standpoint. What you seem to be advocating is keeping

a machine in the bakery that will break a window (or throw a rod) on a regular basis. Of course, I have to agree that

there are larger inefficiencies in our real economy that could be invested in with a higher rate of return.

You might like:

Is Obama's stimulus working? (Chicago Tribune)

DeLong Smackdown Watch: Robert Greenstein on Think-Tank Effectiveness (this site)

8/28/09 6:08 PMMy Side of an LA Times Debate with Ed Leamer, Part II

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Me: Economists: Juicebox

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there are larger inefficiencies in our real economy that could be invested in with a higher rate of return.

Posted by: benamery21 | August 21, 2009 at 08:49 PM

BTW, four for now is enough and I'll sit out.

Benamery21, Brad is basically right even though he didn't adequately address the resource savings. REM that it

takes lots of resources and energy to make a new care, so the savings takes a long time to square up if ever during a

reasonable car life. Also, Brad said "The program is certainly well-targeted at Michigan, which needs all the help it

can get." Well, somewhat but not enough. People can and do buy foreign cars! At least, they should have been

required to buy "US made/maker" cars to get the money.

Posted by: N e i l B | August 22, 2009 at 10:42 AM

> this is NOT "broken windows" because the asset replacement has

> increased productive value over like-for-like replacement.

> Cash for clunkers is the (near-exact) equivalent of taking

> out single-glazed windows to replace them with double-glazed.

While automobiles are not as recyclable as they _should_ be (until the EU directive on recyclability takes full effect

in 5 years or so), they are still highly recyclable compared to other large consumer purchases (particularly houses,

which are being scrapped by the megaton at the moment). Most of the parts from those clunkers will be stripped

and resold; the glass will be recycled, and the steel is of great value. So they are not being left to rust in a junkyard

lot, and that's a point that I haven't really seen taken up.

Similarly, I don't see the value to human society in dumping our low-mileage behemoths on Mexico and South

America. Personally I love cars, and I will say flatout that there is no excuse for the 450 horsepower, 17 mpg station

wagons that have proliferated since 2000. Peter Egan of "Road & Track" wrote an excellent essay where he

compared the stats of 20 models that have kept the same name for 30 years. Despite vast improvements in

technology over that time period only one of the 20 models improved on all stats: emissions, 0-60 time,

horsepower, AND fuel economy: the Corvette. In every other case the technology improvements that were starting

to create much more efficient (and potentially sustainable) cars in 1990-1995 have been dumped into more

horsepower, more inefficiently-used length, and more weight. I don't see any value to encouraging that trend much

less exporting our stupidity to other lands.

Cranky

Posted by: Cranky Observer | August 22, 2009 at 02:47 PM

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