Cash for Clunkers: How bad public policy gets made

M

Max E.

POLITICIANS HAVE difficulty learning from their mistakes; it’s tough enough to just acknowledge them. Admitting mistakes leaves elected officials feeling exposed and vulnerable. And why bother, when the partisan divide encourages both sides to endlessly litigate the rights and wrongs of past legislative choices?

Cash for Clunkers should be the exception. Enacted in 2009, the $3 billion program was intended to stimulate the economy by offering $4,500 credits for trading older vehicles for newer, more fuel-efficient cars. It was a spectacular failure, at least according to two comprehensive studies. The first was completed last year by the Brookings Institute, a left-leaning Washington think tank. Another, conducted by Texas A&M researchers, was released recently by the National Bureau of Economic Research.

excellent work on the subject four years ago.

Meanwhile, if you want to better understand how poor public policy happens, it goes something like this.



First, get caught up in the hoopla. Clunkers produced the type of headlines that politicians dream of: helping people buy cars, better fuel efficiency, the promise of job creation, and the word “cash” in the title. (Spelled with a $, if you please.) It was full of the kind of vague simplicity that has great political appeal, but begins to disintegrate as soon as it comes into contact with the real world.



Second, ignore the reality and complexity of human behavior. Proponents never seriously considered that subsidies would appeal most to consumers who were already considering replacing their vehicles. Both studies showed conclusively that the short-term spike in sales simply represented transactions that were pulled forward in time. Legislators’ belief that a temporary $4,500 rebate would result in sustainable sales growth was wrong from the start.

were convinced to throw away $2 billion more on top of the initial $1 billion program.

Time and again, legislators based their assumptions on hopes and aspirations — what they wanted to happen — rather than honest economic or empirical analysis. It’s a recipe for failure, but one used by Congress many times before. Recent news coverage of laws that encourage illegal immigration, create incentives for overutilization of the health care system, or reward colleges for promoting student debt are driven by similar faulty assumptions about economics and human behavior.



The overall lesson is simple enough: Leave predictions and manipulation of human behavior to the psychologists. Using taxes and rebates to control, coerce, and alter individual actions is inefficient, wasteful, and fraught with unintended consequences.
 
Most Keynesian economists do not want to admit that we are in another depression. They find the word painful.


They find it painful because it contradicts the idea that Keynesian economic ideas have ended depressions forever. It also contradicts the idea that the massive and continuing Keynesian stimulus applied by world governments since 2008 has worked. For this and other reasons, euphemisms such as the Great Recession have been embraced not only by Keynesian economists, but by their allies in government and in the mainstream press.

I argued that we were in a depression in a January article and again in April. Now Brad DeLong, one of the most prestigious Keynesians, a professor at Berkeley and former deputy assistant secretary of the Treasury under Clinton, says that he agrees. It really is a depression.

DeLong doesn’t blame Keynesianism; that would be too much to expect. But he does call the thing by its right name, which is a major departure from the usual Keynesian style.

These are after all the people who call the government creating money out of thin air “quantitative easing,” “bond buying,” and the like, all of which are parroted by the press. When Keynes did this, he was often being impish, as when he called newly created money “green cheese,” echoing the old nursery nonsense that “the moon is made of green cheese.” His acolytes have adopted the style of dissimulation, but without the slightest trace of a sense of humor.

Although we are in a depression, it is not a depression for everyone, as is by now well known. Even so, the full hit on the middle class and the poor relative to the affluent is not adequately understood. Consider these figures from Larry Lindsey, who served Bush 2 as chief economist at the beginning of the first term, only to be booted from the White House for too much truth telling:

US Household Net Worth 2007- 2013

Top 1% Up 1.9%
Next 9 % Up 3.4%
Next 15% Down 0.5%
Next 25% Down 16.7%
Bottom 50% Down 44.2%

None of the economic statistics we get from the government are reliable. Inflation is understated. Economic growth is overstated. Unemployment is understated. But this chart of net worth is about as reliable as we can expect to get.

It tells the story of a middle class in the process of being destroyed and of poor people who will never be able to get into it. It is also noteworthy that the nine percent below the top one percent have done best of all. Although a great many government employee households are in the top one percent, a larger number are in the next nine percent.

Sometimes the economic statistics are intentionally manipulated. It cannot be a coincidence that the method of calculating inflation changed so much under Bill Clinton. But keep in mind that the statistics also reflect Keynesian assumptions that do not make sense.

In Keynesian theory, it doesn’t matter whether money is spent or invested or what it is spent on or invested in. In this cockeyed view, spending more money to put people into Medicaid, paid for by borrowing from overseas or printing new money, is just as good as Apple investing in new jobs.

We saw an example of this in the recent Gross Domestic Product numbers released by the government. Most of the new spending in the first quarter of this year was for health care and most of that for Medicaid expansion. But it wasn’t even actual, documented spending. It was just a wild, finger-in-the-wind guess by the government.

As a result, the first quarter was initially reported with a minus 1% economic growth, then revised to minus 2.9%. One idea floating around is that the Commerce Department’s revision reflected a decision to make the first quarter look worse in order to move healthcare spending to the second quarter and thus make it look better. If so, why would the second quarter have been deemed more important? Because it is leading up the fall elections.

The destruction of common sense economics by Keynesianism is a major reason for what has happened to the American middle class and poor. But our governing elites and special interests do not just love Keynesianism for its own sake. They especially love the opportunity for crony capitalism that it affords. Keynes himself was not financially corrupt, and would have been appalled to see the corruption he unleashed.

Nor did our present problems arrive in 2007-08. They can be dated at least to the beginning of bubbles and busts during the Clinton administration and arguably even further back.

For example, if we look at what has happened to poor people since the War on Poverty began in the 1960’s, we see them earning less and less on their own and sinking even further into poverty, if we exclude growing welfare payments. Analyst John Goodman has calculated that economic growth cut the rate of poverty in half between the end of World War Two and 1964, when the War on Poverty was launched. Since then the percent of people poor would have increased, but for the extraordinary $15 trillion spent by the government, much of it with borrowed funds.

There are those among the top one and top ten percent of households who are working on this problem every day. They help the middle class and poor by working hard, saving, making wise investments, and hiring, or even by not investing or hiring until conditions are right. There are many others who make it steadily worse by feeding off a corrupt and swollen government and wasting trillions of borrowed or manufactured dollars.
 
Yes, I saw that DeLong comment - very interesting. Even the wizards and sorcerers are starting to see the sham for what it is.
 
dbphoenix said:
And what massive and continuing Keynesian stimuli might those be?
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Just for openers.
 
dbphoenix said:
And what massive and continuing Keynesian stimuli might those be?
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Are you joking? Surely You cant be this stupid, With the fed buying tens of billions in bonds each month you ask "what stimulus?" LOL
 
Max E. Pad said:
Are you joking? Surely You cant be this stupid.
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Don't be surprised. He's baiting you to use the Fed as the excuse, so he can try to make the argument that Keynes is more about fiscal policy, not monetary. He's trying to catch you on a technicality (because, as usual, his entire argument is based on such things).

I'll take it from here :)
 
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