In class, I follow the traditional appraoch to teaching macroeconomics. We teach a little of the Keynesian aggregate expenditures theory, followed by quite a bit of "fiscal policy". The we do quite a bit of monetary policy. Then, almost as an afterthought, we spend about a single class session on supply side approaches. This is in part a reflection of how the material is ultimately tested by the College Board and partly a reflection of our textbooks.
Personally, I have serious questions about Keynesian fiscal policy, and I have seen and studied much evidence supporting the effectiveness of supply side approaches. But let's see if we can spot one of my major misgivings about Keynesian fiscal policy in the current "Cash for Clunkers" program.
A digression: if I see one of you at Sonic, and I ask you to come dig a hole in my backyard and pay you $100, then tomorrow I ask you to come fill it in and pay you another $100, how is our economy enhanced? Where is the economic growth? All we have done is transfer $200 from me to you, without there being any economic substance or growth.
If the government pays you $4,500 for your car so that you can buy a new car and insists that your old car be destroyed, how is that any different in substance from my hole-digging analogy? What have we done other than transfer money from the government to the car manufacturers indirectly through this program? Yes, the auto manufacturers employ workers and pay them, but by destroying the traded in cars, we eliminate the potential of real economic growth. Maybe GDP will grow in the immediate time-frame, but how much of this represents purchases that would have occurred in the future? We are time-shifting economic activity, not creating growth.
That's my fundamental problem with most fiscal policy solutions. By having the government increase its spending, it is spending money that taxpayers would otherwise spend on their own. The money the government spends is taken away from taxpayers (or printed - see the post below on inflation) and therefore the taxpayers don't get a chance to spend it on what they want or need. An editorial I read recently in the Wall Street Journal suggested that the logical extension of this is the government should give us incentive payments for other things we buy so that we'll buy them now rather than deferring our purchases - makes as much sense as paying you to dig and then fill in holes in my yard.
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Impeach President Trump, again
3 years ago
While I can see the logic in your statement, another thing to consider is that the purpose of this program is to allow people to get more fuel-efficient vehicles that they would not be able to otherwise afford. This means that people are spending less money on gas and more money on other things, and also means that this is a step towards reducing our dependency on foreign oil.
ReplyDeleteAnother thought is that there are probably quite a few people who have very limited mobility due to a semi- or nonfunctional car, and this allows them to get a working vehicle and get out into the world which, again, gets them spending money and supporting the economy. People who have mobility are also more able to work, which means they're making money, which means they are less dependent on government for support, which means that they have money of their own to spend, which stimulates the economy.
Oftentimes not having a working vehicle severely limits people's ability to participate in the world at large, even with things as simple as employment, and that is one of the many ways that poverty becomes a nigh inescapable trap for people without the support of family and friends. I was in that situation two years ago in another state due to circumstances that were mostly out of my control, but I was lucky enough that, whenever my attempt to stay in the location was foiled by a moneyhole car, I had family to return to here so that I could get back on my feet - however, that process involved government assistance since I couldn't go to my job without the car, and since I had no support base in the location in question, and we would all agree that this is not optimal. Not everyone is so lucky, and this program does a great deal to help those people so that they, like myself, can get off of government support and become self-sufficient once more.
These are thoughts based on my personal observations and anecdotal evidence; I haven't done much to look at the statistics as yet, but this seems entirely rational to me as a method of economic stimulus.
Those are some good and valid points, and I truly thank you for your perspective. A couple of things to respond or perhaps spur more discussion: I am familiar with the environmental/gas mileage aspect of the program but some of the evidence so far seems to suggest that the gains from this are not truly significant. The Washington Post today is questioning the environmental benefits of the program. I understand also that for some trading in a cash-eating older "clunker" improves their economic circumstances in a significant way. But their clunker was still running - it's a requirement of the program. Surely someone could still put that car to good use - someone with no vehicle at all or someone who even with $4,500 can't afford the new car. As much as anything it's the silly wastefulness of requiring the cars to be destroyed that makes me a little crazy!
ReplyDeleteOne of my basic personal themes is that I would like more honesty in our government's programs. If we are really trying to provide financial assistance to the poorer citizens, if we are really trying primarily to redistribute income, let's do it transparently, so the people can decide if that is truly what we want.
Thanks very much for commenting. I appreciate your thoughtful positions.
Oh my god Mr. Balthrop. I get it now! You are right. I mean what good does it do to give someone $200?! Wow! Supply-side just makes so much more sense now that you put it that way. I mean really what is good and what is right about giving someone money? What would they even do with it? Probably go and spend it on something useless. Those bums. I can't believe them. They are bad people.
ReplyDeleteYah I would never give anyone money because it's wrong and I love money. I don't want to ever let go of it. Why would I give my money to anyone? Or the government for that matter? They just want to take my money. MY MONEY!!!!!
Why in the world would ANYONE think it's a good idea to make sure everyone has an efficient mode of transportation? Like buses and trains and trollies, those are useless. We should sell them to the car companies and then make more money! Oh. We already did that? Huh. So you're saying to me that cars are not such a good idea to begin with? WHAT?! No! When you give a faceless corporation tens of thousands of my dollars it's better than me giving someone else thousands. And then them giving me thousands of dollars.
Wait I can get thousands of dollars? YES! MONEY! But they get my money too? No way. That's just plain WRONG!
I love rational discussion.
ReplyDeleteIf the purpose is to stimulate economic growth and activity, let's stimulate economic growth and activity. If the purpose is to redistribute wealth, let's be explicit about it.
Personally I'll avoid the sarcasm as much as I can possibly stand, and I'll at leasst try to understand and appreciate that not everyone thinks as I do.
What's irrational is your objection to the mere spending of money by a gubernatorial body. I just don't understand the ridiculous right wing rhetoric recounted to me.
ReplyDeleteWe once talked about basic disagreements. Where this truly lies is in the fact that moderating oneself is either dicounted or embraced by either party. It's as if the right wing were a child who does not know when to stop eating their Halloween candy. At some point one must tell themselves stop. Unlimited accumulation (ingestion of candy) is what is wrong. What would be right would be to take your candy that is past your point of fill and give it to someone who didn't have as good of a costume and got less candy. You would probaby put it in the freezer to keep to yourself for another day.
Horay for extended metaphors!
You talk about economic growth an prosperity like they are uniquely supply side ideals. To me it is hardly efficent to grow by leaps and bounds and then crash every 10-15 years. What would be better would be to so called "redistribute wealth" (NO! SHARING IS WRONG!!) and to slowly bit surely increase output.
"But the Soviet Union collapsed;" "Gorbachev said communism failed;" well you know when a political ideology is forced to spend billions on it's own defense in a cold war while that money could be better spent on the people, then yah, it will collapse.
I have an idea for our country Jay that I think you'll like:
ReplyDeleteAny job that any person gets, we'll all get paid a baseline 100,000 dollars yearly with no chance for a raise ever. Construction worker: 100,000 dollars. Sonic waitress: 100,000. Astrophysicist: 100,000. Subway Sandwich Artist: 100,000 dollars (hooray for my raise!) President: 100,000 dollars. CEO of Microsoft: 100,000 (sorry Bill Gates you're going to have to work for the betterment of mankind) Similarly all houses will have to be of the exact same substance (sq. footage, appliances, rooms, bathrooms, etc.) Also we'll all get weekly allowances on energy and water so that no one pays more to use more. There will be designated recreation areas of all types built all over the nation that every American is welcome to use. We'll all get the same health care coverage no matter what. Every family is allowed to only have 2 children and 2 cars at any point in time. All other children that come about will be aborted because they're not going to have a good life anyways being the third child and being a burden to their family, so killing them is a better solution. Married Gay people will be given 2 children but no more because they are entirely equal to other married people of a more tradition substance. Drugs of any king will be available to everyone in moderation, but there will be a limit to how much you can have. No more giving to charities that benefit other countries because that would create someone who's more poor than other people in this country. In fact, why don't we just schedule out every persons actions for ever moment of every day!? No chance for differences between people then!
Jay, the point you were trying to make through sarcasm in that first argument was moronic at best and embarrassingly childish at worst, like the one I just posted in response. If Balthrop wants to give me 200 dollars because he believes in me and wants to invest in my future that's his business, but nothing is actually done through that transaction, and GDP doesn't increase a cent.
Onto the purpose of Cash for Clunkers, Mr. B. I think it's obvious that this program is 1) for redistribution of wealth (helping out the little man) but moreso 2) pushing the green agenda by eliminating all of the harmful emissions created by those "clunkers"... That is to say they're trying to force Americans to buy newer, more fuel efficient, less harmful cars.
Their goal isn't to create the most economic prosperity possible as it should be in this time of hardship, although I do believe the program will help out some, it is to contribute to keeping the economy from dying while simultaneously taking steps towards their agendas. That seems to be the basis of everything this administration is doing, not actually pulling us out of the fire... but keeping us from being burned to death while they get their leftist views accomplished. We're seeing the American people wake up and realize this though, which makes me hopeful for the future not just after the Obama administration ends, but even the last 2 or 3 years of his presidency.
I also can see the reasoning behind the first guys argument... it should provide some sort of economic stimulus, but if the entire goal was to create economic stimulus at it's most efficient point and that's all, I'd have to agree with Balthrops scruples about the system.
Existentialism
ReplyDelete[Deep Breath]
ReplyDeleteAt the risk of propagating more "right wing rhetoric", I have never objected to the "mere spending of money by a governmental body." Do I object to the quantity? Yes. Do I question to the purposes and whether they are appropriate for government under the Constitution? Yes. Do I question the efficiency and efficacy of that spending? Yes.
Are prosperity and economic growth exclusively supply-side concepts? No. I seem to recall many classes where we discussed ways in which fiscal and monetary policies could be and have been effective. Maybe some in the room were doing other things and don't recall that part of class.
And I believe that people are self-interested and motivated by the desire to better themselves. For some people that is expressed in monetary terms. For others, it is expressed in other ways. Some students aren't motivated by grades or the possibility of AP credit, therefore they randomly bubble in answers on tests. Others are motivated by those things.If not on the basis of performance, how should a teacher distribute grades?
I for one am glad that we have individuals in our society and history who have been motivated by money and self-interest because they have created things I use and value highly. And if not motivated by the monetary reward, I wonder how many of those creations would have occurred, and how many billions of dollars that have been used for benevolent and charitable purposes by men like Bill Gates would not have ever made it to those causes. Believe it or not, as you call them, the "right-wingers" can be compassionate, generous, and still question the need for intrusive government.
From John Stossel's blog:
ReplyDeleteGMU economist Russ Roberts has a knack for explaining economics in mind opening ways.
He offers this quiz:
Imagine you’re a member of Congress. You’re a fan of the Cash for Clunkers program. You discover that the $1 billion that Congress budgeted for the program has been spent in FOUR DAYS. The program is now out of money. What do you do?
A. Realize that $4500 per clunker was too big a subsidy and that you can achieve the same effects with a much smaller amount.
B. Worry that maybe there is some fraud in the program and that some of the cash isn’t going to clunkers
C. Increase the budget by $2 billion
The correct answer for clunkheads is C, of course. That’s the wise choice when you are spending other people’s money. What fun that must be!
When will the money run out?
I understand your point and generally agree with it. But I think you're missing the point or perhaps misunderstanding politicians.
ReplyDeleteI do not think the main purpose of a program like the Cash for Clunkers program is based on economic growth. Although there may certainly be made a hearty argument for such an assertion.
From my years of studying governments, I've found such programs as this to typify governmental want of control and personal want of power for the provebial purse strings. I see these programs as ways for politicians to force their views of how society "should be" onto the people, call it a form of social engineering; as well as a way for any particular party to entrench itself in power by dolling out dollars to constituents.
The economic policy programs of administrations, outside of the Fed's monetary policy, is ultimately controlled by politicians, not by economists.
Now what frightens me, is how much the general society wants more control by these polticians. Case in point, when the price of gasoline was very high, you heard uproaring cries screaming for the President to "do something" about it. I don't think most screamers had thought through the implications of such a policy. To give any one man the power to at a whim control the price of a commodity is terribly short sided and extremely dangerous. One who does not think that power would be stretched or thinks the power would only be used benevolently, has not studied history. If any one man controlled a downward shirt lever, he would automatically control the reverse. And if you think that justifications for control of another commodity would not soon arise, well, I shall simply say I think one is wrong.
When i first heard of the cash for clunkers program, i was excited. I mean, I have a clunker, it runs great still although a '95, and since it only has 85,000 miles on it, i figured i could for sure get another 40,000 out of it....but i wanted a new car!
ReplyDeleteNow that you've said the government is going to destroy them, i really dont want to get a new car. I mean, i wasnt going to get a new one anyway because although i want a new one, if i can keep on with my old car and wait till after i graduate to get one then i am.
Now i see this program as being more of a wasteful program than anything else.....and besides, this will draw people who already probably have no money to begin with....give them 4,500 dollars for a car that will likely cost 20,000 if not more and that will get them into debt for the next 5 years while they finish paying it off, if of course the car doesnt get reposessed. Investing money into a brand new car in these times seems dangerous to me and i would much rather wait and have enough money OF MY OWN to invest on a down payment, than have some system rush me into getting a new car, when i'm simply not ready for it.
Im not big on just giving people money anyway.....it creates this sort of dependency and a sense of entitlement for people where they think they OUGHT TO and they HAVE TO have things when they have not truly earned it to begin with.
I problem I see that has not yet been discussed.
ReplyDeleteOn the news last night they were interviewing charitable organizations who took "clunkers" as tax deductible donations and fixed them up, with the use of under privileged teens (who happen to be learning a new life skill, YAY!) and in turn donated them to a well deserving person who was in need of a car, any car. And who knows, that person may one day be able to turn around and sell it themselves. Adding another layer to the use of said "clunker."
With the "cash for clunker" program in effect, these donations have dwindled to almost none. Putting to a halt to the teaching and charitable giving that benefits so many other individuals.
To me this is the best use possible for "clunkers". Yes, would could destroy them, but do we even know what exactly "destroy" means? You mean they empty MOST of the fluids then smash them into unrecognizable cubes and send them to a graveyard to rot. Seeping the remaining chemicals and rust into the ground.
Sure, sure, some of the viable metal and rubber will be recycled, but why not the whole car? Why can't other people flourish? Even though it may be non monetarily. To me this would be a much better solution than destroying the cars. I understand that they may get bad fuel economy and they may emit high levels of exhaust. But why not have the kids who are fixing them, try and fix that too? Oh yes, that's right, let's practice engineering while we're at it!
Just a thought. Don't shred me into to many pieces. :)
Shred you? These are excellent points. One of my standard themes about government is the unintended consequences that always seem to pop up. Government is fallible, like the humans it is composed of, and so they cannot think of everything that might result from their actions. It's a huge reason I prefer as little government action as possible, and I like them to move very slowly.
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