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

8/28/09 6:08 PM

Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu. Weblog Home Page Weblog Archives Econ 115: 20th Century Economic History Econ 211: Economic History Seminar Economics Should-Reads Political Economy Should-Reads Politics and Elections Should-Reads Hot on Google Blogsearch Hot on Google Brad DeLong's Egregious Moderation 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 longrun 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. http://delong.typepad.com/sdj/2009/08/my-side-of-an-la-times-debate-with-ed-leamer-part-ii.html

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My 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 welltargeted 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. RECOMMENDED (4.86) by 3 people like you [How?] You might like:

Is Obama's stimulus working? (Chicago Tribune) DeLong Smackdown Watch: Robert Greenstein on Think-Tank Effectiveness (this site) 2 more recommended posts Âť Brad DeLong on August 21, 2009 at 04:53 PM in Economics, Economics: Fiscal Policy | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f0800388340120a50e243d970b Listed below are links to weblogs that reference My Side of an LA Times Debate with Ed Leamer, Part II:

Comments You can follow this conversation by subscribing to the comment feed for this post. 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. http://delong.typepad.com/sdj/2009/08/my-side-of-an-la-times-debate-with-ed-leamer-part-ii.html

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

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

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

Two-Handed Look at the World Brad DeLong's Egregious Moderation J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley,...

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