What Economic Recovery?

From the Hoover Institution, a piece (by Lee Ohanian and John B. Taylor) on which I look favorably (because it expresses what I already believe to be true¹).

Since the fall of 2008, the U.S. government has adopted dozens of policies that were advertised as being necessary to restore prosperity. These policies impacted many key economic channels, including monetary and fiscal policies, commercial and investment banking, manufacturing, housing, and the environment. But many of these policies have depressed growth by distorting the normal forces of supply and demand that are critical for a market economy to function well and create new jobs. Many of the policies that were implemented were based on old Keynesian models that advocate temporary spending increases and one-time tax rebates, while others created new regulations of economic activity in key sectors. But both of these policy responses misdiagnosed the problems facing the American economy. The spending policies had little impact on the economy other than to increase government debt, and regulatory policies raised business costs and depressed growth.

The centerpiece of the old Keynesian stimulus policies was the 2009 $821 billion American Recovery and Reinvestment Act (ARRA), which combined temporary tax cuts with federal funds for national, state, and local government spending...There are two important reasons why the ARRA failed to restore jobs. One is that attempts to stimulate spending likely had a much smaller impact than was advertised. The second is that the type of spending that was supposed to be undertaken – including investment in government infrastructure – simply did not materialize in any significant way. State and local governments did not use these federal funds to significantly expand infrastructure spending. Instead, these governments increased transfer payments and reduced debt, and the nation’s employment rate continued to decline.

Other spending policies were aimed at propping up the hard-hit auto and residential construction industries. These policies included “Cash for Clunkers”, which provided some new car buyers with payments between $3,500 and $4,500 by turning in an old car that was scrapped, and the Homebuyer Tax Credit, which provided some buyers of houses a tax credit of $7,500. These policies did little to strengthen either industry. Sales of autos and homes temporarily increased while these policies were in place, but then sales declined sharply once the policies ended. These policies were pure subsidies to some auto and home buyers, with little if any impact on the industries that were supposed to be helped.

Not that it required a real prophet to see that coming...




¹ - This is called "confirmation bias," and it's a cognitive trap. I know that but believe all of this anyway...

Getting things backwards. Again...

Three years ago, during the Cash for Clunkers disaster (and that was a pretty major program that Obama's not making reference to in his re-election campaign), I noted that the Obama administration had gone to an economic classic and used a cautionary tale as an instruction manual.

Bastiat wrote, over 150 years ago, of the broken-window fallacy, in which a smashed window is looked at as an economic stimulus while completely missing the opportunity cost associated with being unable to spend the window replacement cost on different economic stimulus. The current administration and Congress apparently didn't get to the end of the broken window story, just stopped in the middle, saying, "what a great idea!" They've turned window smashing into the only part of their economic stimulus package which seems to be stimulating anything...

Now Jeffrey Carter notes another instance of the Obama adminstration going to an seminal work of free market economic principles and ... taking the wrong side...

Barack Obama, last week:

There are a lot of wealthy, successful Americans who agree with me, because they want to give something back. They know they didn’t -look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else.

Let me tell you something – there are a whole bunch of hardworking people out there. If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business. you didn’t build that. Somebody else made that happen.

From Atlas Shrugged:

“He didn’t invent iron ore and blast furnaces, did he?”

“Who?”

“Rearden. He didn’t invent smelting and chemistry and air compression. He couldn’t have invented his Metal but for thousands and thousands of other people. His Metal! Why does he think it’s his? Why does he think it’s his invention? Everybody uses the work of everybody else. Nobody ever invents anything.”

She said, puzzled, “But the iron ore and all those other things were there all the time. Why didn’t anybody else make that Metal, but Mr. Rearden did?”

Who can afford a a Chevy Volt anyway?

One of my complaints about the Cash for Clunkers program was that it represented a wealth transfer from poorer to wealthier. The only people who benefited from the program were people who, with the $4500 clunker allowance, could afford a new car. It's unlikely that the group of people who could afford a new car with the credit but could not have afforded a new car without it is a large group. Furthermore, the program removed thousands of functioning used cars from the highways and, more importantly, the used car marketplace, raising prices for anyone that needed one. It doesn't take a rocket scientist to figure out that reducing the price of new cars while raising the cost of used ones is not a good-for-the-working-poor kind of exchange.

Which leads to the quote of the day (topic: tax credits for purchase of electric vehicle Chevy Volts), which is politically incorrect in all the right ways...

Tax credits like this merely take from those too poor to afford a coal fired white elephant and give to those that already live in mansions.

The bad luck Presidency

Obama: I reversed recession until 'bad luck' hit

At a town hall meeting on his campaign-style tour of the Midwest, President Obama claimed that his economic program "reversed the recession" until recovery was frustrated by events overseas. And then, Obama said, with the economy in an increasingly precarious position, the recovery suffered another blow when Republicans pressed the White House for federal spending cuts in exchange for an increase in the national debt limit, resulting in a deal Obama called a "debacle."

"We had reversed the recession, avoided a depression, gotten the economy moving again," Obama told a crowd in Decorah, Iowa. "But over the last six months we've had a run of bad luck." Obama listed three events overseas -- the Arab Spring uprisings, the tsunami in Japan, and the European debt crises -- which set the economy back.

If I were to make a list of the things that have derailed this recovery, none of those items would be on it. I'm willing to concede, for the sake of discussion, that there's been some impact to the US economy from the destruction in Japan. It's not obvious to me that that the European situation, beyond giving a foretaste of what we're headed for in the absence of a course correction, has had much tangible impact. And if the "Arab Spring" has had a negative impact on the US economy, I suspect it pales in comparison to the Cash for Clunkers program, in which the United States transferred tax dollars from less wealthy to more wealthy and paid for the destruction of billions of dollars worth of US assets at the same time.

Bad luck? "The Fault, Dear Barack, lies not in our stars, but in ourselves." At a time when our debt was already bad, we increased it with a poorly designed "stimulus" that utterly failed to spur aggregate demand. At a time of high cyclical unemployment, we implemented plans and policies which inevitably increase the cost of hiring and firing, and therefore increase structural unemployment. At a time when financial markets are scared to invest, we add an enormous law filled with regulations of every aspect of the business, a law which will require years of implementation before people really understand all of the implications. At a time when we need businesses to get back to the business of business, hiring people and selling product, we unleash harsh rhetoric against the business community. To quote the always quotable C.S. Lewis,

we continue to clamour for those very qualities we are rendering impossible. You can hardly open a periodical without coming across the statement that what our civilization needs is more 'drive', or dynamism, or self-sacrifice, or 'creativity'. In a sort of ghastly simplicity we remove the organ and demand the function. We make men without chests and expect of them virtue and enterprise. We laugh at honour and are shocked to find traitors in our midst. We castrate and bid the geldings be fruitful.

Lewis was not talking about business or the economy, but it couldn't be more on-point if he had been. We laugh at prudence and fiscal rectitude and are shocked to find Fannie Mae and Lehman Brothers in our midst. We castrate businesses with excessive regulation and bid them be fruitful and hire.

Bad luck? To the extent that you were elected in 2008, President Obama, yes, we've had bad luck.

Oh, and, of course, we have to close with the Heinlein quote:

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as "bad luck."

Apparently, it wasn't actually important before...

Philip Klein makes another of the excellent points that keeps getting missed in the finger-pointing over the debt downgrade...

For his first two years in office, Obama’s party controlled both chambers of Congress – for part of that period, he had a filibuster proof majority in the Senate. During that time period, he and his fellow Democrats could have passed his supposedly ideal, long-term, deficit-reduction package -- one that represented a “balanced approach” between spending cuts and tax increases. It also could have delayed the deficit reduction for several years, so it wouldn’t have affected the current weak economy or the “investments” he considers crucial. Forget about actually accomplishing serious deficit reduction -- he didn’t even attempt it.

Instead, they used their power to force through another entitlement to worsen the long-term debt situation, and to increase structural unemployment in the midst of the worst cyclical unemployment in decades. (Oh, yeah - there was also a transfer of tax dollars to the wealthy and the concomitant destruction of millions of dollars of American assets, raising prices on used cars for years into the future.)

The debt and the deficit weren't on their list of concerns. And we'll all be paying for that now...

Is this the dumbest government program in my lifetime? There's so much competition...

WSJ: Cash for Clunkers wasn't a great idea. "Rather than stimulating the economy, the program made the nation as a whole $1.4 billion poorer."

Gosh, there's a shocker. We took money from people who couldn't afford new cars and gave it to people who could so that they could have usable assets destroyed, and it didn't make us all better off? Who'd'a thunk it?

Brought to you by the people who think that they should be running the health care system. The same government policy makers who felt that tax dollars would be well spent in destroying useful vehicles and delaying some sales and pulling some forward, while subsidizing the relatively well off at the expense of the less well off, want to take control of the health care system. What could possibly go wrong?

Duh.

The verdict is in, and Cash for Clunkers was a disaster. Obvious that it would be, of course - "the program is so straightforward, so simple, and so obviously a bad idea." The Obama administration "turned window smashing into the only part of their economic stimulus package which seems to be stimulating anything."

But they mean well, and that makes them better and smarter than us racists in flyover country. I'm sure we can trust that they'll get the health-care takeover right, with absolutely no perverse incentives or unintended consequences...

Cash for Clunkers II

There has been some great commentary on this issue, largely because the program is so straightforward, so simple, and so obviously a bad idea.

Matt Welch:

It gets worse, from that whole social-justice angle. What about the estimated 12 percent of Americans aged 15 years and above who don't drive, period? What about all the adults who live in the 8 percent of households that don't have a vehicle? What about half the residents of Manhattan, who took transit planners' decades-old dream to heart and "got out of their cars"? What about those who are too poor to drive? The answer: All of these people are subsidizing whoever turns in an SUV or crappy old $800 K-Car like the one I used to drive. Not only that, but what do you think happens to the $800 car market when the guvmint is handing out $4,500 checks to have the things destroyed? I'll go ahead and state the obvious: It shrinks, making it more expensive for the truly poor people, the ones who want to make that daring leap from the bus system to an awful old bucket of rust.

...

Cash-for-clunkers amounts to a rounding error in Tim Geithner's nose-hair at this point, which is probably why at least some liberals seem so genuinely baffled by the disproportionate criticism it has drawn. But for some of us it's also a nearly perfect symbol of economic statism run amok. The federal government is taking from the many, giving it to the less-than-many, destroying functional cars, funneling money to an auto industry that it already largely owns (at a hefty taxpayer price tag), then taking multiple (and multiply premature) bows for rescuing the economy and the auto industry in the process.

Radley Balko:

You mean the government is offering people free money ... and they’re taking it? And they’re measuring the program’s success by how many people ... are willing to take free money? Shocker that it’s been so successful, huh?

There’s also the laughable idea that the government is ordering the destruction of tens of thousands of used automobiles it paid people thousands of dollars to exchange ... for new cars that may get no more than an added four miles per gallon. And all in the name of saving energy.

Cash for Clunkers

A couple of excellent comments on this economically-illiterate program (a program deemed a success despite, as Howard Kurtz noted, the fact that it was "a billion-dollar effort that was supposed to last till November [but] ran out of money in five days.")

John Hood:

What the federal government is now doing is using taxpayer dollars to subsidize the large-scale destruction of functional cars that would otherwise exchange hands one or more times in the used car market. This will make it harder for poor folks to purchase cars in the future. It’s an income transfer up the income distribution, at the behest of so-called progressives.

Charles Krauthammer:

What we're forgetting is that all of these cars, tens of thousands of clunkers, are going to be turned into scrap. And the question is why? America is going to be destroying tens of thousands of perfectly usable cars, destroying essentially American assets.

A parody of Keynesian economics is to say that you pay half the population to dig holes and the other half to fill them in. This is worse, because we're paying people with the bribe of cash to destroy huge numbers of assets.

Bastiat wrote, over 150 years ago, of the broken-window fallacy, in which a smashed window is looked at as an economic stimulus while completely missing the opportunity cost associated with being unable to spend the window replacement cost on different economic stimulus. The current administration and Congress apparently didn't get to the end of the broken window story, just stopped in the middle, saying, "what a great idea!" They've turned window smashing into the only part of their economic stimulus package which seems to be stimulating anything...