Next to “no free lunch,” perhaps the most important idea in an economics tool kit is “unintended consequences.”
Our story starts in Bogota, Colombia and a visiting professor who tells the Freakonomics people that his friends picked him up with a different car each day. Why? To minimize pollution, the government mandated that car owners could not drive daily. The check-up system? Your license plate. So, many of those who drove daily just used a different car that had a different plate. Less pollution? Not at all. In fact, because those additional cars were old, there was more pollution.
Our next stop is Mexico and a story we have already told. To elevate air quality there, people were encouraged to upgrade refrigerators to newer, more energy efficient models. What happened? Cheaper electric bills let them use their appliances even more.
And this takes us to Cash For Clunkers (aka CARS: Cars Allowance Rebate System, 2009). The source of the idea, Princeton professor Alan Blinder said it would be “trifecta” legislation. By giving a $3500 or $4500 rebate to people who traded old less energy efficient vehicles for newer ones…
- you helped the auto industry through new car purchases
- you helped the environment with elevated mpg requirements
- you helped the poor by making new cars cheaper.
What happened? The program was so popular that Congress had to add $2 billion because they ran out of rebate money.
- After a massive sales burst during the 2 months of the program, purchases plummeted. The program’s incentives time shifted sales decisions.
- The environmental perk did not materialize. Pick-up truck owners did not buy Priuses. Instead, they traded old gas-guzzling pick-ups for newer, lower gas guzzling trucks. In addition, fuel efficiency can lead to more driving and ultimately, any diminished emissions were a tiny proportion of the US total.
- And finally, lower income individuals might not have benefited because the older cars they could have afforded were traded in and destroyed. Fewer used cars meant less supply and a supply curve shifting to the left. Used car prices increased.
In Colombia, in Mexico, in the US, legislators had rational, valid objectives. But the consequences were unintended.
How can government get the best out of us? Your answers?
Sources and Resources: My reading for today was fascinating. I returned to the Michael Grabell book, Money Well Spent? and his chapter, “Cash For Clunkers.” More scholarly but very readable, a paper on the impact of Cash For Clunkers, written by economists Atif R. Mian (Princeton) and Amir Sufi (University of Chicago) was excellent. I got the idea for the post and my information on Colombia from this Freakonomics podcast and Alan Blinder suggests Cash For Clunkers (as “the best stimulus idea you’ve never heard of”) in 2008, here, in the NY Times.
Posted by: adminEcon
Tags: 2009 American Recovery and Reinvestment Act, Alan Blinder, Amir Sufi, ARRA, Atif Mian, cash for clunkers, Colombia, Freakonomics, Keynesian economics, Mexican refrigeration, Michael Grabell, Money Well Spent?, stimulus spending, time shifting
For the first quarter of 2009, GDP declined at a 5.5% rate and, at 7.6% during January, unemployment was rising. With the economy in a tailspin, policy makers wanted to act quickly. Primarily split along party lines, the Congress responded with the $825 billion American Recovery and Reinvestment Act (ARRA).
Was it too much or not enough?
Let’s start with Michael Grabell’s description of the 3 parts of the stimulus in Money Well Spent?
- “First, a flood of money in tax cuts, food stamps, and unemployment checks would get consumers spending.
- An even greater deluge of education and health care money would stop the bleeding in state budgets.
- Then, a wave of “shovel-ready” infrastructure projects would kick in, creating new jobs repaving roads and making homes more efficient. As the economy got churning again, new investments in wind farms, solar panel factories, electric cars…” would follow. (pp. x-xi)
For example, the plan for airport spending said projects had to be ready to start in 30 days, they could cost no more than $15 million, and the cap for any airport board was $20 million (105). That meant the NY/NJ Port Authority, with oversight for LaGuardia, JFK and Newark could get no more money than a South Dakota airstrip with 200 landings a year.
One expert called it the “peanut butter approach.” Because every state had to get something, they had to spread the resources thinly.
You can imagine the tradeoffs.
- Politics or need? Huge money to be spent in countless towns and cities. Where was the money really needed? Would a politician say, “It’s okay, you need it more than my constituency?”
- Shovel ready or deserving projects? Road and bridge projects that were ready to move forward were not necessarily the ones in severe disrepair.
- All 50 states or only those that were recession devastated? The 50 states would all get funds. South Dakota, with an unemployment rate near 5% got twice as much per person ($1952) as Florida, unemployment, 12%.
It’s tough to judge whether the plan worked because econometric models that say “yes” or “no” reflect their creator’s bias. Instead, each of us has to decide.
And that returns us to the candidates. With the economy sluggish, unemployment still high and GDP growth sluggish, do we need more stimulus spending? The President tends toward more government assistance while Governor Romney says no.
Sources and Resources: For excellent detail and an overview, the Michael Grabell book, Money Well Spent? is ideal. Also, from this Mitt Romney policy paper and his website, you can see his philosophy while President Obama’s approach is reflected by the legislation he has supported.
Election Economics Topics:
My apologies to Mr. Grabell. I just discovered I gave his name an “i” and corrected my error.
Posted by: adminEcon
Tags: airports, American Recovery and Reinvestment Act (ARRA), Glenn Hubbard, Governor Romney, infrastructure, Keynesian economics, Michael Grabelli, Money Well Spent?, Paul Krugman, President Obama, roads and bridges, stimulus spending, tradeoffs
Reading about John Maynard Keynes’s investing acumen in last Saturday’s Wall Street Journal, I wondered whether being a Keynesian could involve more than your attitude about the role of government.
So, as a teacher, I created this “Am I a Keynesian?” quiz:
- When you get your lowest mark in economics on a standardized test, do you blame the test writers? On the British civil service examination that got him a job in the India Office in 1907, Maynard Keynes received the second best grade. Hearing that he had fared worst on the economics section of the exam, he said, “I evidently knew more about the Economy than my examiners.” And, he was right.
- Do you own an auspicious art collection? Using profits from currency speculation in 1919 and 1920, Keynes purchased paintings by Seurat, Picasso, Matisse, Renoir and Cezanne.
- Are you a good investor? Keynes was an extraordinary investor. Reacting to his mediocre record during the 1920s, he switched his investing style from a macro approach to a long term bottom-up stock picking perspective and his returns soared. The results have been cited as better than Peter Lynch, Warren Buffett and John Templeton.
- During the morning, do you remain in bed to sip your tea, read reports, and call stockbrokers? Every day, for a half hour after awakening, Keynes started working in bed.
- Would you like to marry a Russian ballet dancer? Described by Sylvia Nasar as, “a Russian ballerina with a voluptuous body and a droll sense of humor but no obvious intellectual interests,” Lydia Lopokova married Keynes in 1925. (The Keyneses honeymooned at her parents’ home in St. Petersburg. He had a lot to say about the Russian economy.)
- Do you sound like a mathematician? Having met with Keynes during the early evening on May 28, 1934, FDR said, “he had ‘a grand talk with Keynes and liked him immensely’ but complained that he talked like a ‘mathematician.’”
During his talk with FDR and in a subsequent NY Times letter to President Roosevelt, Keynes recommended deficit spending to jumpstart the economy. And that is why, today, those of us who supported the $800 billion, 2009 stimulus spending are Keynesians.
My sources: The Worldly Philosophers by Robert Heilbroner, Grand Pursuit by Sylvia Nasar, John Maynard Keynes by Robert Skidelsky, Keynes and Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott. And, this WSJ article.
Economists recently have been debating whether the $787 billion 2009 stimulus package has helped the economy. Perhaps first they should ask what has been spent.
For a variety of reasons, recipients of stimulus money are not spending it. Dollars destined for energy efficiency in Detroit have barely been used. Worried that next year they might not be able to afford teachers hired with stimulus money, school districts in NJ, Texas, NYC, and CA have said that they are not spending it. Other places have just not figured out what to do with their money.
Responding to criticism about slow spending, the Obama Admnistration points out that the stimulus package had 3 sections. They say that: 1) $360 billion in tax breaks and other help for businesses and individuals has been paid out. 2) The $296 billion that targeted unemployment assistance, food stamps, and other aid programs has mostly been spent. 3) $170 billion meant for infrastructure projects has not been spent while $66 billion has.
You might want to look at the Obama administration’s stimulus website to identify local projects. Have you seen any spending near your home?
The Economic Lesson
Fiscal policy includes government spending, taxing, and borrowing. During the 1930s Great Depression, President Roosevelt and the Congress used fiscal policy to try to stimulate economic growth and to create jobs through the TVA and other government funded projects.