Cash for clunkers didn't help economy or improve environment, just made us poorer

This study sees to ignore the fact that "Cash for Clunkers" made the country poorer by destroying perfectly good cars, but it at least makes two other useful points.  From Fox News:

In fact, the Car Allowance Rebate System (CARS) known as Cash for Clunkers, did little to help the environment and was “far more expensive per job created than alternative fiscal stimulus programs,” according to new research led by Ted Gayer and Emily Parker of Brookings. . . . 

“The existing evidence also suggests that these sales were pulled forward from sales that would have occurred otherwise in the future,” Gayer and Parker said. “Ten months after the end of the program, the cumulative purchases from July 2009 to June 2010 were nearly the same, showing little lasting effect.” 

Americans traded in 700,000 “clunkers” between July 1 and Aug. 24, 2009, according to Brookings. . . . 

The environmental gains made through the program weren’t all that impressive either, according to the study. . . . 

Total emissions reduction was not “substantial” because “only about half a percent of all vehicles in the United States were the new, more energy-efficient CARS vehicles.” . . .

On this last point, suppose that fuel economy increased by 25 percent for these new cars and that the program did have an impact on cumulative purchases, the impact would be about 0.1% on energy use.  Now recognize that it cost energy to produce those new cars and to destroy the old ones and the benefit is some tiny fraction of 0.1%.

More Obama hyperbole on the impact that the shutdown will have on the economy

JOHN HARWOOD: You mentioned calm. Wall Street's been pretty calm about this. The reaction I would say, generally speaking, has been, "Washington fighting, Washington posturing, yaddah, yaddah, yaddah." Is that the right way for them to look at it? 

PRESIDENT BARACK OBAMA: No, I think this time's different. I think they should be concerned. And-- I had a chance to speak to-- some of the financial industry who came down for their typical trip. And I told them that-- it is-- not unusual for Democrats and Republicans to disagree. That's the way the founders designed our government. Democracy's messy. 

But when you have a situation in which-- a faction is willing potentially to default on-- U.S. government obligations-- then we are in trouble. And if they're willing to do it-- now, they'll be willing to do it later. One thing that I often hear-- is, "Well, Mr. President-- even if they're being unreasonable, why can't you just go ahead and-- do something that makes them happy now?" And I have to remind people-- 

Italy moves to more government spending as the solution for economic growth

Italy is going back to the policies that got it in trouble to begin with.  I wasn't a fan of the higher taxes and it would have been nice to see some real cuts in government spending, but this will be worse.  From the NY Times:

Mr. Letta is part of a growing European effort to question the austerity policies championed by Germany as the medicine to deal with the economic malaise in Europe, where unemployment has surpassed Great Depression levels in some places in the south and recession is creeping toward the once-resilient economies in the north. . . .

New piece in Investors' Business Daily: "Obama's Sequester Cuts Are A Mere 1% Of Budget"

My new piece starts this way:

President Obama is almost breathless predicting "devastating" consequences if the sequester trigger is pulled. 

He warns the cuts "will hurt our economy ... add hundreds of thousands of Americans to the unemployment rolls. ... The unemployment rate might tick up again." 

But will a $44 billion cut in spending out of a $3.8 trillion budget, a mere 1%, really be a "meat cleaver approach" that will "eviscerate" government programs? 

Obama frightens people by pretending that the $1 trillion cut takes place right away rather than being spread out over 10 years. 

He has taken almost every possible position on spending and taxes. During the 2008 presidential campaign, Obama continually promised to "cut net spending" and make government smaller. The stimulus was promised not to "raise projected deficits beyond a short horizon of a year or at most two." . . . .

Daily Caller piece: "Obama’s spending failure"

My piece starts this way:

According to President Obama, cutting government spending will “certainly slow our recovery.” Over and over again, he has described the sequester’s threatened $85 billion cut in spending out of a $3.8 trillion budget as “devastating.” But that represents a mere 2 percent cut in spending. Obama frightens people by pretending that the $1 trillion cut takes place right away rather than being spread out over 10 years. 

Sounds like more of the same. During the 2008 presidential campaign, Obama continually promised to “cut net spending” and make government smaller. The stimulus was promised not to “raise projected deficits beyond a short horizon of a year or at most two.” Yet, now during the fifth year of Obama’s presidency, we are told that we can’t cut spending, that we need even more government “investments.” . . .

Obama's state of the union heavy on Keynesianism

Well, given how well Keynesianism has been working out so far, it was understandable that Obama would keep pushing it further.  From The Hill newspaper:

The economy will remain Topic A, and Obama’s speech is expected to warn of the danger automatic spending cuts known as the sequester pose to a slowly improving economy. At the same time, Obama will give due weight to other priorities such as immigration and gun control. . . .

A note for me to remember some dumb economics: Stiglitz on inequality

This claim is based on the crazy argument that people don't spend all of their money.  It is almost as if wealthy people are digging a hole in their back yard and burying the money there.  But wealthy people's money doesn't just disappear.  If they put it in the bank, it is loaned out to others.

“What sustains the American economy is consumption, and the people at the top spend on consumption a smaller fraction than those at the bottom. In fact, those at the bottom have to — to get by — spend about basically 100 percent. So when you move money from the bottom and the middle to the top, overall spending gets constrained, and that weakens the economy,” economist Joseph Stiglitz said on MSNBC's "Up with Chris Hayes" . . .

Keynesian claims about Sequestration

Will spending cuts really government spending cuts hurt the economy?  Yet, despite what Keynesians believe the evidence doesn't support that.  From The Hill newspaper:

A sharp decline in defense spending led the U.S. economy to contract at the end of 2012 by 0.1 percent, but it did little to change the fight over further cuts to the Pentagon set to begin in March. 

The White House used the report to lash out at Republicans, arguing the GOP should agree to a deficit-reduction package that includes spending cuts and tax hikes to replace the $85 billion in scheduled cuts known as sequestration. 

“Our economy is facing a major headwinds, and that's Republicans in Congress,” White House press secretary Jay Carney said. “It can't be 'we'll let sequester kick in because we insist tax loopholes remain in place for corporate jet-owners.' ” 

Republicans counter that they agreed to raise tax rates on households with annual income above $450,000 in a deal earlier this month and that they will not raise taxes again. Instead, they say President Obama must accept spending cuts. . . . .

Germany is not taking Paul Krugman's attacks seriously

I have previously noted how far off Krugman's predictions have been about Germany and other countries.  So is it surprising that German's haven't really taken his critiques seriously?  From the New Republic:

And yet, it’s equally apparent that Germans aren’t cowed by his vitriol—nor are they much persuaded by what he has to say. Merkel is still enjoying record popularity and Steinbrueck recently received a birthday greeting from an ordinary German citizen thanking him for sticking up to the New York Times columnist. When Krugman suggested the international community impose “sanctions” against Germany for its monetary policies, a number of notable German economists publicly, and sternly, pushed back. When Krugman accused Wolfgang Schaueble, the country's current finance minister, of “just making stuff up” when discussing the Euro crisis, Schaueble told the press that he had “no use for” economists with Nobel prizes. And when Krugman received a major award from one of Germany’s most prestigious economic research centers in 2010, the organizers made sure to pair his remarks on the European crisis with a speech by Schaeuble that undermined everything he had to say. . . .

Does Krugman understand that there is both Supply and Demand?

Low interest rates can be due to two reasons.  Either people don't find the US an attractive place to invest (demand has shifted down) and/or the supply of funds is increasing.

Far from fleeing U.S. debt, investors have continued to pile in, driving interest rates to historical lows. . . .

So Krugman's solution?  With massive debt, the solution is yet more debt.

Beyond that, suddenly the clear and present danger to the American economy isn’t that we’ll fail to reduce the deficit enough; it is, instead, that we’ll reduce the deficit too much. For that’s what the “fiscal cliff” — better described as the austerity bomb — is all about: the tax hikes and spending cuts scheduled to kick in at the end of this year are precisely not what we want to see happen in a still-depressed economy. . . .

Does anyone notice what a failure these policies have been for the countries that have adopted them (see here)?

UPDATE: Michael Tanner has some notes on Krugman here.

Obama adm keeps pushing the false claim about the loss in state and local government jobs

Secretary Of Labor Hilda Solis on PBS’s “To The Contrary,” 8/31/12: “The area where we haven't been able to put back jobs quickly is in local government and state government and that has more to do with the fiscal outlook of the states. But I would say that the recovery is working.”

Democrats are continually pushing the notion the problem is too little spending on state and local government jobs -- state and local is down 2% and private is down 3.7%.  Possibly the Democrats could make up a little of the drop in state and local government jobs by taking some of the jobs from the  11.3% increase in Federal government employment.

The data shown in the figure is from the BLS.gov establishment survey.  Some other info is available here.

Poland has adopted austerity with a vengeance, but its economy has done very well

Sherwin and I had a piece a little while ago that showed how well Poland has done, but it is nice to see others recognizing that also.  The Economist magazine just published this: "The economy is slowing but it is still the fastest-growing among big EU countries."

NY Times' David Leonhardt confuses the parts for the whole

David Leonhardt at the New York Times has this ringing defense of Keynesianism.  The problem is that just because moving a lot of money from the rest of the country to Washington DC doesn't mean that the country as a whole is being helped.  The states that are losing money are hurt.  DC is helped.  But that doesn't mean that all this movement of money makes the economy as a whole better.

Some of the local prosperity [in DC], of course, is not worth celebrating. It stems from what economists call rent-seeking — tapping into the economic value created by someone else, rather than creating new value. 

In Washington’s case, the rent-seeking takes the form of capturing even a small portion of the financial gusher flowing to and from the federal government. The lobbyists, consultants and defense contractors building some of those mansions in McLean and Potomac are doing so, in effect, with government dollars from military or Medicare or other budgets. As most of the country continues to struggle through an agonizingly slow recovery, Washington uncomfortably calls to mind the rapacious Capitol in Suzanne Collins’s “Hunger Games” series. 

Still, Washington’s good times are not all — or even mostly — about rent-seeking. The region has two legitimate economic lessons to offer the rest of the country. 

The narrower of the two is a reminder that, for all its unpopularity, a Keynesian response to an economic crisis really can make a difference. The Washington area’s households and businesses have cut back in recent years, too, but their frugality has been offset by steady government spending. If anything, government has helped fill the void, with the District of Columbia’s having received more stimulus dollars per capita than any state, according to an analysis by ProPublica. 

In the worldwide experiment on fiscal policy that’s been run during the past few years, Washington has joined China firmly in the stimulus camp. Much of the rest of the United States, where almost two million state and local government jobs have disappeared, looks more like austerity-hobbled Europe. 

Washington’s second lesson is arguably even more important. If you wanted to imagine what the economy might look like if the country were much better educated, you can look at Washington. . . .

Leonhardt points to DC having the lowest June unemployment rate of the 20 largest metro areas (here is the BLS data for July).  On housing prices, the DC area went from falling more than the national average to improving relative to it (see here for graphics from NY Times).

To Obama the solution is always more government spending

Obama's interview in Black Enterprise magazine.

Most economists will tell you that there is no doubt the economy has gotten stronger, but we are digging ourselves out a deep hole. There are a lot more things we could be doing. To get them done, we need cooperation of Congress. We got the payroll tax portion of [my American Jobs Act] done, but what we didn’t get done is the assistance I was proposing to the states to help them hire back teachers, firefighters, and first responders, because one of the weakest parts of this recovery has been state and local government hiring. 

Given the weaknesses of the construction industry, the American Jobs Act proposed that we rebuild schools, roads, bridges, airport, and ports. That would provide small businesses with opportunities as contractors and vendors in this rebuilding process. Again, Congress needs to act. . . .

Can Obama make up his mind on the value of "shovel-ready" job spending?

Remember just over a year ago when Obama confessed that "'Shovel-ready' was not as shovel-ready as we expected."  Well that was then. Now Obama is back on the old claim: "If we’re investing in roads and bridges, putting some hard hats back to work, getting our steel workers back to work, they got some more money to spend. Maybe they buy that new computer. Maybe they decide to take a little vacation. And all that money circulates in the economy and it makes us all grow."  Of course, there are other problems such as where the money has to come from.

Op-ed at RealClearMarkets: Austerity Works: It's Time to Give It a Try

This piece is with my son Sherwin. The graphs are pretty powerful. The piece starts this way:

Austerity or growth, is that the choice facing Americans and others around the world?

The debate never seems to abate. European Union finance ministers last week gave Spain permission to delay cutting some government spending and reducing its deficit, though many such as The Economist magazine fear that even the cuts that will be made go too far. A similar decision may soon have to be made for Greece. Even though the pro-bailout parties won the June Parliamentary election, they too are asking for a two-year delay in cutting spending and reducing their budget deficit.

The Obama administration has put increasing pressure on German Chancellor Angela Merkel to ease up on Germany's austerity prescription. President Obama continually touts more government spending as the cure, and derided Republican "let's cut more" spending strategy as the cause of Europe's economic problems.

Last month, German Finance Minister Wolfgang Schäuble was having none of it, telling Obama to fix the U.S. deficit before giving Europe advice: "Herr Obama should above all deal with the reduction of the American deficit. That is higher than that in the euro zone." . . .

The Debate over Spain's Austerity Program heats up

Reuters reports:

Recession-plagued Spain unveiled new austerity measures on Wednesday designed to slash 65 billion euros from the public deficit by 2014 . . .
The conservative leader announced a 3-point hike in the main rate of Value Added Tax on goods and services to 21 percent and cuts in unemployment benefits and civil service pay and perks in a speech interrupted by jeers and boos from the opposition. . . .
Madrid won softer deficit targets from its European Union partners this week and also negotiated rescue aid of up to 100 billion euros ($123 billion) from the euro zone's bailout fund for its crippled banking sector. . . .

The Economist magazine talks about the kooky claimed "Multiplier" effect from government spending. I am not thrilled by the increase in marginal taxes, but that isn't the concern of the Economist.

More important, this is incredibly counterproductive. The Spanish economy is imploding. Without the ability to offset these cuts with a very aggressive monetary policy, the multiplier on this austerity will be substantial. There can't be much confidence that this austerity plan will generate any fiscal improvement given the likely cyclical hit to revenues and the resulting impact on banks, which could well feed back into greater sovereign obligations. It's more economic pain for no fiscal gain. . . .

There are two problems with this claim. 1) It ignores that the money has to come from someplace. 2) The multiplier implies that government spends all of times money, but private individuals don't. Yet, as I have tried to explain many times before, people essentially spend all of their money. If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money. To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard. David Malpass says that this is a false austerity, that they are really just moving money to other areas of spending.

To Obama government money comes out of thin air

Obama on June 1, 2012 in Golden Valley, MN: I assume there are some folks here who could use $3,000 a year. Let's get that done right now. That means they're going to be -- you know, if you have $3,000 a year extra, that helps you pay down your credit cards, that helps you go out and buy some things that your family needs, which is good for business. Maybe somebody will be replacing some thingamajig for their furnace. They've been putting that off. But if they got that extra money, they might just go out there and buy that thing, right? . . .

Obama fails to understand that the money has to come from someplace. If government takes the money from some people and gives to others, why will that increase total spending.  If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money.  To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard. 

Bruce Barlett's Keynesian claims in the New York Times

Bruce Bartlett wrote this in the New York Times.

Republicans have been warning about the loss of jobs from cuts in military spending for some time. At a hearing last October, the House Armed Services Committee chairman,Howard P. McKeon, a California Republican, said, “Defense cuts are certainly a path to job loss.” The committee’s blog often highlights the loss of jobs from military spending cuts. . . .
Historically, economists have believed that government consumption and investment spending has the same impact on jobs and growth whether it’s for military or domestic purposes. As Paul Samuelson, the Massachusetts Institute of Technology economist, put it in his best-selling economics text: “There is nothing special about G spending on jet bomber and intercontinental missiles that leads to a larger multiplier support of the economy than would other kinds of G expenditure.” . . . .
World War II ended the Great Depression. . . . .
Indeed, some economists have argued that military spending has in fact been the primary vehicle through which Keynesian economics has operated during the postwar era. The reason is that conservatives who routinely denounce government always give a pass to military spending. . . .
It is clear in today’s world that national defense does not consist only of bombs and rockets. Adequate public infrastructure, a well-trained labor force that can produce soldiers capable of operating high-tech weaponry, and a strong economy are as important as the traditional tools of war, or more so.

This strong Keynesian claim by him is very disappointing.  I wrote this on Bruce's Facebook page.

Bruce, what is all this Keynesianism that you are pushing these days?  Do you really believe that government spending increases wealth?  Don't you acknowledge that the money has to come from someplace else?  Why does moving money from where you and I would have spent it to where the government would spend it increases wealth?  Are you going to make some Keynesian claim about different marginal propensity to consume?  Don't you recognize that all the money people have is essentially spent?  If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money.  To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard.  I thought that the writing here is a bit overstated. "Republicans have been warning . . . Historically, economists have believed . . . ."  Have you heard of Milton Friedman?  All Republicans?  Why such categorical statements?

Government Deficits and GDP

 The OECD data is available here.  The relationship is still statistically significant even when Ireland and Iceland are removed.