April 2010 Archives
(First posted on this date in 2005)
It's April 15. Have you filed your taxes yet?
When I was in college, the local Dairy Queen ice cream stand would give away free chocolate sundaes from 10pm to midnight on April 15. You see, it was just a couple blocks from the post office (and the college). But the event became a college tradition (even though none of us actually waited until the 15th to file our taxes).
The line was longer at the Dairy Queen than at the post office. Much longer. And much happier!
I hope they still do it. If you're in Moorhead, Minnesota tonight, have a sundae for me.
That's right, don't take my word for it. No less than Nobel Laureate Joseph
Stiglitz--hardly my ideological compatriot, but an economist I certainly do
respect--wrote in his latest book Freefall:
The cash-for-clunkers program also exemplifies poorly targeted spending--there were ways of spending the money that would have stimulated the economy more in the short run and helped the economy to restructure in the ways that were needed for the long run (p. 70).Which is what I've been saying since August. Thanks for having my back on this Prof. Stiglitz.
In a comment to this post, spencer writes:
1. tout its great success in helping the recovery and give it way more credit than it deserves because it's something tangible the voters can latch onto? (Remember, the program accounted for about two weeks of pre-recession sales and moved those sales forward at most a few months. Its effect has probably now been all but played out and auto sales continue to lag.)
or ...
2. will their silence show that they realize it didn't do much?
Or will they...
3. say that it saved a few thousand workers from a temporary layoff at a cost of $3 billion and a non-trivial amount of destroyed capital?
Politicians love to look like they are saving jobs. And certainly saving jobs is a worthy goal. But what politicians never learn is that the politically easy ways to save jobs are seldom the most efficient. CARS was an easy to explain, easy to understand policy that had obvious political advantages. As I pointed out at the time, this crowded out discussion of better policies. That's what's so frustrating. Remember, I'm not saying that the government should have done nothing. I'm saying (as I said then) that they could have done better. Big difference.
If the leaders from both parties would stop acting like politicians and act more like statesmen we would have fewer things like this to make me frustrated.
What you are ignoring is that the objective of cash for clunkers was to eliminate the inventory overhang at the dealers so that firms would resume auto production.
You are evaluating the program on a completely different basis than it was designed to achieve.
It is like saying the doctor set my broken arm so it would heal properly but he failed because he did not make me look like a movie star.
And yet, the excitement over the program was, as you will recall, pretty intense, was it not? It was something tangible for people to hold onto, yes. There may have been some "animal spirits" effect on consumer confidence. Politically, I think the administration got a lot more invested in the whole idea than spencer is admitting.
There is a way to test this going forward, of course. Look at what the politicians say about cash-for-clunkers in the fall campaign.
Will they...1. tout its great success in helping the recovery and give it way more credit than it deserves because it's something tangible the voters can latch onto? (Remember, the program accounted for about two weeks of pre-recession sales and moved those sales forward at most a few months. Its effect has probably now been all but played out and auto sales continue to lag.)
or ...
2. will their silence show that they realize it didn't do much?
Or will they...
3. say that it saved a few thousand workers from a temporary layoff at a cost of $3 billion and a non-trivial amount of destroyed capital?
Politicians love to look like they are saving jobs. And certainly saving jobs is a worthy goal. But what politicians never learn is that the politically easy ways to save jobs are seldom the most efficient. CARS was an easy to explain, easy to understand policy that had obvious political advantages. As I pointed out at the time, this crowded out discussion of better policies. That's what's so frustrating. Remember, I'm not saying that the government should have done nothing. I'm saying (as I said then) that they could have done better. Big difference.
If the leaders from both parties would stop acting like politicians and act more like statesmen we would have fewer things like this to make me frustrated.
Earlier this month, the first ocean-going vessel of the season arrived
at the Duluth, MN harbor.
The ship was built in China...
sails under the flag of Cyprus...
is operated by a Canadian company...
has a Polish captain...
crew members from the Philippines...
will carry grain from the US (most of it from North Dakota)...
to be made into pasta in Italy.
The name of the ship is the Federal Elbe. A little Internet research turned up additional information. It left Italy on March 16, arrived in Duluth on April 7, left about a day later, and is now east of Montreal. It is expected to reach Italy at the end of the month carrying the harvest of about 26,000 acres of durum wheat... that's the harvest of slightly more than a whole township's worth of land (40 square miles).
As a side note, if you ever get a chance to tour (or just observe from a distance) a major port facility of any kind, do it. Few things showcase economics so clearly.
UPDATE: In quoting this post, Tim Schilling advises that it looks like you have to pay for the link. I was surprised as I didn't have to pay, but then realized why. That newspaper is owned by Forum Communications, which has the rather odd policy of making an article freely available for one week and then charging you $2.95 for it after that if you're not a subscriber. So, my apologies that the link is no longer free, but you get the idea from what I quote.
The ship was built in China...
sails under the flag of Cyprus...
is operated by a Canadian company...
has a Polish captain...
crew members from the Philippines...
will carry grain from the US (most of it from North Dakota)...
to be made into pasta in Italy.
The name of the ship is the Federal Elbe. A little Internet research turned up additional information. It left Italy on March 16, arrived in Duluth on April 7, left about a day later, and is now east of Montreal. It is expected to reach Italy at the end of the month carrying the harvest of about 26,000 acres of durum wheat... that's the harvest of slightly more than a whole township's worth of land (40 square miles).
As a side note, if you ever get a chance to tour (or just observe from a distance) a major port facility of any kind, do it. Few things showcase economics so clearly.
UPDATE: In quoting this post, Tim Schilling advises that it looks like you have to pay for the link. I was surprised as I didn't have to pay, but then realized why. That newspaper is owned by Forum Communications, which has the rather odd policy of making an article freely available for one week and then charging you $2.95 for it after that if you're not a subscriber. So, my apologies that the link is no longer free, but you get the idea from what I quote.
Brad DeLong finds a post on the White House website that makes him believe.
Looks good, doesn't it? Kind of makes me want to believe too. But something's fishy here. As I tell my students, always be conscious of the scale of the chart. And the corollary, always be conscious of the time period chosen.
Thanks to the St. Louis Fed (FRED database), I had a chart with a bit more historical context on my screen in about 30 seconds. I then merged the Edmunds data from the White House chart and produced this:
Two things emerge which are worth pointing out. The first is that the difference between the forecast and the counterfactual is extremely small. Repeat after me, forecasts without confidence intervals are not very useful. The press release from Edmunds.com back in October doesn't report a confidence interval. My take is as follows. Any reasonable confidence interval would have mostly likely encompassed the counterfactual. But since only one side of the confidence interval really mattered to them, they were essentially gambling that the actual number would come in at the lower end of the interval and they would look smart without having to reveal how much guesswork was really involved. Oops!
The other feature of the chart is something that we've known for some time. Namely, that the spike due to Cash for Clunkers did not even make a dent in reversing the cumulative deficit in auto sales that had built up for the last year-and-a-half.
But only when you put those two observations together do you realize just how silly it is for either "side" to claim "victory" in this argument. Look at the chart (either one). Project out the counterfactual and the forecast to continue out on the same trajectory for a few more months. Guess what, the actual data bounce above and below both. That's not too surprising, is it? Auto sales tend to do that. They are quite volatile. This exercise really doesn't tell us much at all about whether the program "succeeded" or "failed." That judgment rests on your definition of "succeeded" and "failed."
Edmunds and others (myself included) argued that the program would simply shift sales from the future. People who might have purchased in the next few months would purchase during the program and this would decrease sales in the months that followed. I still think this is true to a certain extent--and not completely undesirable either. However, because the time horizon over which this will take place is not something that we can know with any certainty, any forecast is going to be imprecise.
Furthermore, the auto sales are very heavily dependent on the state of the economy as we recover. Construction of the counterfactual needs to acknowledge this, and would need to be updated periodically to reflect how the recovery is progressing. Maybe the counterfactual was overly pessimistic. What if the economy turns up in the second half of this year and autos continue to lag? There's a lot more going on here than these charts show.
Let's revisit some of my own favorite statements about Cash for Clunkers and see if they still ring true.
On August 9, I said:
The next day, I said:
And two days after that:
Indeed. And so in closing, on a scale of 1 to 10 with 1 being "causing great damage and remembered in the annals of policy blunders forever" and 10 being "give this man a Nobel prize," I would give CARS a solid 5. Incidentally, this is the same rating that I would give to spitting into the wind or pouring a glass of water into the ocean. All of which reminds me of another great policy debate in which I said:
That will continue to be my rallying cry.
Wow! Cash for Clunkers Worked!! Graph of the Day for April 7, 2010: That surprises me. But Christy Romer and Chris Carroll have a graph:And here is that graph...
Looks good, doesn't it? Kind of makes me want to believe too. But something's fishy here. As I tell my students, always be conscious of the scale of the chart. And the corollary, always be conscious of the time period chosen.
Thanks to the St. Louis Fed (FRED database), I had a chart with a bit more historical context on my screen in about 30 seconds. I then merged the Edmunds data from the White House chart and produced this:
Two things emerge which are worth pointing out. The first is that the difference between the forecast and the counterfactual is extremely small. Repeat after me, forecasts without confidence intervals are not very useful. The press release from Edmunds.com back in October doesn't report a confidence interval. My take is as follows. Any reasonable confidence interval would have mostly likely encompassed the counterfactual. But since only one side of the confidence interval really mattered to them, they were essentially gambling that the actual number would come in at the lower end of the interval and they would look smart without having to reveal how much guesswork was really involved. Oops!
The other feature of the chart is something that we've known for some time. Namely, that the spike due to Cash for Clunkers did not even make a dent in reversing the cumulative deficit in auto sales that had built up for the last year-and-a-half.
But only when you put those two observations together do you realize just how silly it is for either "side" to claim "victory" in this argument. Look at the chart (either one). Project out the counterfactual and the forecast to continue out on the same trajectory for a few more months. Guess what, the actual data bounce above and below both. That's not too surprising, is it? Auto sales tend to do that. They are quite volatile. This exercise really doesn't tell us much at all about whether the program "succeeded" or "failed." That judgment rests on your definition of "succeeded" and "failed."
Edmunds and others (myself included) argued that the program would simply shift sales from the future. People who might have purchased in the next few months would purchase during the program and this would decrease sales in the months that followed. I still think this is true to a certain extent--and not completely undesirable either. However, because the time horizon over which this will take place is not something that we can know with any certainty, any forecast is going to be imprecise.
Furthermore, the auto sales are very heavily dependent on the state of the economy as we recover. Construction of the counterfactual needs to acknowledge this, and would need to be updated periodically to reflect how the recovery is progressing. Maybe the counterfactual was overly pessimistic. What if the economy turns up in the second half of this year and autos continue to lag? There's a lot more going on here than these charts show.
Let's revisit some of my own favorite statements about Cash for Clunkers and see if they still ring true.
On August 9, I said:
As policies go, it's probably better than some ways to spend money and worse than others. But to those who think it is undeniably a net benefit to the economy, then I would ask, why stop at cars? Why not distort the prices of some other things that could be replaced with more energy efficient versions and let the government pick up part of the tab? Why not tear down rodent and asbestos infested old inner-city school buildings and replace them with safer high-tech environmentally sound buildings? Sure it would cost more upfront, but the energy savings and the environmental impact would be enormous. And think of the jobs!I really like that last part. I've got to use that more often.
The next day, I said:
Basically I get really irritated when any politician from any party tries to score points with a policy that is bound to be popular for obvious reasons even though it produces little or no real positive effect. It irritates me that so many people can't see through the smoke and mirrors. It irritates me that politically popular but nearly pointless policies crowd out other policies that are less politically popular but could produce far better results.
And two days after that:
And that means that any meaningful increase in production going forward would have happened anyway. The increased sales from CARS could not possibly explain even a return of production to the levels of a year or two ago. The sales declines have been too large, and the CARS program too small.
But I have to give the politicians credit for setting up the illusion that they made the recovery happen. Sales (and production) will turn up eventually. They have nowhere to go but up. And when they do, CARS will get the credit, just you watch.
Indeed. And so in closing, on a scale of 1 to 10 with 1 being "causing great damage and remembered in the annals of policy blunders forever" and 10 being "give this man a Nobel prize," I would give CARS a solid 5. Incidentally, this is the same rating that I would give to spitting into the wind or pouring a glass of water into the ocean. All of which reminds me of another great policy debate in which I said:
My criteria for good public policy is that it be well out of the neighborhood of "pointless."
That will continue to be my rallying cry.
