Some things just lend themselves to smart ass responses:
Megan McCardle has pointed out that the ‘successful’ cash for clunkers program has resulted in a rather nasty hangover for automakers. Her argument is that:
Cash for Clunkers moved a bunch of auto sales forward, causing people who thought they might replace their car in the next year or two to rush into the showrooms.
This is a true but incomplete explanation. The Cash for Clunkers sales likely came from several sources:
Sales resulting from explanations 1 and 2 were simply a direct wealth transfer from future taxpayers to car buyers. There wasn’t any real impact on the number of cars sold, just the timing, so the car companies aren’t really better off. Any stimulative effect on economy would be the result of car buyers choosing to spend rather than save their subsidy windfall.
By contrast, sales resulting from explanation 3 were rather more insidious. In addition, to the wealth transfer from future taxpayers to car buyers these sales also include a wealth transfer from non-car companies to their automotive brethren. In other words, politically favored companies got some increased sales at the expense of those with less political pull.
Overall, these sales don’t represent any increase in aggregate demand. Again, any stimulative effect on economy would be the result of car buyers choosing to spend rather than save their subsidy windfall.
The subset of sales driven by explanation 4 was the most economically useful. Additional cars sold without an offsetting loss of sales in other parts of the economy actually represent an increase in aggregate demand.
So the utility of the program as a Keynesian stimulus depends on the proportion of sales driven by explanation 4 and the extent to which the windfalls enjoyed by car buyers driven by explanations 1, 2 and 3 were spent rather than saved. It is possible, even likely, that the effective stimulus was substantially less than the $3 billion plus the program cost.
Taking a broader view, this program suffers from the same problem that dogs most stimulus initiatives. A small fraction of the economy will experience direct benefits. The remainder of the economy will simply see future costs in the form of higher taxes, interest rates and inflation, and a more politicized economy. For this reason, stimulus efforts that aren’t linked to future productivity improvements are, at best, a questionable idea.
In the high profile lobbying contest to win hosting rights to the 2016 Olympics Brazil’s President Luiz Inacio Lula da Silva has completely shellacked President Obama.
In the grand scheme of things the location of the 2016 Olympics isn’t of great importance. In fact, Chicago is probably better off for having lost. However, Obama’s involvement in Chicago’s bid displays in microcosm one of the key problems with the Obama presidency.
Having stood aloof from the selection process, the president swooped in at the last minute, made a pretty speech and expected to swing the vote.
By contrast, the rather more effective President Lula da Silva was far more engaged. He apparently understood that the result would be decided well before the TV cameras were turned on. Lula was so confident he had the votes that he supposedly pressed the Obamas to go to Copenhagen.
President Obama’s approach to the Olympic selection process mirrors his approach to the far more important issues being decided on Capitol Hill. Stand aloof from the messy politics and trust that golden voice to swing the necessary votes.
It appears that we have an applause line President. He looks great on TV and gives a great speech. These are fine qualities in a politician, but fall well short of what is require to make an effective leader. When it comes to shaping legislation and winning diplomatic fights he is doing about as well as you would expect for a guy with a whole half term of Senate experience.
From the Stand-up Economist:
If I had to pick an animal to describe the US economy right now I’d have to go with the hamster. But like a really tired hamster that has been running around its cage for like seven years. Right now it’s exhausted.
As a micro-economist I would say that the hamster needs some rest. Macro-economists, of course, look at the hamster and think that it needs some methamphetamines.
Now, I’m sure that they are right. Over the past month I’ve learned that the three most terrifying words in the English language are, “macro-economists agree that”.
I’m sure they are right about the hamster needing methamphetamines. But all I’m saying is that in two years that is going to be one ugly hamster.
Bill Clinton apparently believes that the “vast right-wing conspiracy” that undermined his presidency (Did Republicans smuggle buxom interns into the White house?) is diminished but not dead.
This vast right-wing conspiracy theory is just as dopey as the vast left-wing conspiracy theory that remains very popular on Fox News.
Isn’t it about time that America’s leaders came to to accept that some people will inevitably oppose their policies, dislike them personally, or find some other reason to make their lives as difficult as possible? It is a mystery to me why American politicians feel that they ought to be handled with kid gloves.
In the UK (also New Zealand, Australia, Canada and India) the Prime Minister is required to front up in parliament on a weekly basis and answer the best verbal assault that the opposition parties can muster. This forces the leaders of these countries to develop nice thick skins. It also removes any illusions they might have about entitlement to deferential treatment.
By contrast, American leaders, who generally avoid unscripted situations whenever possible, are complete wusses. Perhaps weekly ‘President’s Questions’ in Congress might toughen up the denizens of the White House so they don’t feel the need to cry like little girls when people don’t treat them nice.
It appears that some liberal Democrats are so incensed by President Obama’s unreasonably centrist tendencies and willingness to compromise with Republicans that there is talk of Obama facing a primary challenge before the 2012 election.
It’s no wonder that so many in the liberal base are falling out of love with the president. So much so that there is even faint talk of an insurrection if Obama doesn’t straighten up and fly left. Recently, during an appearance on a cable TV show, Washington Post columnist Gene Robinson discussed the political costs for Obama if the public option is dropped from the health care bill. They included the possibility of a primary challenge in the 2012 presidential election. Said Robinson, “You don’t want to see the progressive caucus in a foul mood.”
A interesting question is whether the Obama re-election team would consider a primary challenge from the left a bad thing. If you were trying to get a relatively liberal president re-elected, a wild eyed progressive challenger playing up how crazily centrist and bipartisan your guy was might actually be an asset.
The only scenario in which this might be negative is if the president is so weak in 2012 that a primary challenger actually has a chance of winning the nomination. In that case President Obama might be forced to publicly tack left in order to win the primary, which might be the thing that costs him the general election.
Brad DeLong has written a pretty interesting piece on his reminiscences of the health care battles of the mid nineties. As Mr DeLong tells it, there was never any hope of getting a Democratic plan through the Senate. Key Democratic Senators weren’t going to let a “hick from Arkansas” push through health reform. Even a reform they might otherwise support (charming).
All hope actually rested on an eventual compromise coauthored with Bob Dole. Apparently, this plan was sabotaged by “Gingrich and company”, who allegedly made opposition to any Clinton health plan a condition of supporting Mr Dole’s presidential aspirations.
The moral according to Mr DeLong is:
I have drawn what I think are appropriate lessons from it. First, Democratic senators do themselves no good either in the next world or in this when they block sensible initiatives from Democratic presidents. (But what lessons are Democrats Landrieu, Nelson, and Lincoln drawing?) Second, Republican senators do themselves no good either in this world or in the next when they block sensible initiatives from Democratic presidents. (But what lessons are Republicans Grassley, Voinovich, and Hatch drawing?)
I don’t know how accurate Mr DeLong’s recollections are, however his conclusions are a little iffy.
On the subject of Democratic Senators Mr DeLong may have at least half a point. All elected Democrat’s have a vested interest in making the President appear successful. Perceptions of how the President is doing will inevitably hang over every race in the coming mid-term elections. On the other hand, getting the President’s bills passed is hardly a guarantee of electoral success. The Democrats may well have lost control of Congress in 1994 even if they had passed health care reform.
Regardless, the situation in 2010 will be very different from 1994. The 1994 election was a decisive swing against a decades long Democratic majority that resulted in Republicans picking up many marginal or even liberal leaning seats. The 2010 election will probably be more like 1996, 1998 and 2000 when the Democrats picked up seats as the Republican tide ebbed.
This time around disgust with the Bush administration resulted in a Democratic flood in 2008. With the focus of anti-Republican feeling long gone, this tide too will begin ebb. The marginal Democrats who survive 2010 may well be the ones who recognize that the President is rather more liberal than their constituents and vote accordingly.
On the subject of Republican Senators, my guess is that they are drawing conclusions exactly opposite to what Mr DeLong would prefer. By Mr DeLong’s own admission, the real political winners in the health care struggles of the early nineties were the Republicans who led the charge against ‘Hillarycare’.
This gem is from an opinion piece published on CNN.com by a former Republican staffer turned lobbyist. The subject is what the Obama administration can learn from the way Republicans were able to pass the Medicare prescription drug benefit:
Under the leadership of Speaker of the House J. Dennis Hastert, a veteran of many health care battles, and Senate Majority Leader Bill Frist, himself a physician, Republicans were able to get critical interest groups, including the usually left-leaning AARP and well-funded trade association PhRma, to join forces in support of the reform effort.
Yes, ladies and gentlemen, by truly heroic efforts Mr Hastert and Mr Frist managed to get the AARP to support a massive new benefit for seniors and, unbelievably, the pharmaceutical industry to support massive government subsidies for prescription drugs. One wonders how on earth they were able to pull off such a herculean feat.
Of course, the President has in fact already lined up support from both the AARP and PhRma. However, support from AARP members remains somewhat equivocal since funding for the plan relies on several hundred billion dollars in efficiencies (cuts) to Medicare. If only he would follow the Republican example and drop even the pretense of making the plan fiscally sustainable perhaps all would be well.
Mark Thoma has published a detailed rebuttal of the idea that the the Waxman-Markey (carbon permits) bill is a massive corporate giveaway. Mr Thoma’s reasoning is that:
The split over the entire period from 2012 to 2050 is 53.4% for consumers and public purposes, and 20.1% for private industry.
Assuming you believe Mr Thoma’s math, Waxman-Markey is actually a massive giveaway to consumers, special interests and private industry. This is not exactly a compelling defense.
The problem with the bill is not the manner in which the giveaways are divided. It’s the existence of giveaways.
The whole point of a cap and trade system is to price carbon emissions and thus incorporate the cost of CO2 emissions into the price of everything those emissions produce. Price signals can then drive innovation to minimize the carbon use and ensure that maximum economic benefit comes from the level of emission we believe is acceptable. If carbon permits are given away, regardless of who exactly the giveaways are intended to benefit, this price mechanism is undermined.
The fundamental problem here is that American public would apparently like to believe that the transition to a low carbon economy can somehow be achieved without carbon based energy becoming significantly more expensive. Unfortunately, there is no free lunch to be had here. A major restructuring of the US economy isn’t going to occur unless the financial incentives surrounding energy use are significantly realigned.
What Congress should have done is create a fully auctioned cap and trade system, then used the resulting revenue to lower and simplify income taxes. This would have shifted the burden of taxation from a earned income (generally considered a social positive) to a negative externality without increasing the overall tax burden on the economy. Energy would get more expensive while labor gets cheaper. It would also likely have created a broad base of political support for cap and trade.
Tragically, this is not what happened. The administration, somewhat naively, expected their fully auctioned program to become a new and fruitful source of revenue to fund its ambitious spending plans. When this proved politically unfeasible, the congressional leadership was allowed to use carbon credits giveaways to buy off opposition to the bill. In its desperation to achieve legislative success, congress has not flinched at undermining the bill’s original objectives. The revised bill is more politically palatable in that it apparently won’t really affect energy costs. Of course, if energy costs aren’t affected there is very little chance the thing will actually work.
It is revealing that Congress choose to lard the bill with energy use regulations. If the bill were going to effectively price CO2 emissions the regulations would be redundant. Market forces would drive change without the need for mandates from Washington. Clearly, even Congress doesn’t really believe that the cap and trade portion of the bill will drive change.
To be fair, the successful SO2 cap and trade scheme, on which the bill is based, gave away rather than auctioned SO2 emission rights. The prospect of selling surplus SO2 credits, or the threat of having to buy extra credits, encouraged enough companies to find ways to limit SO2 output. So Waxman-Markey may not be completely hopeless.
However, SO2 was a relatively minor problem that could be minimized without a wholesale restructuring of the US economy. It is extremely difficult to believe that a similarly low key approach will yield the changes required to move us towards a low carbon economy. For those of us who believe in harnessing the power of markets to solve environmental issues Waxman-Markey is a profound disappointment.
Today’s 30-year treasury bond auction apparently went smoothly, with prices even firming slightly in subsequent trading. I confess that I don’t fully understand why there is such strong investor demand for long term (and thus inflation sensitive) treasury debt. Some of the possible explanations are:
The third explanation arises from an old, informal rule of banking, “If you owe a $100 the bank owns you. If you owe a $100m you own the bank”. My thinking here is that the United States has become a debtor that is too important to be denied credit.
Due to years of conscientious currency manipulation China (and other trade surplus nations) have accumulated enormous dollar assets. Protecting the value of these assets is not an insignificant concern. This means that US interest rates cannot be allowed to go up in any situation where the rise would not be accompanied by an offsetting rise in the dollar.
The 30 year bond auction was just such a situation. A poor auction would have resulted in higher long term interest rates. Normally higher rates would put upward pressure on the dollar. However, right now, a bad auction would imply that the government is going to have difficulty funding the deficit, increasing the likelihood that the deficit will be monetized, which would be bad for the dollar.
So a bad auction would likely mean US interest rates up and the US dollar down, which is the worst possible combination if you happen to be a foreign power that owns a lot of dollar assets.
If you were such a power my guess is that ensuring a strong auction, by say bidding for a bunch of bonds, would start to look like a good idea. Interestingly, indirect bidding (i.e. by foreign central banks) during the Treasury auction was described as “strong”.
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