‘Politicians’ Top 10 Promises Gone Wrong’
That’s the title of an upcoming FOX News Channel feature program with John Stossel, in which Cato Executive Vice President David Boaz and Director of Health Policy Studies Michael F. Cannon weigh in on some of the hidden, unforeseen, and unintended consequences of the attempts to deliver on promises our politicians make.
Politicians promised that:
- Cash for Clunkers would save the auto industry.
- Increasing the minimum wage would be good for the working poor.
- Title IX would end gender-based discrimination in college sports.
- Mega-construction projects like stadiums, arenas, and conference centers would create jobs.
- Changing the tax code would save small farmers and the environment.
- Credit card reform would save us from banking fees.
- Reforming the health care system would give us more affordable and more comprehensive care.
- Ethanol would reduce our dependence on foreign oil and save the environment.
- Home ownership for all would be good for America.
And the #1 promise politicians made that went awry?
Tune in to FOX News Channel this Friday, December 17, 2010 at 9:00 p.m. Eastern to find out. Use the #10Promises hashtag on Twitter during the program to follow the conversation.
Kindly note that while John Stossel’s programs normally air on the FOX Business Network, this feature program will appear on the FOX News Channel.
Cash 4 Clunkers Fails Again
In a new study, economists Atif Mian and Amir Sufi find that the government’s “cash for clunkers” program “had no long run effect on auto purchases.”
C4C was supposed to stimulate the struggling automobile industry – and thus the economy – by inducing people to purchase autos today that they might otherwise have purchased in the future. However, whereas the White House’s Council of Economic Advisors claimed that C4C “pulled forward” purchases that would have occurred five years into the future, Mian and Sufi found that it merely pulled forward purchases that would have been made in the next seven months.
From the study:
In the subsequent ten months after the program (September 2009 through June 2010), high clunker cities purchased significantly fewer automobiles than low clunker cities. By the end of March 2010, seven months after the program, the cumulative purchases of high and low clunker cities from July 2009 to March 2010 were almost the same. In other words, the relative impact of the program on high clunker cities was almost completely reversed in just seven months.
Mian and Sufi also looked at whether C4C had a positive effect on other aspects of the economy. The answer is pretty much “no”:
Cities with high CARS exposure show no noticeable difference in economic outcomes from before the program to after the program relative to cities with low CARS exposure. We also examine economic outcomes for cities that have a high number of employees working in the auto industry. There is some evidence that high auto employment share cities had a relative increase in employment after the CARS program, but there is no noticeable effect on either house prices or household defaults. We should caution however that the effect of CARS on employment in the automobile industry is difficult to separate from the federal bailouts of General Motors and Chrysler in early 2009.
As we recently noted, short-term measures implemented by policymakers to “fix” the economy have introduced unwelcome economic distortions. For example, because auto purchasers benefiting from C4C were required to turn in their used cars for destruction, the supply of used cars decreased. The result is that prices of used cars increased, which has hurt low-income families and others struggling through the recession.
Policymakers should stop trying to “fix” economic problems with short-term gimmicks, especially since it was ill-advised government policies that facilitated the present economic downturn. Given that these “fixes” are only driving up already dangerous levels of debt, policymakers should reverse course and pursue policies that would facilitate long-term economic growth such as eliminating burdensome programs and regulations.
Government’s Unwelcome Economic Distortions
A couple of weeks ago, David Boaz discussed the Old Testament story in which the people of Israel ask Samuel for a king to rule over them. God’s instructions to Samuel can be summed up as “tell them to be careful of what you wish for.” David brought up the passage in the context of civil liberties, but the story’s lesson also applies to economic liberties.
Over the past eighty years, the public has become conditioned in times of crisis to turn to their rulers and demand that they “do something.” That the rulers had a hand in the crisis is all too often either unrecognized or it’s a secondary concern. As Robert Higgs demonstrated in his seminal book, Crisis and Leviathan, the rulers will willingly oblige the public and, in the process, come away with more power and control than they had prior to the crisis. Unfortunately, the rulers’ enhanced authority begets more crises in the future.
The latest chapter in this story is the economic downturn. Many of the “seeds” for the recession were planted by government. Regardless, the average citizen reflexively looked toward Washington to quickly fix the economy. The public’s limited patience meshes well with policymakers who are naturally inclined to operate on a short-term horizon (i.e., the next election). Therefore, policymakers responded with quick-fix measures with almost no regard to the long-term consequences.
The long-term economic problems caused by massive deficit spending and mounting debt are the most obvious. But as two stories in the news show, short-term measures implemented by policymakers to “fix” the economy have also introduced unwelcome economic distortions.
First, following the expiration of the federal homebuyer tax credit, home sales have fallen off the cliff. The Christian Science Monitor asks: was the homebuyer tax credit the “scam of the century?” The program was riddled with fraud, some folks who were induced to purchase a house are already underwater or are headed in that direction, and the billions of dollars spent on the program did zilch for the long-term health of the housing market.
Monday Links
- Michael Tanner says the difficult part of passing the health care bill has only just begun: “The bill must now go to a conference committee to resolve significant differences between the House and Senate versions. And history shows that agreement is far from guaranteed.”
- Get ready for Cash for Clunkers…the Home Edition.
- Gene Healy on the new decade: “Yes, it was a rotten 10 years for America. But cheer up: Things aren’t as bad as they seem, and there’s a good chance they’ll get better.”
- Will the market rise or fall? Richard Rahn: “The long-term outlook for the stock market is not good, and here is why. For the past 100 years, there has been an inverse relationship between changes in the size of government and the growth or decline in the stock market.”
- Podcast: “A New Policy Toward Cuba” featuring Rep. Jeff Flake.
Spending Our Way Into More Debt
Huge deficit spending, a supposed stimulus bill, and financial bailouts by the Bush administration failed to stave off a deep recession. President Obama continued his predecessor’s policies with an even bigger stimulus, which helped push the deficit over the unimaginable trillion dollar mark. Prosperity hasn’t returned, but the president is persistent in his interventionist beliefs. In his speech yesterday, he told the country that we must “spend our way out of this recession.”
While a dedicated segment of the intelligentsia continues to believe in simplistic Kindergarten Keynesianism, average Americans are increasingly leery. Businesses and entrepreneurs are hesitant to invest and hire because of the uncertainty surrounding the President’s agenda for higher taxes, higher energy costs, health care mandates, and greater regulation. The economy will eventually recover despite the government’s intervention, but as the debt mounts, today’s profligacy will more likely do long-term damage to the nation’s prosperity.
Some leaders in Congress want a new round of stimulus spending of $150 billion or more. The following are some of the ways that money might be spent from the president’s speech:
- Extend unemployment insurance. When you subsidize something you get more it, so increasing unemployment benefits will push up the unemployment rate, as Alan Reynolds notes.”
- More infrastructure spending. This will lead to misallocation of resources since only markets can allocate resources efficiently. Governments allocate capital on the basis of politics instead of economics.
- “Cash for Caulkers.” This would be like Cash for Clunkers except people would get tax credits to make their homes more energy efficient. Any program modeled off “the dumbest government program ever” should be put back on the shelf.
- More Small Business Administration lending. A little noticed SBA program created by the stimulus bill offered banks an “unprecedented” 100 percent guarantee on loans to small businesses. The program has an anticipated default rate of 60 percent. Small businesses need lower taxes and fewer regulations, not a government program that perpetuates more moral hazard.
- More aid to state and local governments. State and local government should be using the recession to implement reforms that will prevent them from going on another unsustainable spending spree when the economy recovers. Also, we need fewer state and local government employees – not more – as they’re becoming an increasing burden on taxpayers.
The president said his administration was “forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it to others to solve.” Mr. President, nobody has forced you to do anything. You’ve chosen to embrace – and expand upon – the big spending policies that were a hallmark of your predecessor’s administration.
Today’s White House ‘Jobs Summit’
Today’s Politico Arena asks:
The WH Jobs Summit: “A little less conversation? A little more action? ( please)”
My response:
Feds Giveth Jobs & Cars, Then Taketh Away Again
The bad news this morning on the impact of both the federal stimulus and the Cash for Clunkers program should not come as a surprise to anyone who has paid attention to the history of government intervention in the economy.
New data that the jobs created by the stimulus have been overstated by thousands is compelling, but it’s really a secondary issue. The primary issue is that the government cannot “create” anything without hurting something else. To “create” jobs, the government must first extract wealth from the economy via taxation, or raise the money by issuing debt. Regardless of whether the burden is borne by present or future taxpayers, the result is the same: job creation and economic growth are inhibited.
At the same time the government is taking undeserved credit for “creating jobs,” a new analysis of the Cash for Clunkers program by Edmunds.com shows that most cars bought with taxpayer help would have been purchased anyhow. The same analysis finds the post-Clunker car sales would have been higher in the absence of the program, which proves that the program merely altered the timing of auto purchases.
Once again, the government claims to have “created” economic growth, but the reality is that Cash for Clunkers had no positive long-term effect and actually destroyed wealth in the process.
Right now businesses and entrepreneurs are hesitant to make investments or add new workers because they’re worried about what Washington’s interventions could mean for their bottom lines. The potential for higher taxes, health care mandates, and costly climate change legislation are all being cited by businesspeople as reasons why further investment or hiring is on hold. Unless this “regime uncertainty” subsides, the U.S. economy could be in for sluggish growth for a long time to come.
For more on the topic of regime uncertainty and economic growth, please see the Downsizing Government blog.
Weekend Links
- Bush-era surveillance powers are set to expire at the end of this year. Julian Sanchez explores the efforts to revise the PATRIOT Act.
- More on the medical professionals who aided in acts of torture.
- Doug Bandow: Ireland is holding a second referendum on the Lisbon Treaty on Friday. If the Irish say yes, the European Union will be stronger. But will anyone notice?
- The aftermath of “Cash for Clunkers” hits automakers. Looks like it just might have been the “dumbest program ever” after all.
- Podcast: “Three Felonies a Day“
Dancing on Cash for Clunkers’ Grave
My colleague Chris Edwards called the government’s “Cash for Clunkers” program the “Dumbest Program Ever.” Given that Chris is familiar with more than a few dumb government programs, that’s quite a statement.
Today, the Washington Post provides more evidence that he might be right:
After the shopping binge inspired by the government’s “Cash for Clunkers” incentive program ended, U.S. auto sales plunged in September and the industry sunk back to the depths from which it started, figures released Thursday showed… The results raised doubts from some economists about the effectiveness of the $3 billion federal program as a stimulus.
Alan Blinder, a Princeton professor who was among the first to push an auto sales incentive program in the United States, doubted it provided much stimulus, in large part because it was in effect for only a month. “Most of the idea of any stimulus is to pull spending up from the future, but it doesn’t make any sense to design a program that only pulls up spending by one month,” said Blinder, a member of the Council of Economic Advisers during the Clinton administration. “Why in the world would you make it a one-month program? The Germans didn’t do that. The British do that. When I designed a mock version of this I was thinking of it as a one-year or two-year program.“
So, Professor Blinder, what happens to auto sales after your one- or two-year program disappears? Regardless of whether the programs lasts one month, three months, one year, or three years, when the “free” money from Uncle Sam goes away, the result is going to be the same.
Milton Friedman said “Nothing is so permanent as a temporary government program.” Let’s hope he’s wrong in the case of Cash for Clunkers.
Monday Links
- Seven ideas for dealing with North Korea.
- Paging the Fifth Amendment: Florida high court rules that the state can seize your private property without giving you a dime.
- How to cut the deficit by spending less. It sounds crazy, but it just might work.
- Why stop at “Cash for Clunkers”? Why not have a “Cash for Everything” program? Because it was a dumb idea to begin with, that’s why.
- Podcast: When Germany enacted their own “Cash for Clunkers” scheme, some of the old vehicles were illegally exported and sold out of the country before being destroyed. Could it happen here? Would that be so bad?
Another Dumb “Stimulus” Idea at Taxpayer Expense
Sigh. Will the error never end? If you listen to Washington, you would think that taking money from taxpayers, who otherwise would buy cars, homes, computers, and any number of other items, and giving it the same taxpayers to get them to buy cars is a great way to stimulate the economy.
Of course, the Keynesian hope is that Americans will spend rather than save, as if the best way to resolve a crisis resulting from too much spending and borrowing is to encourage more people to spend and borrow more. Alas, Washington has never met an expensive new program that it didn’t like.
In fact, the “Cash for Clunkers” program is an even dumber idea than most “stimulus” proposals. Cato’s Alan Reynolds notes how easily the program can be manipulated to frustrate the objective of improving auto gas mileage.
Moreover, the initiative probably doesn’t increase auto sales. Rather, it primarily rewards people who would have bought a new car anyway. Explains Jeremy Anwyl in the Wall Street Journal:
Nearly everyone now seems to be praising “cash for clunkers”—the federal program recently launched that will credit you up to $4,500 to trade in your old car for a more fuel-efficient vehicle. President Barack Obama says the program “has succeeded well beyond our expectations and all expectations.” Transportation Secretary Ray LaHood claims “this is the stimulus program that has worked better than any other stimulus program that was conceived.”
But cash for clunkers is also a program in limbo, having quickly run out of the $1 billion budgeted for it. Congress must now decide whether to let it die or whether to pump more money into it. So it’s time to ask if this program is really a good idea.
It is true that Internet car shopping activity, showroom traffic, and sales are all up, which is why the auto industry wants to keep the program going.
I love a good sales surge as much as anyone. But it’s not that simple. First, it’s not clear that cash for clunkers actually increased sales. Edmunds.com noted recently that over 100,000 buyers put their purchases on hold waiting for the program to launch. Once consumers could start cashing in on July 24, showrooms were flooded and government servers were overwhelmed as the backlog of buyers finalized their purchases.
Secondly, on July 27, Edmunds.com published an analysis showing that in any given month 60,000 to 70,000 “clunker-like” deals happen with no government program in place. The 200,000-plus deals the government was originally prepared to fund through the program’s Nov. 1 end date were about the “natural” clunker trade-in rate.
Let’s hope we can be saved from additional “stimulus” proposals which do far more to waste money than spur the economy.
Using ‘Cash For Clunkers’ Money to Buy a Muscle Car
ABC News reports that the “Cash for Clunkers” scheme, a government program that offers a rebate to people who trade in vehicles with low gas mileage for more fuel efficient cars, is gaining popularity:
The program is off to a fast start. In less than a week, 8,000 cars have been traded in for new ones — deals that might not have happened if Washington were not offering people $3,500 to $4,500 to get their aging gas guzzlers off the road.
In June, Cato senior fellow Alan Reynolds explained how you can use that money to buy the muscle car or truck you always wanted:
Consider how easy it would be to game this giveaway program by using that $4,500 voucher to buy a big SUV or V-8 muscle car.
First of all, with Chrysler and GM dealerships folding, it should be easy to buy a mediocre Chevy Cobalt or Dodge Caliber for about $10,000 more than the voucher.
What you do next is sell that boring econobox, even if you end up with $1,000 less than you paid — that still leaves you with $3,500 of free money, courtesy of taxpayers.
As this process unfolds, the flood of resold small cars will make it even harder for GM, Chrysler and Ford dealers to get a decent price for small cars, because of added competition from new cars being resold as used.
That’s their problem, not yours.
So, take the $9,000 net from reselling the crummy little car plus the $4,500 from Uncle Sam. Then use that $13,500 to make a big down payment on a used Cadillac Escalade, Toyota Tundra pickup or Corvette.
File this under “unintended consequences” (my own file is running out of space).
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