Friday, October 30, 2009

Cash for Clunkers cost $24,000 per car has analyzed the car sales numbers during the Cash for Clunkers program and estimated that the marginal cost was $24,000 of our tax dollars for each new car sold:
A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site ...

The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.

The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales.
The average rebate value mentioned above seems like bad rounding. It appears the average rebate was closer to $4,348. Here's the math:

$3 billion overall cost ÷ 690,000 cars sold = $4,348 per car total cost

(690,000 / 125,000) × $4,348 = $24,000 per car marginal cost

In an example of regulatory capture (government regulators protecting the industry they are supposed to regulate), the Department of Transportation is defending Cash for Clunkers (i.e. "Car Allowance Rebate System") by saying that it was good for the auto industry:
"It is unfortunate that has had nothing but negative things to say about a wildly successful program that sold nearly 250,000 cars in its first four days alone," said Bill Adams, spokesman for the Department of Transportation. "There can be no doubt that CARS drummed up more business for car dealers at a time when they needed help the most."
Note that what's good for car dealers is not necessarily what's good for the overall economy, just as what's good for Realtors is not necessarily what's good for the overall economy. Like the first-time home buyer tax credit, Cash for Clunkers is nothing more than wasteful corporate welfare.

The White House has come out with a weak, short-term-oriented defense of the program. Notice, however, that for the most part the left-wing economics bloggers who are usually quick to defend the White House against faulty economic reasoning (e.g. Paul Krugman, Mark Thoma, Calculated Risk) are remaining silent on this one. In fact, left-leaning economist Jeffrey Sachs is out with his own criticism of Cash for Clunkers' supposed climate benefits. Sachs actually makes the mistake of measuring total cost, rather than marginal cost, so the program is actually 5.5 times more wasteful than the numbers he complains about.

Just like the first-time home buyer tax credit, Cash for Clunkers is a handout of our tax money to the special interests who lobby Congress.

Monday, October 26, 2009

Health care reform will hurt those it is intended to help

George Mason University economics professor Tyler Cowen argues that the proposed health care reforms will be harmful. Here's his summary:
We’re on the verge of enacting a policy that is due to explode, penalizing many of the very people that it was ostensibly designed to help.

Saturday, October 24, 2009

Starting salary by category of college major

Here is a graph of starting salaries by general category of college major. These are the starting salaries for bachelor's degrees. Notice that technology-oriented degrees pay substantially more than other degrees. Business and science degrees take up the middle of the pack. Liberal arts and education majors are at the bottom.

Source: NACE Salary Survey, Fall 2009

If a student goes on to business school, law school, or medical school, the choice of undergraduate major would generally lose its influence on salary. Some natural complements are a liberal arts bachelor's degree combined with a law degree, a health sciences bachelor's degree combined with a medical degree,* or a liberal arts, sciences, or business bachelor's degree combined with an M.B.A.

One case in which the undergraduate degree continues to have a large influence on salary is the powerful mix of an engineering or computer science bachelor's degree combined with an M.B.A. This is because managers with both technical and business skills are needed at many computer, aerospace, and industrial companies.

I wonder how seeing a graph like this in high school might have affected my choice of college major. Probably not much since my multiple requests for a computer in high school were denied by my then-Luddite parents. Thus, I was intimidated by computers when I entered college.

People who like this post may also be interested in a previous blog post of mine, earnings by level of education.

* I have no idea how stringent the prerequisites are for medical school.

Thursday, October 22, 2009

ObamaCare would increase health care burden

The Office of the Actuary, part of the U.S. Department of Health and Human Services, exposes the hard truth about ObamaCare:
The nation's medical costs will keep spiraling upward even faster than they are now under Democratic legislation pending in the House, a report from government economic experts concluded Wednesday. ...

Unlike previous estimates that have focused mainly on the legislation's impact on the federal deficit, the actuaries' report looked at total costs, public and private, over the next 10 years. It found that the nation's health care tab would increase somewhat more rapidly with the legislation than if nothing is done. The main reason: Newly insured people will seek medical care. ...

Health care would account for 21.3 percent of the U.S. economy in 2019, slightly more than an estimated share of 20.8 percent of the economy if no bill passes. Economists have warned such increases are unsustainable.

"With the exception of the proposed reductions in Medicare ... (the legislation) would not have a significant impact on future health care cost growth rates," the report said. Moreover, it's "doubtful" that proposed Medicare cuts will stay in place, the analysts concluded.
If I remember correctly, the House bill includes the public option. This casts serious doubt on the Democrats' claim that the public option would reduce health care costs.

Tuesday, October 20, 2009

The definition of High Broderism

"Broderism," named after Washington Post columnist David Broder, is a word invented by left-wing bloggers to express contempt for bipartisanship and political centrism among elected officials. A quick Google search for "Broderism" turns up lots of left-wing blogs and websites, but no right-wing ones and few moderate ones. Basically, if someone uses the word "Broderism," you can expect that they hate Senator Joe Lieberman.

Variants: "Broderism," "High Broderism," and "Higher Broderism."

Tuesday, October 13, 2009

Unemployment to remain high for years

According to a survey of professional forecasters conducted by the Philadelphia Fed, the unemployment rate is expected to remain abnormally high for at least three more years.

When looking at the graph above, keep in mind that from the mid-1990s until 2007, unemployment generally ranged from 4-6%, with NAIRU (essentially the natural rate of unemployment) being about 5%. Furthermore, since 1947 there have only been three times when the unemployment rate exceeded 8%: the mid-1970s, the early 1980s, and now.

These numbers echo, but are worse than, a recovery prediction I quoted six months ago:
Even if the recession miraculously ended tomorrow, economists estimate that at least three years would pass before full employment returned and output rose enough for the economy to operate at full throttle.

Monday, October 12, 2009

How to create better financial regulation

Lots of people like to blame stuff like the current financial crisis on the opposing political party. For example, note how Republicans like to blame the housing bubble, which caused our current troubles, on the Community Reinvestment Act and Democrats like to blame it on lax Bush administration regulation.

The truth is that nobody of any political affiliation likes to step in and take away the punchbowl when everyone's partying. Just look at the failure of anyone to do anything about this decade's housing bubble under President Bush or the stock market bubble that occurred during Bill Clinton's second term.

Bubbles are caused by human nature. Since regulators are human beings, they are as susceptible as anyone else. How many home-owning regulators of any political affiliation would have wanted to reign in the rapid rise in housing prices, for example?

Instead what are needed are mathematical rules, such as requiring home buyers to make 20% down payments when buying homes. (Note that under President Obama and a Democratically-controlled Congress, the FHA is actively encouraging absurdly low 3.5% down payments.)

Larger down payments would encourage home buyers to care less about monthly payments and more about overall price. They also would give home owners a bigger buffer to protect themselves when home prices fall. They would also force home buyers to have more skin in the game, so they will be less inclined to just walk away when their home price falls.

All financial institutions should be required to maintain sufficient capital reserves, not just traditional banks. The required reserve ratio should automatically rise during booms and fall during busts. Countercyclical reserve policy like this would help stabilize both the financial system and the money supply.

Finally, teaser rates should be outlawed. Teaser rates are intended to take advantage of people's innate susceptibility to hyperbolic discounting. If someone isn't willing to buy a home based on the regular interest rate and the regular monthly payments, then they shouldn't be buying the home.

Thursday, October 8, 2009

My thoughts on a second economic stimulus package

Some economists and politicians are advocating a second economic stimulus package. Here are my thoughts on a second stimulus.

State governments likely have better ideas than Congress regarding what are high value spending projects within each state. On the whole, pre-existing state spending was likely already going to the highest-value projects available. Since state governments are now being forced by circumstances to drastically cut back at a time when Congress's stimulus package is in effect, this suggests that Congress massively misallocated capital with the first stimulus.

If Congress creates a second economic stimulus package, it should only consist of more aid to the states and extended unemployment benefits. Congress should avoid a bunch of bells, whistles, and pet projects. Stuff like cash for clunkers and subsidies to transfer existing homes from one person to another are just real-life examples of the broken window fallacy.

Wasteful spending harms long-term economic growth just to avoid short-term pain. On the other hand, when states are forced to cut useful investment spending (e.g. education and infrastructure), then it harms the economy in both the short-term and the long-term.

Warren Buffett described the first stimulus package as a mix of Viagra and candy. Aid to the states and extended unemployment benefits would be pure Viagra. Most other spending options would be candy.