The Broken Clunker Fallacy

Shikha Dalmia has an article in Forbes detailing the hidden costs of the Cash for Clunkers program.

Some excerpts:
One, even if one accepts LaHood’s numbers, the fuel savings add up to only 72 million fewer gallons of gasoline every year–about what Americans consume in four and a half hours. This translates into 700,000 tons fewer carbon dioxide emissions annually–about what Americans emit every 57 minutes. …

the program might severely disrupt the ability of the used-car market to recycle parts, producing all kinds of negative unintended consequences for the environment. (Where is the green obsession with recycling when you need it?) The engine, combined with the drive train, accounts for about 35% of the value of the used car. But with this destroyed, it will make far less sense for recyclers to incur the cost of cleaning up mercury and other toxins to mine the remaining parts from the discarded vehicle. The upshot is that the car is more likely to land in scrappage with many valuable parts–engine, pistons, brakes–still intact. …

So, to recap, the Cash for Clunkers plan involves restoring the economy by destroying wealth and healing the environment by destroying resources. By this logic, we should use the stimulus money to fund a new Godzilla brigade to mow down the country and rebuild it in a more environmentally friendly way. Imagine how much richer and cleaner the planet would be.

This is about as classic an example of the broken window fallacy as you can imagine.

It’s a program built around a theory of economic stimulation that was debunked in 1850.


Double plus ungood


The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.

But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation. — AP

When politics determines interest rates and commodity pricing bad things happen. But hey, this administration rarely demonstrates much sense.

Eager to show action on the ailing economy, President Barack Obama promised Monday to speed federal money into hundreds of public works projects this summer, vowing that 600,000 jobs will be created or saved. — Breitbart

Created! Or saved… whatever.  When you’re talking trillions in debt, who cares about little details like that? Mortgage rates can be lowered and increased! Jobs can be created and saved!

The government reported last week that the number of unemployed continues to rise; the unemployment rate now sits at 9.4 percent, the highest in more than 25 years. Hundreds of thousands of Americans continue to lose jobs each month, although fewer jobs were lost last month than expected. — Breitbart

So the White House says that although things look bad, really bad, they’re improving because the loss wasn’t as bad as we thought it was going to be, right? Not so much:

“The economy clearly has gotten substantially worse from the initial predictions that were being made, not just by the White House, but by all of the private sector,” said Austan Goolsbee. — VOA

See, what will happen is we’ll increase our debt to increase our assets and we’ll pay the debt with increased taxes that our increased debt will help pay. We’ll print more money to offset some of the debt that we can’t finance by increasing taxes in the short term. By printing more money we’ll help increase interest rates which will speed recovery by raising interest rates which will slow the recovery by making it more difficult for us to spend the money we’re borrowing. So we’ll lower interest rates by borrowing more money to spend in the mortgage markets which we’ll pay for by printing more money which will raise the interest rates that we’re trying to lower.

But have no fear! We can also finance the increased debt and inflation by increasing tax revenue by saving jobs. Every job that’s saved means that we haven’t lost any additional tax revenue. And we can use the increased revenue we get from decreasing the rate at which tax revenue declines to offset the amount of taxes we’ll have to raise. Which means that even if we lose 300,000 jobs in a month we can plan to borrow trillions of dollars over the course of ten years to save 600,000 jobs. Besides, losing 300,000 jobs in a month isn’t that bad because when we lose more jobs than we expected, that just means that we lost less than we expected.


Oh, and don’t worry about North Korea; we’ve always been at war with Eastasia.

Update: You don’t often get much better double-speak than this:

President Barack Obama sought on Tuesday to show he was serious about improving the U.S. budget picture as he called on Congress to pass new limits on tax cuts and spending programs to avoid adding to deficits. — Reuters

The headline reads, “Obama seeks fiscal responsibility mantle.” It would be funny if it weren’t so terribly sad.


I came across this quote today,

With U.S. interest rates near zero; with American consumers too poor and indebted to continue spending wildly; and with demand plummeting around the world, governments have to step in and run up deficits as they spend on projects that create jobs, generate income and permit workers to buy products.

It’s from this article about the global financial crisis. I know, why do I bother clicking through? But let’s, just for fun, parse this line of reasoning.

The prime rates set by the U.S. Federal Reserve Board are as near zero as they can likely get. And yet, these low rates have done little to budge actual consumer or manufacturing lending rates as lenders, brutalized by high default rates, are skittish about throwing good money after bad. American consumers are indebted and scared about the long-term prospects for growth and demand has fallen.

The solution to terrible debt, record loan defaults, and plummeting demand. Borrow more, of course. “Running up deficits” to increase spending and “stimulate” demand is doing nothing more than pretending that demand hasn’t actually fallen. When tax revenue declines and consumer spending falls, that indicates a contraction in the economy.

Borrowing money from our children so that we can spend money to pretend that we know what we’re doing is not good policy.

But wait! There’s more,

In addition to flexible but coordinated regulation, governments should also impose a small tax on financial transactions, such as buying and selling stocks, bonds and currencies. Such a tax would accomplish two objectives: It would discourage speculation by increasing the trading costs, and, in the near term, the tax would raise funds to pay for the costs of the meltdown.

Investors are unwilling risk accumulated capital because of the risk involved in lending and trading in a collapsing economy. That’s, after all, the argument for running up deficits: the private sector won’t spend, so the government should spend. Guess what the market response to a tax on “financial transactions” would be? It would sure as shit discourage speculation. But you know what? That’s what investment and lending are; they’re forms of speculation. If the economy is tanking because we’re illiquid and debt-ridden, how does decreasing the potential profit from lending do anything to decrease consumer interest rates or increase liquidity?

Then there’s this:

For balance to be restored, two things must happen.

First, the United States—which has disproportionately served as the market for global exporters—must increase its exports, either through devaluation of the dollar (something dollar holders fear) or industrial policies that encourage exports (not of financial services, but of manufacturing), or both.

And second, export surplus countries, particularly China, must raise wages, expand social safety nets and increase domestic demand. China’s stimulus program includes first steps in this direction, and its proposal for a global currency would also help redress financial and trade imbalances.

That’s all? All we need to do is retool the largest economy in the world by devaluing its wealth (making all Americans much, much poorer) and then have that economy revert to a manufacturing model it hasn’t embraced for decades and make stuff to sell to everyone else who are all even poorer. This buy high, sell low kind of advice.

He’s saying that we’d all be better off if America made stuff to sell to China than we are now, when China makes stuff to sell to America.  All China has to do is “raise wages.” Which it will do, how? Not by selling stuff to poor, dollar devalued Americans, that’s for sure.

Whatever they do, it would have to happen in the face of rising debt and decreased speculation.

Does this really make sense to anyone?

more nudity

From CNN.

Turns out that the stimulus bill contained a special exemption designed to allow AIG to pay out bonuses.

“Multiple Senate Democratic leadership sources also deny knowing how the exemption got into the bill.”

Why didn’t they, you know, read the bill that they passed? I”m just asking….

No, no I’m not just asking. The stimulus bill was the biggest single piece of legislation that any of these people will ever have their name attached to.

And they didn’t freaking read the thing before they pushed it through. Chris Dodd, that paragon of integritude, wrote and sponsored the freaking exemption in question and he doesn’t know how the exemption got in the bill? Dude, it’s in there BECAUSE YOU PUT IT THERE. It’s got your name on it, bub. Own up.

So, now that Congress looks sort of stupid (because they are stupid), they want to tax those bonuses and recover the money. One proposal is to tax the bonuses at 70%. (Wow!) It’s been suggested that such a targeted tax could amount to a bill of attainder, but I’m guessing that so long as it targets more than just the AIG bonuses, it’ll be OK.

My question about a 70% tax on bonuses is, “you gonna tax all the bonuses, or just some?” I’m fairly confident that a number of people who received the bonuses will make less than $250,000 this year. I’m also pretty sure most of these bonuses were contractually guaranteed, which means that those recipients were counting on those bonuses as part of their regular income. Now they get a special 70% tax on their income because Chris Dodd is a freaking weenie and won’t defend the text of the law that he wrote and sponsored.

Here’s the quote,

If you make under $250,000 a year, you will not see your taxes increase by a single dime — not your income tax, not your payroll taxes, not your capital gains taxes, no taxes.

Yeah, yeah, I know; he’s already broken that promise (March. It’s March. He’s been in office less than two months.) but 70%? Them’s a lot of dimes.

The bonus stuff is all absurd. If you’re going to bail out a company, you give the company money to fulfill its obligations–that’s the point of a bailout. Now, I think the bailouts are a bad idea, but you can’t give the company money and then complain when they spend the money you gave them. That’s what you gave them the money for in the first place!

Sure, the bonuses are politically unpopular, and they should be, but the bonuses aren’t sneaky deals, they’re the cost of AIG staying in business. They’re like office supplies or computer equipment or employee compensation. The bonuses don’t represent AIG doing the wrong thing with the bailout money, they represent everything the bailout money is designed to be used for: evading the consequences of catastrophic failure.

Of course, that doesn’t make the posturing and monumental ignorance of the twits in Congress any less disheartening or contemptible.

Ps. Oh, Goldman Sachs got $93 billion of the bonuses. Geithner and Paulson are both from Goldman. Goldman depends on AIF for $93 billion and AIG gets a bailout with an exemption authorizing the bonus. Lehman was a competitor of Goldman. Lehman didn’t get a bailout. I’m just saying…. If the recovery tax somehow exempts Goldman, I won’t be too shocked.

naked empire

There’s this from the Washington Post.

Too big to fail, too small to fail, too small to bailout, too small not to bailout, you’re spending too much money on employee compensation, you’re not spending enough money on employee compensation… the administration is all over the map. The dithering is breathtaking.

There’s this gem:

“We need you to put that assistance to work for the American economy,” Geithner said. “Many banks in this country took too much risk, but the risk now to the economy is that you will take too little risk.”

Seriously? Make more risky loans? That’s their solution? Make more risky loans??

I’ve said it before elsewhere, but it needs to be said again:

Geithner is so far out of his depth that his appointment to Treasury is a monumental embarassment to himself and the administration.

This from the NY Times.

“All across the country, there are people who work hard and meet their responsibilities every day, without the benefit of government bailouts or multimillion-dollar bonuses,” said Mr. Obama, who called the issue one of “fundamental values.”

“All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules,” he said.

So Congress will give back their pay raises? What about the $93,000 per member expense accounts they just granted themselves? Will Congress end their franking privileges?

Will Rangel pay his taxes? Will Dodd tell us who else owns his Irish cottage? What about PMA? End earmarks? Will Congress submit itself to OSHA standards? What about energy consumption? Will Pelosi stop complaining about a lack of personal access to military Gulfstream jets?

It’s an issue of fundamental values, that’s for sure. The rules are just different in Washington.

And for the record, the last administration wasn’t any better. Nor was the last Congress. But neither got a free pass on their piles of sanctimonious, self-serving bullsh~t. This one shouldn’t either.

oh shit

This is not a happy chart:

oh shit!

That’s the growth in the money supply. Note the monetary expansion of the past year.

record deficits, failing banks, benchmark lending rates at near-zero, protectionist trade measures, tax increases, a helpless treasury… and just for good measure, wild monetary expansion.

The more things Change™…

I’m quoting Tad DeHaven from Cato in full.

Page 14 of the President’s FY2010 budget “blueprint” contains a section called “Fiscal Irresponsibility” that deserves scrutiny:

“Another manifestation of irresponsibility is the large budget deficits we are inheriting. These deficits, over time, will harm economic growth and impose burdens on our children and grandchildren.”


“Between 2000 and 2008, real Government outlays increased at a 3.6 percent annual average rate, three times the 1.2 percent annual average rate between 1992 and 2000…Furthermore, the amount of debt held by the public has nearly doubled to $6.4 trillion from 2001 to 2008. We are now living with the fallout of this deep fiscal irresponsibility.”


“Unfortunately, we are also inheriting the worst economic crisis since the Great Depression—which will force us to increase deficit spending temporarily as we try to jumpstart economic growth.”

Time-out.  The administration accurately states that federal spending and debt have increased at a detrimental pace this decade.  Then it says we’re in the worst economic crisis since the Great Depression. 

And the solution to the economic downturn caused in part by too much spending and debt is to increase deficit spending and further run up the national debt?  By the administration’s own logic, shouldn’t we be experiencing economic growth with all the deficit spending it “inherited?”

A lot of people are pointing this out. You can’t blame Bush for profligate and irresponsible spending when you qudruple the national deficit in your first four weeks. OK, you can blame Bush, and you should blame Bush and his bleating, craven Republican colleagues for eviscerating the poltical organization that should have resisted this policy disaster.