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.

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Sobering

Jeffrey Rogers Hummel’s article, “Why Default on U.S. Treasuries is Likely,” is troubling.

In it, he argues that inflation alone won’t be enough to compensate for the coming Social Security/Medicare budgetary shortfall and that Treasury will instead repudiate a large portion of its debt. I recommend reading the whole thing.

Defaulting on our debt would be bad.

Right now, U. S. treasury bills are traded as essentially “risk free” investments. They form the backbone of the global financial system.

He closes the article with this:

All the social democracies are facing similar fiscal dilemmas at almost the same time. Pay-as-you go social insurance is just not sustainable over the long run, despite the higher tax rates in other welfare States. Even though the United States initiated social insurance later than most of these other welfare States, it has caught up with them because of the Medicare subsidy. In other words, the social-democratic welfare State will come to end, just as the socialist State came to an end. Socialism was doomed by the calculation problem identified by Ludwig Mises and Friedrich Hayek. Mises also argued that the mixed economy was unstable and that the dynamics of intervention would inevitably drive it towards socialism or laissez faire. But in this case, he was mistaken; a century of experience has taught us that the client-oriented, power-broker State is the gravity well toward which public choice drives both command and market economies. What will ultimately kill the welfare State is that its centerpiece, government-provided social insurance, is simultaneously above reproach and beyond salvation. Fully-funded systems could have survived, but politicians had little incentive to enact them, and much less incentive to impose the huge costs of converting from pay-as-you-go. Whether this inevitable collapse of social democracies will ultimately be a good or bad thing depends on what replaces them.

Only four things can happen when the bills come due:

1)  We can raise taxes to cover the shortfall.

This is problematic for several reasons. Revenue does not increase linearly with tax rates and higher tax rates reduce growth rates which further reduces revenue. The target rates, as Hummel points out, would need to be in excess of 45%, a level that far exceeeds anything Americans have shown a willingness to put up with. I think this is a political non-starter. Taxe rates would have to climb across the board and I don’t see any politician in the next twenty years seriosuly campaigning to double the taxes on middle-class earners.

2) We can cut benefits and services, end Social Security and radically reduce Medicare commitments.

Political suicide. No politician will do it. Won’t happen.

3) We can radically inflate the money supply.

Hummel argues that we actually can’t do this because there’s so much private money in the world. I think he’s probably right, but I’ll offer another reason why we can’t do this, and it’s the same as the reasons we won’t do 1) or 2). It’s political suicide. Hyper-inflation affects everyone equally. Everyone’s wealth is reduced both here at home and abroad. Think this recession looks bad? Significant inflation would cripple the global economy.

4) We can repudiate some of our debt.

In other words, we’d just default on T-bills. But of course, we wouldn’t default on the T-bill rate, we’d default on particular T-bills. I’m guessing we’d default on debt obligations held by foreign banks and foreign governments. I’m also guessing that we’d be less likely to default on our debt obligations to Western Europe than we would be to default on our debt obligations to China.

The economic fallout of debt repudiation would be bad, very bad. We’d likely lose the dollar as the world’s reserve currency, some inflation would likely attend any debt default, and the global economy would take a significant hit. But the consequences would obviously be most dire for whoever holds the debt we choose to default on. How will our creditors respond?

No time to think

The administration is pushing both houses of Congress hard to pass health care bills before the August recess.  Reports are that the administration wants this badly enough to push it through on a purely partisan basis. Whether enough Democrats would be willing to entirely own the consequences of such woeful legislation remains to be seen. They certainly wouldn’t have gotten the stimulus packages through without significant Republican cover, and the Republicans may have learned their lesson (sometimes, even idiot dogs can learn new tricks).

But why the rush? Why is it SO darned urgent to push 1,000 pages of legislation through Congress RIGHT NOW? Well, the rush is on because the administration sees its approval ratings slipping (no surprise) and they don’t imagine that they’ll be able to strong arm as many Blue Dog Democrats in the fall as they might be able to right now. Plus, if they waited, well then someone might actually read the legislation. (Well, probably not any of the legislators… let’s not get silly.)

Instead of saving the federal government from fiscal catastrophe, the health reform measures being drafted by congressional Democrats would increase rather than reduce public spending on health care, potentially worsening an already bleak budget outlook, the director of the nonpartisan Congressional Budget Office said this morning.

Under questioning by members of the Senate Budget Committee, CBO director Douglas Elmendorf said bills crafted by House leaders and the Senate health committee do not propose “the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount.”

“On the contrary,” Elmendorf said, “the legislation significantly expands the federal responsibility for health-care costs.” — Washington Post

Well… duh.

So let’s see here, we’ve got increased health-care costs, higher taxes, and we’re going to limit access to care, reduce Medicare coverage for the elderly and, oh yeah, make private individual health insurance illegal. Sounds like business as usual.

The end of insurance

Remember?

So let me begin by saying this: I know that there are millions of Americans who are content with their health care coverage – they like their plan and they value their relationship with their doctor. And that means that no matter how we reform health care, we will keep this promise: If you like your doctor, you will be able to keep your doctor. Period. If you like your health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what. . . .

From IBD, (emphasis added)

It didn’t take long to run into an “uh-oh” moment when reading the House’s “health care for all Americans” bill. Right there on Page 16 is a provision making individual private medical insurance illegal.

When we first saw the paragraph Tuesday, just after the 1,018-page document was released, we thought we surely must be misreading it. So we sought help from the House Ways and Means Committee.

It turns out we were right: The provision would indeed outlaw individual private coverage. Under the Orwellian header of “Protecting The Choice To Keep Current Coverage,” the “Limitation On New Enrollment” section of the bill clearly states:

“Except as provided in this paragraph, the individual health insurance issuer offering such coverage does not enroll any individual in such coverage if the first effective date of coverage is on or after the first day” of the year the legislation becomes law.

So we can all keep our coverage, just as promised — with, of course, exceptions: Those who currently have private individual coverage won’t be able to change it. Nor will those who leave a company to work for themselves be free to buy individual plans from private carriers.

The public option won’t be an option for many, but rather a mandate for buying government care. A free people should be outraged at this advance of soft tyranny.

Washington does not have the constitutional or moral authority to outlaw private markets in which parties voluntarily participate. It shouldn’t be killing business opportunities, or limiting choices, or legislating major changes in Americans’ lives.

It took just 16 pages of reading to find this naked attempt by the political powers to increase their reach. It’s scary to think how many more breaches of liberty we’ll come across in the final 1,002.

Making private insurance illegal is the surest way to ensure that the quality of medical care will decline and that medical costs will rise.

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.

Why the stimulus plan sucks

I’ve been pretty critical of the stimulus plan.

The economy is in the tank, no question. That, at least, I don’t dispute. But the economy is in the tank because a whole boatload of people made very, very bad decisions. It wasn’t just “fat cats” on Wall Street making bad decisions, it was financial planners in Poduka and loan managers in Los Angeles. Congressmen and women (both Democrat and Republican) share the blame with the voters that elected them. Then there are the families that defaulted on their debts, the companies that invested too heavily in real estate and the investors around the worldthat bought into the credit default swap swamp. There’s plenty of blame to go around.

A lot of people lost money and many, many more will lose much more. A lot of people are much worse off than they were before. That’s what it means when we say “the economy sucks.” We mean, “a lot of people have lost a bunch of money.” And that’s all we mean. We’ve lost a bunch of money. We’ve overextended our debt and we can’t pay our bills.

The “stimulus” plan works on the idea that we really haven’t lost a bunch of money. The stimulus plan (and the bailout, and TARP, and the other bailout, oh… and the other bailout) amounts to no more than a “Maybe the money is under the couch?” kind of approach to the financial crisis. Current policy (Obushama policy) amounts to pretending that what is valueless has value, that devaluation of the dollar and deficit spending are like, totally different from inflation, and that debt can be counted as capital.

The big idea behind the stimulus plan is that so long as we spend $90 million on this project and $40 million on that project and $7 bejillion on those politically connected projects, and so long as we mail out more checks to more people and borrow more and more money from China (because owing money to communist dictatorships is SUCH a good idea), then everything will be peachy and we’ll find the money under the couch and we won’t have any more recessions any more and daddy will solve all our problems…. It’s adolescent bullshit.

The economy sucks. We lost a bunch of money. It’s not under the couch; it’s gone. Moving a bunch of other money around isn’t going to make anything better.

Oh, the plan will make some people better off. There are always winners in any government policy. But there are also always losers. And if there’s a bedrock principle of politics, it’s that the winners are always very loud and highly visible and the losers are quiet and invisible. The thing is, there’s always more losers than winners. In most cases, the losers are our kids; they get to pay off our debt.

The “stimulus” plan will “stimulate” the people it’s meant to stimulate: the politically connected. That’s all it will do because that’s all it can do.

So, we should do nothing?

Yes.

Nothing. Really?

Yes.

Nothing… just let banks fail and let people lose their homes?

Yes.

But… that’s a catastrophe!

Well… no. See, the banks have already failed. The bailout doesn’t keep the bank from failing, it just lets the bank avoid the consequences of its failure. When a business fails, the capital that the business held is released and the market allocates that capital to new ventures. Some of those ventures succeed. Some fail. That’s how the market works. When we bail out a failed business we keep the capital from being reallocated. That means that the capital stays in a spot where it’s not being used as well as it could be. That means that we don’t make as much money as we otherwise could.

As for people’s homes. the same thing applies. When a home is foreclosed, the house is put on the market where it’s sold to another family. A family that might actually pay its bills!

We  see the loss of the bank and all of the jobs at the bank, but we don’t see the business that would have been created had the bank been allowed to close, and we don’t see all the new jobs that would have been created.

We see the family that loses it’s home, but we don’t see the family that didn’t get a home.

We see the politically connected interests that will slop up the stimulus pork. We don’t see the millions who will inherit crippling taxes, growing deficits and an economy that grows at a slower rate. (More on the seen and the unseen here.)

Wait… an “economy that grows at a slower rate” that’s all? That’s what you’re up in arms about? “a slower rate?”

Yes!!!!!! Absolutely!!!! Economic growth is the THE GREATEST THING in the HISTORY OF MANKIND.

Economic growth lifts people out of poverty faster and more assuredly than charity, aid, or education. Economic growth saves more lives than any hospital, doctor, or government health program can ever hope to match. Economic growth makes us all rich, allows all of us to live longer, live better, and have more fun. In short, economic growth freakin’ rocks!

From the Concise Encyclopedia of Economics:

In the modern version of an old legend, an investment banker asks to be paid by placing one penny on the first square of a chessboard, two pennies on the second square, four on the third, etc. If the banker had asked that only the white squares be used, the initial penny would have doubled in value thirty-one times, leaving $21.5 million on the last square. Using both the black and the white squares would have made the penny grow to $92 million billion.

People are reasonably good at forming estimates based on addition, but for operations such as compounding that depend on repeated multiplication, we systematically underestimate how quickly things grow. As a result, we often lose sight of how important the average rate of growth is for an economy. For an investment banker, the choice between a payment that doubles with every square on the chessboard and one that doubles with every other square is more important than any other part of the contract. Who cares whether the payment is in pennies, pounds, or pesos? For a nation, the choices that determine whether income doubles with every generation, or instead with every other generation, dwarf all other economic policy concerns.

The massive increase in deficit spending, the corresponding increase in taxes (debt = taxes), and the increase in percentage of GDP that the government consumes, all work to slow economic growth and slowing economic growth means consigning more and more people to poverty.

Wealth is good. The sole object of sane public policy is to make as many people as wealthy as posible; to unleash the power of compound interest and increase the rate of economic growth.

Or we could borrow from our children and try to push our mistakes under the rug. That’s what Bush/Obama/Pelosi/McCain want to do. They and their cohorts will contnue to sacrifice the future in a futile attempt to ignore the present. They’ll continue to do it so long as we let them.

$4 trillion and counting

More and more banks have decided to reject the intial bailout offer. The banks that did accept the bailout used it to help pay bonuses to their executives, resulting in predictable, if Captain Renault-esque, outrage from President Obama. (Really, what did he think? He voted to give them $300 billion. What did he think they’d do with it? Make paper hats?)

Biden, as usual, makes the dumbest comment,

I’d like to throw these guys in the brig,” he said. “They’re thinking the same old thing that got us here, greed. They’re thinking, ‘Take care of me.’

Well, I wonder why they think that? Let me get this straight… Biden voted to give the banks $700 billion dollars, no strings attached, and is campaigning for an additional $900 billion and he says that someone else is greedy? He gave them the money and now he wants to put them in prison for accepting it.

Local banks are rejecting TARP money because, well because it only makes sense to spend the money on bonuses and corporate jets. Using it to make more bad loans is stupid.

Congress wants banks to make loans, so businesses can expand and people can start buying houses again. But lawmakers also want them to make only trustworthy loans. But there are only so many good loans to make in a weak economy with high unemployment.

So the money’s not going where Congress wants. But where does Congress want the money to go?

We’ve looked it over, and even we can’t quite believe it. There’s $1 billion for Amtrak, the federal railroad that hasn’t turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There’s even $650 million on top of the billions already doled out to pay for digital TV conversion coupons. — Wall Street Journal

Don’t forget the billions of dollars they’re giving Acorn. And… wait… wait a minute! The whole farging point of this “stimulus” bill is to spend money, right? To “create jobs?” then why is buying a corporate jet a bad thing? That creates demand for jets, right? That stimulates demand for manufacturing jobs, right? Why is that bad spending, but $600 million for government cars is a good spending? Is there any sense in this mess?

The numbers are staggering:

If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion dollars.

Crunching the inflation adjusted numbers, we find the bailout has cost more than all of these big budget government expenditures – combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

Barry Ritholtz

But some of that $4 TRILLION must be “good” spending right?

If, for example, your teenager came home after spending the day at the shopping mall with your personal credit card and tells you “Hey Mom and Dad, I know that you told me to spend no more than $100, but I spent instead $10,000,” you’d likely be furious.  And you would not be becalmed by your profligate teenager suggesting that, because he spent $10,000, surely some of it is wise. — Don Boudreaux

We’re up to our necks in debt! Let’s borrow our way out!

I’ve said it before and I’ll say it again. If the economy really does need a “stimulus” then why not simply stop withholding taxes? Simple, easy, direct, effective, and immediate. But no graft.