American Elephants

The Clunker Stimulus Didn’t Stimulate. Are You Surprised? by The Elephant's Child
September 20, 2010, 7:20 pm
Filed under: Capitalism, Domestic Policy, Economy, Liberalism | Tags: , ,

It is becoming clear that the Obama stimulus programs were a flop.  But would the economy have been worse without them?

Economists Atif Midan of the University of California, Berkeley and Amir Sufi of the University of Chicago have studied the $2.85 billion program that gave consumers a subsidy to turn in their old cars to be destroyed and buy new ones.

We called it “Cash for Clunkers.”  They concluded that the program “had no long run effect on auto purchases.”  It boosted sales during its two-month run last summer by about 360,000 cars and then quickly hurt sales by about the same amount.  In effect, it stole sales from the future, and was a complete wash in only seven months.

The goal of White House economists was to stimulate “aggregate demand” in the regular economy.  It wasn’t sold as a discount for cars that people were already planning to buy. Christina Romer, the former chairman of the Council of Economic Advisers wrote that ‘cash for clunkers was “very nearly the best possible countercyclical  fiscal policy in an economy suffering from temporarily low aggregate demand.”  It was meant to encourage economic activity like more consumer spending and job creation.

Economists Mian and Sufi caution that their findings that there was no noticeable difference in economic outcomes in the 957 metropolitan areas they studied, does not mean that all forms of fiscal stimulus fail to boost long-run economic output.  There was a blip in the cities where the auto industry concentrated, but that can’t be disentangled from the bailout money.

The article doesn’t indicate whether the study included the long-term effects of removing so many cars from the used car market and the parts department.  Supposedly it raised the cost of used cars across the board, but I have not seen that confirmed.


Taxes, Spending, Revenue and Other Confusing Problems. by The Elephant's Child

Republicans are completely opposed to administration efforts to raise taxes when the economy is so fragile. For when President Obama wants to cancel the Bush tax cuts for “the rich” — those married couples with income over $250,000 and singles with income over $200,000 — he is talking about raising taxes.

Democrats have a spending problem.  Economist Donald Marron notes that in 2009, the federal government spent $3.4 trillion and took in $2.1 trillion in revenue. The $1.4 trillion that they had to borrow to make up the difference represented 40% of federal spending and 10% of the nation’s economic output.  And that’s just in 2009.

The Obama administration forecasts continuing deficits that average more than $1 trillion annually for the next ten years, even with optimistic assumptions about economic recovery.  By 2020 the United States would owe more than $20 trillion, the equivalent of  about 85% of GDP.

So of course President Obama wants to raise taxes on the wealthy. (When he talks about letting the Bush tax cuts ‘expire,’ he is raising taxes).  The ‘wealthy’ already pay most of the taxes.  The wealthy also have the most options.  People can invest without receiving dividends, and they can choose when to take capital gains, and they can choose where to invest their money. They can invest in other countries.

But won’t raising taxes on the wealthy help to compensate for all that spending?  To quote economist Alan Reynolds, writing today:

“Raising taxes on the top 2% of households, as Mr. Obama proposes, would bring in $34 billion next year: enough to cover nine days’ worth of the deficit,” notes The Economist. So that is what all the political fuss about extending the Bush tax cuts for another year is all about. Does this make any sense? After all, errors in estimating next year’s revenues are typically much larger than $34 billion.

The arithmetic is even more absurd than it appears, because the alleged $34 billion of extra revenue is a static estimate. That means the number assumes higher tax rates do literally no damage at all to the affected taxpayers, and therefore no damage to consumer spending, business investment, employment, stock prices, housing prices, new car sales, etc.
(emphasis added)

He goes on to say that the $34 billion is a wildly optimistic figure, and if there was the slightest ill effect from the tax hike, it could turn into a big revenue loss.  31 nervous Democrats wrote to Pelosi and Steny Hoyer asking them to extend the Bush tax cuts, so Pelosi would have to once again resort to bullying, bribing and arm-twisting.

The Treasury department divides the American population into 5 divisions according to the information from the IRS.  This gives the government some statistics to estimate how people are doing.  That’s as far as it should go.  America has never been a class-conscious country in spite of all efforts to promote class (wealth) envy for political purposes.

America has the world’s most progressive tax system.  Those who make $200,000 a year are 3% of all taxpayers but pay 53% of all income tax revenue.  Total revenues for the period 2003 to 2007 were about $350 billion higher than the Joint Tax and the Congressional Budget Office predicted when the 2003 tax cuts were enacted, and the wealthiest taxpayers paid a larger share of all income taxes.  In 2003 those with incomes above $200,000 paid $313 billion, but by 2007 they paid $610 billion.

It always sounds so simple.  You raise tax rates, you get more money.  But things are never that easy.  And you can figure, even without a calculator,  that spending $3.4 trillion and only taking in $2.1 trillion is a heck of a way to run a government.  If those were my bills and my checkbook, there would be some rapid changes to the family budget.  Oh wait.  That’s what we’ve been asking President Obama to do.

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