James Pethokoukis

Politics and policy from inside Washington

Study: Cash for clunkers won’t spur any net new car sales

Jul 9, 2009 16:49 UTC

The  $1 billion federal “Cash for Clunkers” program that will pay consumers up to  $4,500 for trading in aging gas-guzzlers for new, more fuel efficient models could be a big bust. Macroeconomic Advisers just completed a study on the program and found that it will bring forward future sales that would have happened anyway (though that could be good for cash-strapped companies). This is very similar to what economists have found with natalist policies that try to incentivize women to have more kids:

We expect the program to be successful in that all of the roughly $1 billion of incentives will be exhausted in the purchase of some 250 thousand new vehicles.  However, we expect CARS to affect the timing of sales, not total sales.  In particular, we expect that roughly half of the 250 thousand in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway.  Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.  It does, however, accelerate the return to more comfortable inventory levels and provides needed near-term cash flow to an industry that is struggling with the current low pace of sales.


Too many rules….if you read about it your car must be worth less then the 4500 bucks. There’s not a lot of people driving a car that used up that can afford to buy a new one. There’s also rules about the milage etc.You have to do it by Semptember. In the end, it will be a boondogle and will be rampant with fraud, but what do you expect being written by congress.

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Roubini: ‘Around 11 percent’ unemployment in 2010

Jul 9, 2009 13:38 UTC

Nouriel Roubini speaks (or, rather, writes in Forbes):

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11% next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11% in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans and commercial loans–much bigger numbers than what the stress tests projected.

Fed Watch: Obama’s shortlist for next Fed chair

Jul 9, 2009 12:11 UTC

From the WSJ:

Treasury Secretary Timothy Geithner is expected to play a key role in advising President Barack Obama on whether to reappoint Mr. Bernanke. Mr. Geithner has worked closely both with Mr. Bernanke and with the leading alternative for the powerful post — Lawrence Summers, the former Treasury secretary, who is currently the president’s top economic adviser.

Before making a decision later this year, the White House also is expected to look at other economists, including Roger Ferguson and Alan Blinder, former Fed vice chairmen; Janet Yellen, president of the San Francisco Federal Reserve Bank; and Christina Romer, chairman of Mr. Obama’s Council of Economic Advisers.

My spin:  What is the political landscape here? You would think that GOPers would prefer Bernanke since he was a Bush appointee, while the rest are no-doubt Dems. And it’s not like Obama would dump BB for John Taylor or Glenn Hubbard.  Yet Big Ben has come to personify Bailout Nation to many on the right. And at least one high-profile conservative, CNBC host Larry Kudlow, seems to have a soft spot for Summers:

So given the choice between those two, who do I like? Well, meaning no disrespect to Mr. Bernanke, I think I’ll go out on a limb and choose Summers. Why? Because during the Clinton years, when Summers held several Treasury posts (including Treasury secretary), a strong-dollar policy was in place. Back then I called it King Dollar. And I frequently praised Robert Rubin and Larry Summers for backing King Dollar.

And since I believe in a price-rule approach to Fed policy, where the dollar should be stable and the Fed head should watch open-market prices such as the dollar, gold, and commodities in order to promote price stability and economic growth, Larry Summers’s résumé as a Clinton-Rubin alumnus is closer to my liking.

And in terms of Mr. Summers’s so-called prickly personality, that might be an excellent credential for a truly independent Fed chairman. Paul Volcker had a prickly personality, but he was the inflation slayer (with Ronald Reagan’s help).

Ben Bernanke, on the other hand, seems to be targeting the unemployment rate, and he has never given much emphasis to a stable dollar as a key Fed-policy variable. Right now the bond markets are pricing in five or six Fed tightening moves as the economy shifts toward recovery. And at least until recently, the dollar was soft and gold was strong. But if Mr. Bernanke targets the unemployment rate, the Fed will overstay its easy-money welcome and inflation will shoot up in the years ahead.


Our fiat monetary system has failed. Abolish the Fed and institute a free-market medium of exchange.

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Independents souring on Obamanomics (Virginia version)

Jul 9, 2009 11:28 UTC

Very interesting (via Politico):

A Public Policy Polling survey in Virginia found Obama’s approval and disapproval numbers effectively tied, with independents disapproving of the president’s job performance, 52 percent to 38 percent. “That is fairly consistent with all our polling around the country — Obama tends to be really well-liked personally, but he’s starting to lose a majority of the independents,” said Public Policy’s Dean Debnam. Democrats have “had long enough in some voters’ minds that they’re getting blame for nothing happening, and Republicans are scaring them around health care and tax increases.”

And Obama, of course, isn’t up for reelection anytime soon, and even nervous Democratic congressmen can keep their fingers crossed for economic recovery over the next year.

“It’s been more or less inevitable that we’re going to see some decline in numbers for Democrats,” said Mark Mellman, another Democratic pollster. “For most folks, there’s not an election until 2010, and most economists suggest that by the time we get to 2010, we’re going to see the beginnings of an uptick in the economy.”

My spin: Is Mellman taking into account a possible jobless recovery? Upticks in GDP ain’t going to cut, I don’t believe.


I remember when Charles Krauthammer said back in January that Obama would start to own the recession 6 months into his term. Alot of people laughed at that prediction and said it wouldn’t be until 1-2 years into his term that he would own it. But now, based on all the polling, he was right on.

Posted by Tony Franjie | Report as abusive

The econ chart that should worry David Axelrod and the Dems

Jul 9, 2009 11:11 UTC

Brad DeLong worries that the downturn in bond yields is hinting at an anemic economic recovery.

A recovery in which unemployment is higher two years later than when
the recovery began is not much of a recovery. And I don’t see what is
going to keep the probability of such an eventuality low.

The lower are ten-year Treasury interest rates, the more are people
trading in the bond market willing to bet their money that the future
holds that kind of non-recovery recovery. And so I worry.

Me:  Think a second stimulus would change that trajectory? Remember that the 2001 Bush tax cuts were considered to be almost perfectly timed stimulus.



Recall the first Stimulus Plan. The “design” is the problem.

The first Stimulus is not based on Political-Economy. Rather its based on Political-Political.

Fed study: Bailouts and stimulus plans can recessions into depressions

Jul 9, 2009 11:03 UTC

Some interesting conclusions from a Minneapolis Federal Reserve Bank study of how country’s deal with financial crises. The White House might want to take a peak at the whole thing. Here is a bit of it (bold is mine):

1) Governments are now spending huge sums of public money to bail out financial institutions that had not been previously regulated. … Labor and capital will stay employed in unproductive uses. Incentives for future investment will be distorted by moral hazard problems.  …  Indiscriminate bailouts in the financial sector will reward many of those who made bad decisions and make it even more difficult to assess risks in the future. Understanding the moral hazard problems created by bailouts, many citizens and politicians will call for massive regulation of all financial institutions. Directly and indirectly, massive and indiscriminate bailouts of the financial system will create inefficiency and low productivity.

2) What do we need to do now? The central banks in the countries that are in crisis should lend to banks to maintain liquidity.  … The bailout should not be used to maintain high returns either to the equity holders or to the bond holders in these institutions. Investors who made risky investments should not be rewarded when these investments have  gone bad. Any public spending on investment in infrastructure should be justified on its own merits, especially in terms of its potential for increasing productivity. Otherwise, we should let the market work in letting unproductive firms go bankrupt and reallocating what remains of their resources to more productive firms. Reforming bankruptcy laws in some countries could make this process more efficient.

3) Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression. Those who try to justify the sorts of Keynesian policies implemented by the Mexican government in the 1980s and the Japanese government in the 1990s often quote Keynes’s dictum from A Tract on Monetary Reform: “The long run is a misleading guide to current affairs. In the long run we are all dead.” Studying past great depressions turns this dictum on its head: “If we do not consider the consequences of policy for productivity, in the long run we could all be in a great depression.”