Broken windows theory in action: Cash for clunkers!

BRIAN WESBURY applies the "broken windows" fallacy to Cash for Clunkers:

The basic problem with cash for clunkers is that it uses the old “broken windows” theory of economic activity. Everyone who lives in a hurricane zone knows that typically people are never busier than right after a major storm. Roofs need to be replaced, while damage to vegetation, glass, power lines, boats, etc., all require overtime to repair. All that activity gets counted in GDP.
 
But everyone also knows the storm was a bad thing, destroying property that was built at a cost in the first place. Sure, everyone is as busy as a beaver, but they’re just busy replacing what they had, not actually improving their standard of living.

Bush Crowding Out

President Bush does like to stick by his word, as we have seen.

“I've abandoned free-market principles to save the free-market system ... I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis,"

Less then a week after making this statement to CNN, the Bush administration offered $17.4 billion in taxpayer earnings to GM and Chrysler, in order to prop up companies that are producing items that currently no consumers wants, and have not wanted for some time.

In April 2008, before the government begin handing out money, Honda's sales were up 4.2% and Nissan's were up 3.6% yet Detroit's big three car companies sale's were down 10.4% (HT: International Herald Tribune)

The opportunity cost here is seen in two major areas. First, that $17.4 billion could still be in the hands of taxpayers, encouraging spending. Secondly, these companies are putting capital to use in inefficient ways. Should they be allowed to go bankrupt, the capital would be allocated, by the invisible hand of the market, to much more efficient sources. This would in-turn create more jobs then are being protected.

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,"

Too bad President Bush did not see this quote as a good thing.
(minus "disorderly," but bankruptcy is a government regulation, if it was "disorderly" would a better fix be to adjust the regulation, as opposed to throwing money at companies?)

Biodieseling: the mirage of energy independence.

In May 2005, President Bush signed legislation creating federal subsidies for domestic biodiesel production. Along with supporters of biofuels, the President argued:

“... every time we use homegrown biodiesel, we support American farmers, not foreign oil producers.”

The reduction of baseline oil imports was a goal of the $1 per gallon tax credit, funded mainly though debt and the income tax payments. However, as is the case with most government-induced price distortions, unforeseen consequences came into play.

In 2007 almost 60% (291 million gallons out of 490 million gallons) of domestic production was exported. In the first eight months of 2008, an estimated 511 million gallons out of the 600 million gallons of biodiesel were exported rather than consumed domestically.

This means that $600 million was spent to replace 89 million gallons of oil. Since we import about 60% of our oil, we reduced our "foreign oil dependence" by 52 million gallons or a cost of about $11.54 per gallon, which seems to be hardly cost-effective.

HT: The Houston Chronicle

America's Economic Myths

Suffolk University Master in Economic Policy student David Saied debunks some commonly-held economic myths over at the Ludwig von Mises's web site.

My personal favorite is a put-down of the unfortunately popular catchphrase: "energy independence." Both McCain and Obama would do well to have a quick look at this paper, as it seems one of the few things they both agree on is false.

The high price of oil has nothing to do with its origin; the price of oil is determined in international markets. Even if the United States were to produce 100% of the oil it consumes, the price would be the same if the worldwide supply and demand of oil were to remain the same.

Read the whole article.

Government is not an efficient entrepreneur

Barack Obama thinks that government can pick a winner and his industrial policy suggests that green jobs will help grow the U.S. economy.

At last month's DNC, Obama claimed that he will “invest $150 billion over the next decade in affordable, renewable sources of energy” creating “five million new jobs that pay well and can't ever be outsourced.”

Not so fast with those job numbers says John Stossel who takes on Obama's major premise that government directed "investment" to create Green Jobs is something that he should be proud of. Obama's claim misses the larger point: government is a lousy investor subject to the push and pull of politics.

1.) Stossel reminds us "Alaska Rep. Don Young claimed the infamous "bridge to nowhere" would create jobs." Digging a hole then filling it is also creates jobs, but people would not consider that a benefit.

As BHI research economist Ben Powell has noted numerous times, “Jobs themselves are not a benefit; if they were, workers would be paying their employers for the privilege of working, rather than vice versa! It is the value created by performing those jobs that is the benefit, while doing the job is the cost an individual must pay to obtain a benefit.”

2.) Stossel also questions the idea “that Obama knows how best to 'invest' the $150 billion.” I have always held a firm belief that entrepreneurs invest much better then any politician. The entrepreneur risks their own money, and therefore will suffer any costs of a poor investment, encouraging them to measure the risk very carefully. The government risks my, and your, money so the costs are merely passed onto taxpayers. McCain suffers from the same issue, saying he “will support projects to advance technologies that capture and store carbon emissions,” funded via federal revenue. He is careful to say he is for “support,” as he is against “subsidies." Six one way, half a dozen the other.

Green jobs are touted as a welcome byproduct of climate change legislation. In truth it is taking money out of the private sector and putting it into a government that take a cut. When an indepth look is taken and the hand waving and populist rhetoric has been pushed aside, current climate change strategies that consist of a mixing of heavy handed government regulation often fail to meet the basic criteria of cost-benefit analysis.

More of this line of critique can be found here at BHI:

The Faulty Economics of Colorado's Climate Change Action Plan: A Peer Review

The Economics of Climate Change Legislation in North Carolina

Peer Review: Minnesota Climate Mitigation Action Plan Cost-Benefit Analysis

Is Laissez Faire to Blame?

Thomas Sowell is one of the intellectual giants of our time. Not since Milton Friedman have we seen an economist who can translate economic jargon into everyday language.

Sowell's two latest columns, both on the so-called housing crisis, are a testament to his ability to see an issue clearly. Despite what others say, Sowell demonstrates how government, not the market, is at the root of the latest housing crisis. You can read them here and here.

I once had an economics professor tell me that the crisis came about because the housing market was unregulated. He said this with a straight face ignoring the long history of housing legislation and regulation. No doubt my professor would like more government. But, as Howard Husock has demonstrated, housing problems become worse when the federal, state and local governments intervene.

Hard Times or Easy Rules?

This entry is a follow-up on John's post about the media's coverage of the economy.

Today's Globe story, "Food stamp use soars in Mass," is an illustration of how the media lacks a sense of proportion. Given the ubiquity of economic progress, are we as bad off as the screaming headlines suggest?

At first glance the reader gathers the impression that there are hungry people out there scrapping for food. But further down the inverted pyramid of the story is a useful detail that obviously doesn't fit into the messy and gloomy Globe meme of economic chaos.

The online applications made available in November, combined with the state's eight new satellite offices, help working families and disabled people who might have difficulty going into state offices for interviews and paperwork, officials say. Four of the new centers - in Boston, Lynn, Chelsea, and Fall River - are dedicated solely to food stamps. The state is also waiving the need for face-to-face interviews more frequently for working families and the disabled.

In June, the state changed its asset requirements for recipients and no longer considers bank accounts, retirement accounts, or property ownership when determining eligibility.

Basically, it's not so much that the demand for food stamps has increased because more people going hungry. Rather the rules have changed thus lowering the transaction costs for acquiring food stamps. The incentives to apply for food stamps are now greater than they were a year ago.

The downturn in the business cycle no doubt puts a strain on low-income people. However, there is little evidence that indicates a long-term rise in hunger. The bureaucrats have shifted the goalposts to ensure the survival and expansion of the food stamp program.