A new NBER working paper from Atif Mia and Amir Sufi finds that the Cash-for-Clunkers program didn’t work. Here’s part of the abstract:
We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. The effect of the program on auto purchases was significantly more short-lived than previously suggested. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.
In other words, cash for clunkers didn’t change how much people spent. It only changed when they spent. Sales were higher than normal during the program, and lower than normal after.
As the data come in, they are proving what theory predicts: fiscal stimulus doesn’t work. President George W. Bush tried Keynesian stimulus in 2001. It didn’t work. He tried again in 2003. It didn’t work then, either. President Obama’s stimulus programs aren’t faring any better. It’s time for a different approach.
Telling the truth to one’s superiors is hard. Especially when the stakes are high. Christina Romer comes to mind. Brilliant economist. She’s done excellent work on the role of monetary policy during the Great Depression.
A partisan Democrat, she was summoned to Washington soon after President Obama’s election to advise him. All of a sudden she endorsed the Bush-Obama views on stimulus. This is a 180 degree turn from her previous views. Romer’s own academic research shows that fiscal stimulus’ effects are too small to do measurable good.
Romer the economist believes that most business cycles have monetary causes. Not fiscal. Monetary. Romer the economist had been very consistent in expressing that view. But that view changed as soon as she arrived in Washington and Romer the economist transformed into Romer the political advisor. Suspicious.
This is not a new phenomenon. Politicians from both parties have been using economists for as long as economists have let themselves be so used. Politicians love the air of legitimacy that pointy-headed academics can give to their proposals. And economists love the sudden rush of attention and name recognition — and the professional prestige that will long outlast the current administration. They are happy to sell out. Or is it buying in?
That thought was sparked by reading about F.A. Hayek mourning the death of some of his colleagues’ integrity back during the Reagan years:
“You can either be an economist or a policy advisor.
I have seen in some of my closest friends… how a few years in government corrupted them intellectually and made them unable to think straight.”
–Cato Policy Report, Vol. 5, No. 2, February 1983.
Posted in Economics, Stimulus
Tagged christina romer, f.a. hayek, fa hayek, fiscal stimulus, hayek, monetary policy, Political Animals, romer, speaking truth to power, Stimulus