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Sunday, October 24, 2010

Cash for Clunkers in a Macro Context

More empirical studies are demonstrating that temporary fiscal stimulus actions are a poor way to get the economy moving again on a sustainable basis. More permanent and predictable policies are much better. I demonstrated this problem in the case of the stimulus packages of 2008 and 2009, but perhaps the clearest case is the “cash for clunkers” program of July and August 2009. To illustrate the problem quantitatively, it is useful to put some new micro-empirical results of Atif Mian and Amir Sufi into a macroeconomic context, as I do with the following charts.

The first chart shows disposable personal income along with personal consumption expenditures in the United States. In previous work I focused on how the two big bulges in disposable income due to the stimulus programs failed to jump start consumption. But here I focus on the cash for clunker program, which clearly did change consumption.
Using the Mian-Sufi results, which are based on a comparison of different regions of the United States, I estimated the amount by which total personal consumption expenditures first increased as people were encouraged to trade in their clunker and purchase new cars, and then declined because many of the trade-ins were simply brought forward. To make this increase and subsequent decrease easier to see, the second chart focuses on personal consumption expenditure during the period of the program. You can see that consumption rises above what it would have been without the program and then actually falls below what it would have been. Some argue that bringing forward purchases like this is exactly what such programs are supposed to do, but the graph makes it very clear that the offsetting secondary effects occur so quickly that the net result is an insignificant blip in the recovery. The impact is not sustainable.
An important result of Mian and Sufi is that the positive effects are completely offset in a few months, as you can see in the picture. But even if they were not offset, the graph raises serious doubts about how such a program could sustain a recovery. Suppose that the red line never dipped below the blue line. We would still see growth simply picking up for a month and then slowing down again. That is not sustainability.