The horizon is not so far as we can see, but as far as we can imagine

Doing a Stimulus Right and Wrong

Jobs lost and gained in construction over the last year

Jobs lost and gained in construction over the last year

Chris over at Construction Software Adice dug into the stimulus numbers to figure out how many construction jobs it has created or saved. The graph to the left shows jobs lost vs. jobs saved and gained, from Sept of last year to this September.

Less than overwhelming.

Meanwhile, the news about last week’s GDP numbers was that a big chunk of the 3.5% gain came from “motor vehicles”, which most economists are reading as meaning that the cash for clunkers program, in which the government gave credits for purchasing a new relatively fuel efficient car if you turned in an older car, was wildly succesful.

The Wall Street Journal bewails that the real cost is more than the 3 billion sticker price, which is odd.  I mean, the government has spent trillions during the financial crisis, and the stimulus bill itself was 787 billion dollars.  In that context, 3 billion is peanuts.

Think about that for a moment.  3 billion for the cash for clunkers produced a huge chunk of GDP growth.  It probably wasn’t the full 1.7%, but it was significant.  So far, about 160 billion dollars of the stimulus bill has been spent (bear in mind, about 37% of the bill was tax cuts and not spending).

What this should twig you to is that most of the stimulus was done in incredibly inefficient fashion.  If 3 billion could be responsible for that much GDP growth, it means the the remaining 157 billion wasn’t pulling its weight.

A proper stimulus should do a few things:

  • It should increase spending in the economy or stop a spending decline.
  • It should fix fundamental economic problems at the same time.
  • It should be something which businesses can plan on going forward.

Cash for clunkers met two of the three criteria.  It increased spending in the economy and even pried loose money that wouldn’t have been spent otherwise.  Consumers received a credit, sure, but they also had to pony up some of their own money.

It also worked on a fundamental economic problem in the economy: it increased fuel efficiency and decreased pollution from cars.

What it didn’t do is create any sort of long term demand which business could count on going forward.  It happened, it’s done.  Auto companies can’t ramp up production expecting that demand to continue, auto dealers can’t order more cars expecting that demand to continue, and auto suppliers can’t rehire employees expecting this demand to continue.

But for 3 billion for so much effect, why not extend it, and gaurantee funding for, say, 3 years?  36 billion for a proven effective stimulus is a good deal.

Let’s step back to the construction workers we started this piece with.  What should the government have done to really help them?  To really help the construction industry?  The current real help, forget direct spending, is a tax credit for those buying new houses.   That may seem like it meets the criteria of being ongoing and creating new spending, but in fact it is only ongoing.

In fact, high housing prices are a problem in the US economy.  They need to be lower, because right now they reduce job mobility (if you can’t sell your house, you can’t move), they lock younger people out of the housing market (houses are still too expensive even with the credit), they make the US internationally uncompetitive because Americans have to be paid wages capable of supporting inflated housing prices, and they depress general demand because high mortgage payments are money not being spent on goods other than housing.  Trying to make housing prices artificially high is as stupid now as  it was Greenspan was doing it.

Instead, why not give credits for refitting buildings for energy efficiency, active and passive solar?  Say 10K for a single family 3 bedroom home with scaling credits for larger and smaller homes, and credits for office buildings, factories and so on?  Immediately you have a ton of work for construction workers, if the credits are expected to go on for years businesses can plan for them, and that means manufacturing all the necessary materials including solar panels, and they reduce the amount of energy the US needs, which means it’s solving a fundamental problem in the economy rather than making it worse.

The scandal of the stimulus bill isn’t how much it cost.  It’s how relatively inefficient it was, and how little it looked forward and attempted to fix fundamental problems in the US economy.  Contra the WSJ, cash for clunkers was a good and efficient program.  Not perfect, but as stimulus goes, effective.  Let’s learn from it, and do even better.


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  1. I agree with the general principle behind the Cash for Clunkers program, but I think the way it was actually administered was awful. It had all sorts of bizarre details, like a cap on how old a car could be traded in, for example. That makes no sense; it’s directly opposed to the purpose of the program, which already had a provision that the car had to be drivable and owned for a year prior to receiving the credit. There are people still driving cars from the 80s who couldn’t cash in, but someone who bought an H2 two years ago could.

    Then there was the part about fuel economy being computed based on revised EPA estimates of the efficiency of a car *when it was new*. This is the one that prevented me from trading in my old junker, by the way (for full disclosure). By an estimated 2 mpg. Another outright loony idea, as if cars don’t degrade over time, leaking/burning fluids, losing fuel economy, and becoming less safe along the way. Granted, factoring in depreciation might not be easy, but ignoring it is fantasy. (I’ll admit to being piqued that the car in question would be illegal to drive in a state with emissions testing, but is too ‘clean’ to be a clunker)

    The various eco-stimulus packages the government has tried often seem to be constructed like this. Take the older tax-credit for hybrid cars, for instance. It phases out as the cars become more popular, so poorly selling hybrids that never took off can still collect, while the Prius has been ineligible for years. (another disclosure, my wife owns a Prius, along with what feels like a third of Madison, WI). Considering that the goal is to put more hybrids on the road, this is again rather backward.

    Finally there’s the new ‘plug-in hybrid’ tax credit, which was specifically created to reward the GM Volt and all-electric novelty cars like the Tesla. The credit in question is computed by the battery capacity of the car, purely the amount of juice it can hold. This means that people with a two-car garage can get an almost 8k tax credit on their family sedan and run it off the grid, which in most of the country means burning more dirty coal at the power plant. Meanwhile, urban and apartment dwellers, without a place to plug in a car, receive no benefit. A plug-in hybrid without an outlet has no special utility, but it does cost a lot more to make, uses an enormous amount of rare lithium, and has, depending on the battery design, a distinct risk of breaking down, or even having the battery explode. Lithium’s fairly toxic too.

  2. Lex

    I followed Cash for Clunkers rather closely…being a native Detroiter and a jalopnik (the ideal, not the website).

    It was a very effective economic stimulus that could have been designed much better than it was. John’s quite right about some of the silly qualifications. My 1987 Toyota Pickup (not that i’d have the heart to send it to the crusher) originally qualified and then had its EPA numbers changed right before the program took effect. But the idea that a vehicle sees no efficiency loss over its life span is just silly. The nine year old vehicle that sees more miles than my truck would have been traded for something both American and much more efficient, but it didn’t qualify either.

    I agree that the program should be continued, and the only qualification should be a mileage increase of X or Y mpg. As the program was structured, it was easy to game. The Hummer could be traded in on another truck/SUV that was only 4 mpg better than the Hummer and the buyer got the full credit.

    And the program was gamed. Worse, the government gamed the numbers after the fact to make it look like an environmental success that it was not. It counted the same vehicle with different drive train options as different models. Eg, a Ford Escape has 5 configurations, each was considered a model. The Prius has just one configuration.

    The government count should small, efficient cars as the most purchased. But Edmunds crunched the numbers using the standard metrics for figuring car sales: there were two full-sized pickup trucks and an SUV (maybe two) in the top ten.

    But all that’s besides the point of Ian’s post. Even considering its failures, Cash for Clunkers proved to be a very good model for economic stimulus. It certainly put people in the auto industry back to work. Stimulus should flow up, not trickle down.

  3. It does certainly seem to be effective as a stimulus package, but it’d be nice if it was also better at the ecological aspects, and I think you could do both without diminishing the stimulus.

    I’ve long thought that we should ditch the technology specific credits, whether they be for hybrids or plug ins or what not, and replace it with a sliding scale emissions-based credit. Emissions per mile, counting, and this is critical, the emissions generated to produce and deliver the Kwhs to the home needed to charge up any plug-ins, so they don’t game it. (Currently people seem to think that electricity is clean, until the power company wants to put up a new coal plant next door.)

    Beyond that, anything should go. The goal is to improve air quality, after all; that and stimulate car purchases. High efficiency diesels can be just as efficient as hybrids, and you can build a very efficient small gasoline powered car without any fancy technological bells and whistles. This would encourage innovation, instead of lobbying Congress for handouts on specific designs.

  4. Lex

    Indeed, John. Using the example of my truck, i would have been hard pressed to replace it within the same class and receive the credit. It’s a sad state of affairs when our technological progress has resulted in lower fuel efficiency (some of that is because of mandated safety features…mandating stricter licensing requirements seems like a better way to reduce road fatalities, and some of it is the desire for a vehicle to have a bazillion gadgets).

    I think that in the big picture diesels are probably cleaner than hybrids, but why nobody has paired a diesel engine with a hybrid system is beyond me. The idea that cars are disposable is environmentally dangerous too.

    An interesting vehicular stimulus might be an offer to pay for LPG/LNG conversions. It doesn’t change fuel economy much, but it is clean. The automakers will howl though. A natural gas engine will last forever. (no carbon buildup inside the engine. A family member was part of an automaker test: after 50,000 continuous, hard miles the engine oil was like brand new)

    You’re right, the point is to achieve the improvements. Structure credits based on the result, not the means to achieve them.

    BTW, the Volt technology will be the future of automobiles (not that GM will lead that future). I’ll drive an electric car when it works like the Volt and has a diesel generator tuned to run 50% recycled vegetable oil.

  5. Your point about hybrid diesels is something my stepfather, a big diesel fan, always says when this topic comes up. Diesel-electric engines are a no-brainer and proven technology, used in trains for… I don’t even know how many decades. There’s a reason hospitals use diesel generators for their emergency power; it’s absolutely 100% reliable and dead simple to maintain. If we could take a good hybrid system and slap a diesel engine in, instead of a gas one, then perhaps adjust our tax system to reflect how clean diesel fuel is these days with the ultra low sulfur content, we might have ourselves a winner.

    As for the Volt: I’m highly skeptical. While the idea of directly using electricity to drive the motors is absolutely correct in the long run, the battery design is a real problem for me. Li-ion is just not a good technology for cars. Lithium is incredibly rare in a usable form and expensive, mostly found in high remote mountain ranges. Half the world’s proven reserves are in the hands of one country, Bolivia; China has an additional large chunk locked up in Tibet. If li-ion hybrids like the Volt really took off the price of lithium would go into the stratosphere; it’s already terribly high. Then there’s the safety issue, as most li-ion batteries are vulnerable to temperature extremes and catastrophic failure. It’s bad enough when a laptop battery fails, starting a small fire. Imagine the risk when that battery weighs almost four hundred pounds, like the Volt’s.

    I guess time will tell on the battery’s safety and reliability. As for the Volt, at a 40k price tag, I doubt it will imperil the affordability of lithium batteries as a whole. I do chuckle at the geopolitics of the idea of getting off of our dependence on OPEC only to become dependent on a Bolivian-Chinese lithium consortium though. That’s leaving aside any environmental concerns about strip-mining those areas, too.

    We can agree on biodiesel, by the sound of it, recycled vegetable oil being just one of the thousand ways you can make diesel fuel from plants, heh. I have a friend in Miami where they run some buses off the stuff, and he says there’s one major downside: the exhaust smells like very delicious french fries and makes you hungry.

    Imagine that: good smelling car exhaust. McDonalds could be looking at an advertising windfall.

  6. Lex

    The batteries are always the trouble, and if you live in a cold climate they’re even more trouble. My point was more that i don’t see much point in the “strong” hybrid system currently in use. Too much manufacturing complexity and the batteries to achieve diesel efficiency.

    Yeah, for $40,000 i could do a frame off restoration of my truck (protect it from the rust goblins); rebuild the engine; convert it to natural gas; and never buy another vehicle…with plenty of change left over. That’s my idea of environmentally sound motoring.

    Dr. Diesel designed his cycle and the engine that uses it with homemade, plant based, fuel in mind. If we’re really lucky someone will figure out how to hijack photosynthesis at the hydrogen ion production phase and someone else will figure out a way to store hydrogen with burned chicken feathers or something.

  7. My wife drives a Prius so I have a lot of experience with it on trips. I love the car, though it’s not perfect. It isn’t so much that it gets great mileage (though it does) as that every little thing seems exceptionally well-engineered. It’s a very smooth, very easy, very comfortable drive, it barely touches its fluids, the oil never even gets dirty, though we have it changed every 5k as recommended anyway, etc.

    It’s even a great car for winter, which is important here in Madison. The traction control system is the best I’ve ever seen in a car (though man it kills your mileage).

    I guess my point is, the fact that it’s a *hybrid* that gets 48 mpg isn’t as important to me as that it’s a *good vehicle* that gets 48 mpg. I’m firmly agnostic when it comes to how you get to the low emission goal, so long as there’s a fuel supply lined up. Natural gas, biodiesel, some more reliable battery type for full hybrids, gas, cellulosic ethanol, whatever ends up working best.

    I’m thinking I’ve wasted enough of your time today, heh. Thanks for the conversation though.

  8. DWCG

    The more I listened to the debate about how to stimulate the economy the less complicated it all seemed. All one had to do was assess what the immediate problem was and plug the hole in ways that have proven to generate economic activity. Let’s just take two of them:

    -People on unemployment, maxing out their credit cards to pay the bills, loads of late payments, higher costs for everything, foreclosures, etc.
    -Local governments cutting back their budgets laying off workers and reducing private contracts for small scale infrastructure work, closing schools/expanding class size, laying off cops/firefighters, reducing medical/health benefits.

    You slow the sinking by throwing a bucket load of money at the programs that are being cut:
    -fixing potholes, tree trimming, sidewalk repair, bus and rail maintenance
    -more investment in secondary/early education/cops and firefighters/Medicaid, and
    -Pell Grant increases and subsidies for student loans

    To help those being hit:
    -extending and expanding unemployment benefits
    -increased food stamp eligibility and benefits, and
    -more ambitiously: HOLC, caps on credit card interests rates and allowing anyone to buy into Medicare and covering those who can’t afford it.

    That’s not to say he shouldn’t have used the crisis to do big and transform our economy, but those things take time to plan if they’re to be done right (revolutionizing the energy grid, expanding urban mass transit, etc.). He could have simply deferred the big stuff to 2010-2012, telling the local/state govs to get their strategic plans ready because in that span of time $2 trillion will be dedicated to bricks and mortar. It would have allowed him to barnstorm the country and generate consensus with the Congress and refine broad policy visions/the country’s transition. And more importantly, come 2012 this country would be ready to reward him with another term.

    On Day One that stimulus package didn’t have to be anything special to slow the bleeding. In fact, the less sexy and mysterious it was (simply expanding existing commitments) the easier it would have been to implement.

    That’s my two cents.

  9. BYD, in China, is building some very advanced electric cars. It has also invented a new battery called, lithium ion ferrous phosphate technology. Warren Buffet has invested heavily in this company; very interesting.

    Here’s a link to the article;

  10. As far as stimulus goes; something to think about is a modern version of the WPA. Most unemployment goes for about 6 months and then extensions for another 3-6 months. Why not put people to work doing WPA type projects for the extension money payed out. It’s been my experience unemployed people would rather work than spend the days, weeks, and months pounding the pavement for nonexistent jobs.
    The infrastructure in the U.S. is and has been deteriorating for many many years. One but has to look at Timberline Lodge (Mt. Hood, Or) and the stone work of the old Columbia River hiway to see the value of such work.

  11. Oops. It would be nice to have an edit feature here; ^ should read: One has but to…

  12. Lex

    Didn’t feel like a waste of my time, Paul, though it might not have been the conversation that Ian expected to provoke. I’ll stop by your place sometime.

    I’m with you DWCG, from both an economic and political perspective the stimulus was befuddled. One that went to the people directly would be more effective and give Obama a direct relationship to the population. He’ll have a hard time shaking the impression that he took care of the bankers first and best.

  13. Ian Welsh

    DWCG. Don’t agree. Reforming the economy doesn’t take that long to plan. That idea is a fallacy. The work on how to do it has been done, repeatedly. Over and over and over again. Whether it’s changing the energy grid or whatever, there are people who have made it their life’s work to figure out how to do it. The broad legislative details can be done in a couple months, if that’s what is desired, the specific details of implementation can be handled by the bureaucracy. The problem these days is that Congress tries to detail implementation far too precisely. The entire New Deal legislation could fit into one bloated bill coming out of today’s Congress. Canada’s entire health care act is less than 20 pages.

    With regards to the rest, yes, there’s a fair bit of truth to that. Keep up state and city spending, extend UI (which should have been done ages ago) and so on.

  14. Ian Welsh

    WPA would be a good idea, yes. Nothing wrong with the car conversation. It’s a field I don’t follow closely, and I’m learning a great deal.

  15. DWCG

    In general I’m in total agreement that too much legislation is bad. Much of the reason a lot of the Stimulus funds to the state and locals have yet to be spent is because they all spent the first few months figuring out how to draw down the dollars.

    However, I’m concerned any time the government shovels out hundreds of billions, without first requiring states and locals to identify plans and entities to efficiently utilize the funds.

    Take an energy grid. Sure lots of states, even those far ahead of the curve like California, have goals to create a clean grid, but converting a 25 year strategic goal into 25 month implementation plan requires discussion, permits and most important public input and transparency.

    I’m saying do it, but give the public a good year to discuss it, local small biz to bid on the contracts and for the states and municipals to fine tune their plans – NOT Congress (albeit they unfortunately will over-legislate). And admittedly I’m partially of this belief because I know how the stimulus created a rather insane environment at local agencies.

  16. If I were ruler of the world, I’d just mandate that these enormous bills be written as directly runnable computer programs, considering that money is administered electronically these days. Unfortunately, that would require all our legislators to be competent programmers. I’m not sure this is a bad thing though.

  17. Lex

    Dead conversation, i know, but i made an assertion about the gaming of the Cash for Clunkers program without backing it up because i didn’t have a link handy. Yesterday the Detroit News published a story on it:

    “The single most common swap — which occurred more than 8,200 times — involved Ford F150 pickup owners who took advantage of a government rebate to trade their old trucks for new Ford F150s. They were 17 times more likely to buy a new F150 than, say, a Toyota Prius. The fuel economy for the new trucks ranged from 15 mpg to 17 mpg based on engine size and other factors, an improvement of just 1 mpg to 3 mpg over the clunkers. ”

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