Category Archives: Economics

More on the economics of the Car Allowance Rebate System (CARS); AKA “Cash for Clunkers”

Yesterday, I blogged concerning The economics of the Car Allowance Rebate System (CARS) and the First-Time-Home-Buyer Tax Credit (FTHBTC).  I brought up the topic of economic stimulus but didn’t follow through on it.  In what follows, I will try to make some assessment of stimulus possibilities based upon data reported in the article entitled “Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold, Reports Edmunds.com”.

If you read the Edmunds.com article referenced above a bit more closely, you’ll notice the following table which compares (annualized) Actual/Forecast sales with and without Cash for Clunkers:

Month Actual (or Forecast) If no Cash for Clunkers Difference
Jan ’09 9.59 9.59 0.00
Feb ’09 9.14 9.14 0.00
Mar ’09 9.69 9.69 0.00
April ’09 9.20 9.20 0.00
May ’09 9.85 9.85 0.00
Jun ’09 9.67 9.80 -0.13
Jul ’09 11.22 10.11 1.11
Aug ’09 14.06 10.45 3.61
Sep ’09 9.19 10.63 -1.44
Oct ’09 10.40 10.89 -0.49
Nov ’09 10.40 10.82 -0.42
Dec ’09 10.61 10.85 -0.24

The numbers in this table indicate annualized auto sales rates (actual or forecast) on a monthly basis during 2009 (the monthly unit sales is calculated by dividing the annualized data by 12, so this implies that in May 2009, 9.85 million/12 = 820,833 new cars were sold in the United States). 

This table clearly indicates that the primary effect of CARS was to change the timing of vehicle sales, and that it had a very limited effect on total volume; specifically, during the months in which CARS was in full swing (i.e., July and August, 2009), more sales were generated than would have been the case had the program not been implemented. The program stimulated temporarily higher sales rates last summer primarily by motivating people who would have bought cars anyway to simply act sooner.  The overall effect of CARS during 2009 is to increase new car sales in the United States by a total of 1.65%, which translates into an additional 170,000 unit sales (obviously, it will be interesting to see how long it takes for new car sales to revert back to the seasonally adjusted trend line).  After the program expired, the auto industry had marginally worse sales than they normally would have expected simply because some of the sales that “should” have occurred in September through December occurred instead during July-August.  Based upon this analysis, I stand by my earlier assertion; i.e., that as far as stimulus measures go, CARS most certainly had a very low (probably close to 0) multiplier effect upon the overall economy.

Print Friendly, PDF & Email

More on the economics of the Car Allowance Rebate System (CARS); AKA "Cash for Clunkers"

Yesterday, I blogged concerning The economics of the Car Allowance Rebate System (CARS) and the First-Time-Home-Buyer Tax Credit (FTHBTC).  I brought up the topic of economic stimulus but didn’t follow through on it.  In what follows, I will try to make some assessment of stimulus possibilities based upon data reported in the article entitled “Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold, Reports Edmunds.com”.

If you read the Edmunds.com article referenced above a bit more closely, you’ll notice the following table which compares (annualized) Actual/Forecast sales with and without Cash for Clunkers:

Month Actual (or Forecast) If no Cash for Clunkers Difference
Jan ’09 9.59 9.59 0.00
Feb ’09 9.14 9.14 0.00
Mar ’09 9.69 9.69 0.00
April ’09 9.20 9.20 0.00
May ’09 9.85 9.85 0.00
Jun ’09 9.67 9.80 -0.13
Jul ’09 11.22 10.11 1.11
Aug ’09 14.06 10.45 3.61
Sep ’09 9.19 10.63 -1.44
Oct ’09 10.40 10.89 -0.49
Nov ’09 10.40 10.82 -0.42
Dec ’09 10.61 10.85 -0.24

The numbers in this table indicate annualized auto sales rates (actual or forecast) on a monthly basis during 2009 (the monthly unit sales is calculated by dividing the annualized data by 12, so this implies that in May 2009, 9.85 million/12 = 820,833 new cars were sold in the United States). 

This table clearly indicates that the primary effect of CARS was to change the timing of vehicle sales, and that it had a very limited effect on total volume; specifically, during the months in which CARS was in full swing (i.e., July and August, 2009), more sales were generated than would have been the case had the program not been implemented. The program stimulated temporarily higher sales rates last summer primarily by motivating people who would have bought cars anyway to simply act sooner.  The overall effect of CARS during 2009 is to increase new car sales in the United States by a total of 1.65%, which translates into an additional 170,000 unit sales (obviously, it will be interesting to see how long it takes for new car sales to revert back to the seasonally adjusted trend line).  After the program expired, the auto industry had marginally worse sales than they normally would have expected simply because some of the sales that “should” have occurred in September through December occurred instead during July-August.  Based upon this analysis, I stand by my earlier assertion; i.e., that as far as stimulus measures go, CARS most certainly had a very low (probably close to 0) multiplier effect upon the overall economy.

]]>

Print Friendly, PDF & Email

The economics of the Car Allowance Rebate System (CARS) and the First-Time-Home-Buyer Tax Credit (FTHBTC)

A student in my managerial economics course asked me a very interesting question today concerning the U.S. federal government’s “Cash for Clunkers” (also known as “CARS”, which is an acronym for “Car Allowance Rebate System”) program.  Specifically, she was interested in knowing how to assess the social costs and benefits of government programs like CARS from an economics perspective.

Let’s look at CARS and its cousin, the so-called “first-time-home-buyer tax credit” (FTHBTC).  It’s worthwhile reading the October 28 Edmunds.com article about the economics of CARS.  Apparently the net cost to taxpayers of CARS, per marginal sale, was $24,000.  Coincidentally, MIT economist (and former IMF chief economist) Simon Johnson published a Washington Post article about FTHBTC earlier this week which reports a net cost to taxpayers of FTHBTC of between $43,000 to $80,000 per marginal sale.  Thus the net effect of both policies has been to create a rather muted, temporary, and highly inefficient stimulus at a substantial cost to the taxpayer (the same points could be made about any number of other stimulus measures taken this year by the U.S. government, but I digress).  Professor Johnson notes (and I agree) that “Putting cash in pockets does have a stimulative effect because some of that cash will turn into consumption. But as far as stimulus measures go, it has a low multiplier (the ratio of new economic activity to stimulus spending).” 

In the case of CARS, a social cost of $24,000 provides a maximum net private benefit of $4,500 (note that the clunker would have to be literally worthless in order for the net private benefit to be equal to $4,500!), and in the case of FTHBTC, a social cost of $43,000 – $80,000 provides a maximum net private benefit of $8,000 (note that since the FTHBTC is means-tested, the average net benefit must be less than the $8,000 maximum).  In the case of FTHBTC, Professor Johnson asserts (and I agree), that most, if not all of the private benefit (i.e., additional “surplus”) is enjoyed by the seller of the home in the form of a higher price than she would have otherwise received from the buyer in the absence of the FTHBTC.  With the FTHBTC, the buyer will naturally become less reticent about paying top dollar for owner-occupied housing because up to $8,000 of the price is covered by taxpayers (also note that other public policies such as the tax deductibility of mortgage interest and mortgage securitization by the likes of Fannie Mae, Freddie Mac, the FHA, et al. have similar effects with respect to inflating the value of our nation’s housing stock).  For these very same reasons, I also suspect that much of the “surplus” associated with CARS ended up benefitting sellers by making new car buyers less price sensitive than they otherwise would have been.

Finally, bringing this question “closer to home”, I often think about the economic effect of government subsidies on higher education.  To the extent that the government subsidizes tuition (e.g., in the form of scholarships and below-market interest rates on student loans) this also has the effect of increasing the producer surplus enjoyed by universities by making students and their families less sensitive to price.  I am convinced that an important reason why education costs generally and higher education costs specifically have been increasing faster than overall inflation for some time now is due to the role played by government subsidies.  There’s also an obvious cautionary tale in all of this for health care reform, but I’ll leave that to a future discussion.

Print Friendly, PDF & Email

SuperFreakonomics

Tonight on ABC’s 20/20 program, the entire show will be devoted to SuperFreakonomics (subtitled “Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance”).  SuperFreakonomics is the recently released sequel to Freakonomics (subtitled “A Rogue Economist Explores the Hidden Side of Everything”) which appeared in 2005.  The authors of both books are Steven Levitt and Stephen Dubner.  Levitt is an economics professor at the University of Chicago and the 2003 winner of the John Bates Clark medal (“awarded biennially … to that American economist under the age of forty who is judged to have made the most significant contribution to economic thought and knowledge”; for what it’s worth, roughly 40% of the Clark medalists have subsequently received the Nobel Prize in economics).  Dubner is an award-winning author and journalist who lives in New York.

Anyway, tonight’s 20/20 program will air five segments, all of which can be previewed online: handwashing in hospitals, the effectiveness of car seats, how practice trumps talent, the dirty truth about altruism, and the problems with global warming.  If you’re interested in following the Freakonomics blog, it is located at http://freakonomics.blogs.nytimes.com

Print Friendly, PDF & Email

Executive Compensation Debate

I would like to call everyone’s attention to a formal online debate concerning executive compensation which began on Tuesday, October 20 and is scheduled to conclude on October 30th.  Later in the semester, we’ll discuss how to structure compensation to align incentives between owners and managers of firms.  However, this debate, which is sponsored by The Economistaddresses the ongoing public controversy concerning whether senior executives are worth what they are paid. 

Specifically, the motion reads as follows: “This house believes that on the whole, senior executives are worth what they are paid.”  The person defending the motion is Steven N. Kaplan, who is the Neubauer Family Professor of Entrepreneurship & Finance at the University of Chicago Booth School of Business.  Professor Kaplan may very well be one of the most widely published and prolific scholars on the topic of executive compensation.  The person who is against the motion is Nell Minow, who is Editor and Co-founder of The Corporate Library, which is an organization that bills itself as “…the leading independent source for U.S. and Canadian corporate governance and executive & director compensation information and analysis”.  Anyway, this debate should certainly be interesting to follow!

Print Friendly, PDF & Email

The economics of the market for swine flu vaccine

I would like to call attention to a short article entitled “Swine flu vaccines and elasticity of supply”.  The author of this article, Geoff Riley, claims that most of the swine flu market is being contested by only four companies: GlaxoSmithKline, Sanofi-Aventis, Novartis AG and AstraZeneca.  He also notes that “For students of the price mechanism it is a fascinating example of many supply and demand concepts at work: the challenge of scaling up production to meet huge levels of demand – this has involved out-sourcing, the relative importance of fixed and variable costs in developing and manufacturing/distributing a new drug, the elasticity of supply of vaccines to meet short term health requirements, the oligopolistic race to win and protect market share, economies of scale in production, the balance of power between the major buyers and the multinational drug suppliers, price discrimination tactics.”  I hope that Mr. Riley will expand further upon these topics in future blog postings.  If he does, I will be sure to pass this information along.

It appears (to me, anyway) that the U.S. is not all that well prepared this time around for either the seasonal flu or the swine flu.  Both types of flu appear to be in full swing, and yet there are pervasive shortages of both types of vaccines.  I can only hope that the situation does not deteriorate as badly as it did in 2004, which was the last time that a major vaccine shortage occurred.  Back then, the U.S. government had contracted with just two companies, Aventis (now Sanofi-Aventis) and Chiron (now a division of Novartis AG), for each firm to supply roughly 1/2 of the entire U.S. flu vaccine market that year.  The problem then was that in early October 2004, the UK’s Medicines and Healthcare Products Regulatory Agency (MHRA) suspended Chiron’s license to manufacture influenza virus vaccine in its Liverpool facility, which in turn prevented the company from releasing any of its flu vaccine product during the entire 2004-2005 influenza season.  In fact, the shortage became so severe in the U.S. that by late October 2004, numerous articles began to appear touting medical tourism to Canada for the purpose of getting vaccinated for the seasonal flu; e.g., see my 10/27/2004 blog entry entitled “Some Canadian Flu Shot Alternatives”.  Considering that (according to the Centers for Disease Control (CDC)) seasonal influenza by itself typically accounts for 140,000 hospitalizations and 40,000 deaths per year in the United States, this demonstrates how hazardous it can be to rely upon such a small number of suppliers.

Print Friendly, PDF & Email

Implications for Capital Metro of the Price Elasticity of Demand

Last night on the local (Austin, TX) news, there was a segment concerning how the local public transportation agency (AKA “Capital Metro”) apparently is planning to raise fares. The reporter was speculating about how large of an impact Capital Metro’s pricing decision might have upon ridership. 

Earlier this month, I began teaching a managerial economics course in Baylor University’s Executive MBA program in Austin.  Fortuitously, I just covered the topic of the price elasticity of demand this past week.  This concept measures how sensitive product demand is to price changes for a good or service.  Therefore, I think that my MBA students and I are in a much better position than the reporter was to predict what will likely happen.  Since we know that the price elasticity of demand for public transportation is quite low, averaging around -0.3 in the United States, this statistic implies that the proposed fare increase should reduce overall ridership, but not by nearly as much in percentage terms as the increase in the fare itself. Furthermore, since market demand will decrease in response to an increase in fares, so will overall system costs, assuming that Capital Metro managers not only have the good sense to scale back costs in response to a decline in market demand, but also have the flexibility (particularly from a labor contract and labor relations viewpoint) to do so. The “good” news (from a taxpayer viewpoint, anyway) is that the net effect will be that Capital Metro’s “fare recovery ratio”, or FRR (which measures the percentage of the bus route’s cost that is paid by riders rather than taxpayers) should increase. According to a recent Capital Metro report (see http://bit.ly/2bbGi3), its FRR was just 9% in 2007. Out of 32 North American public transportation systems referenced at http://en.wikipedia.org/wiki/Farebox_recovery_ratio, this is by far and away the worst FRR performance; the average FRR for this group is nearly 40%, and the standard deviation is 18%, which implies that Capital Metro is, in every sense of the term, a true “statistical outlier”.

Print Friendly, PDF & Email

On the use of math in economics (version 2.0)…

In response to my previous posting entitled “On the use of math in economics…”, my colleague Allen Seward pointed out the following quote to me (Attributed to Alfred Marshall; see Todd G. Buchholz, 1989, New Ideas from Dead Economists, New York: Penguin Group, p. 151.):

In a letter to his protégée, A.C. Pigou, he [Marshall] laid out the following system: “(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often.”

Print Friendly, PDF & Email

On the use of math in economics…

As I prepare my course in managerial economics, I have tried to put myself in my students’ shoes and ask why all the math?  This is a particularly relevant question because my students are enrolled in Baylor’s executive MBA program, and they (quite understandably) have no interest in becoming professional economists. 

In his recent blog entry entitled “Mathematics and Economics”, Paul Krugman notes, among other things, that “Math in economics can be extremely useful”, and that math can serve an essential analytic function by helping to clarify one’s thoughts.  Some other samplings from the economics blogosphere include the following observations:

  1. Greg Mankiw (cf. http://gregmankiw.blogspot.com/2006/09/why-aspiring-economists-need-math.html) notes, among other things, that “Math is good training for the mind. It makes you a more rigorous thinker.”
  2. Jason DeBacker (cf. http://www.econosseur.com/2009/02/why-economists-use-so-much-math.html) makes the following observations: “Math provides a common language for economic thought”, and “Math helps to quantify tradeoffs.”  He also notes that “Using math puts in plain sight the assumptions that lie behind a model and the mechanisms at work in the model”, which is consistent with Professor Krugman’s observation noted above.

However, I am also reminded of the famous quote “it is better to be vaguely right than precisely wrong” which is commonly (and incorrectly) attributed to the famous economist John Maynard Keynes. (For what it’s worth, O’Donnell (2006) notes (see p. 403, footnote 14) that “This saying so aptly captures a strand in Keynes’s thought that he is frequently, but wrongly, treated as its author”; apparently, the original source for this memorable quote was a contemporary of Keynes by the name of Wildon Carr (see Shove (1942: 323)). 

References

O’Donnell, R., 2006, “Keynes’s Principles of Writing (Innovative) Economics,” Economic Record 82 (259), 396-407.

Shove, G.F. (1942), “The Place of Marshall’s Principles in the Development of Economic Theory,” Economic Journal, 52 (208), 294–329.

Print Friendly, PDF & Email

How to Fix America's Health Insurance Crisis: GET SOME

Although this video is somewhat dated (since it makes passing reference to the health care reform proposals of the 2008 presidential candidates), it provocatively illustrates why a nontrivial proportion of the nearly 47 million Americans who lack health insurance may be “voluntarily” uninsured.  Indeed, a recently released study by the Employment Policies Institute puts the number of uninsured Americans ages 18-64 who could likely afford health coverage at roughly 18 million people.  This video provides some anecdotes as to why this occurs.

]]>

Print Friendly, PDF & Email