Wednesday, August 26, 2009

A Study of Unintended Consequences?

The "Cash for Clunkers" program has been a great lesson for classroom use. This is particularly true if you believe the true value of economic-thinking is developing the ability to understand second-order effects.

Perhaps one of the better (or at least more entertaining) assessments of the program to date has been on the Economists Do It with Models blog. (You have to go beyond the blog's banner - trust me.)

The author of the Cash for Clunkers post at EDIWM has a clear opinion about the program. I'm not sure I'm as down on it as she is. I do agree it distorted the market and was a significant wealth transfer. (To paraphrase, "A billion here, a billion there, pretty soon you're talking real money.")

The program itself was touted as a classic example of targeted fiscal stimulus. I suspect that the authors of the legislation were hoping that the impact would be longer lasting, and focused on the "Big Three." Nevertheless, there was an impact on the numbers (see today's release of durable goods numbers). Now the question for your students, and perhaps one all of us should have asked earlier, "What’s the likely effect now that the program has ended?"

But the post goes beyond the effect on the auto industry. It examines the impact on charitable giving (smaller than we think, I expect) and the used car market (larger than we think). It also provides some points to counter concerns about which companies benefitted and, by extension, which workers and which stockholders. And the video she uses can surely be used in some classes to generate discussion - especially later in year when you start discussing macro and the role of government.

Finally, a word about the blog itself. I've been following it for a short-time, and I find it both informative and entertaining. The same goes for another recent addition to my blogroll, The Seven Scholars, although that one has more of a “finance and investing” focus. (It’s still worth visiting.)

What I enjoyed about EDIWM's post was the broad array of links and graphics. While I can't say it's joined my daily rotation yet - it's rapidly becoming one of my regular stops.

I welcome your comments about the post and the blog in general.

Here are more posts on the Cash for Clunkers that make very interesting and very clear reading. Gary Becker and Richard Posner on the Becker-Posner blog - one of the best.

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