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Archive for the ‘Bad Economics’ Category

Cash for Clunkers, Turning Beaters into Value

Posted by jab12004 on May 6, 2009

For every good idea there are ten bad ones, and this seems to be one of the bad ones.  The program is just like it sounds.  Turn in your used car; get $3,500 – $4,500 towards a new, fuel efficient one.

Rich put it in perspective by saying that it clearly isn’t an environmental program, it’s an auto subsidy.  But still, seriously???  If we are interested in promoting the purchase of new autos, the government should provide an across the board credit for purchasing a new car.  All Cash for Clunkers does is greenwash an auto subsidy and put it under the climate umbrella.  It also ads a number of strange quarks to what might have been a straightforward auto credit.

Let’s think some reasons that cash for clunkers is a bad idea for an environmental (or economic) perspective

1.  There is no way to know how much someone drives the car they turn in.  I could bring in my 1975 Gremlin which has sat in my front yard collecting rust for the last few years.  As long as I can drive it to trade it in, I get the credit.  Basically, having an old beater gives you a free credit.  In the end a family might end up driving more since they now have more cars than they previously did.

2.  Building a new car generates around 6.7 tons of CO2 emissions according to a duke’s Bill Chameides.   He estimates that it would take at least 5 years to offset this with the new vehicles lower MPG.  This increases to almost 20 years if the new car is an SUV.  This of course assumes that people drove their old cars as much as they drive their new cars.  If they didnt’ drive their old cars it will take a LONG time to offset the zero emissions they gave off.

3. A SUV which has at least 18 MPG (sticker, not actual MPG) gets a voucher (WSJ).

4. Democrats want to potentially fold this into the larger energy bill, “unless [the] measure becomes hopelessly entangled in policy disputes (NY times).”  Adding provisions like this is exactly how a large energy bill is not going to pass.

5.  This is the sort of thing Stavins was trying to warn against…don’t cook dinner and eat in the shower at the same time.  Remember?

I guess we have to give the compromise some credit for not including a “buy American” or flex fuel provision.

Posted in Auto, Bad Economics | 3 Comments »

Farm bill

Posted by Daniel Hall on May 22, 2008

I’ve been surprised by the lack of attention that the U.S. farm bill has received in the corners of the blogosphere I frequent. The current food crisis is getting lots of attention, but the farm bill… not so much. I’ve refrained from commenting largely because of how shamefully little I know about U.S. farm policy.

I suspect that some of the current silence among bloggers is a result of similar ignorance, but a larger portion represents a combination of shame and despair. Nearly every policy wonk of any political persuasion agrees U.S. agricultural policy is a disaster — conservatives hate it (or should) for the massive governement handouts, while liberals decry (or should) who the handouts go to and the environmental damages they cause. But at the same time the political interests entrenched behind leaving policy ‘as is’ mean that substantive reform is a non-starter. Hence the shame and despair.

Now that the bill has passed (over the President’s veto) I thought I’d point you to the best post I’ve seen so far on the bill’s problems: Greg Mankiw quotes an insider at the White House on some of the bill’s most distasteful provisions. Do read the whole thing, but here’s a couple candidates for worst part of the policy:

Too much spending: The bill increases spending by almost $20 billion over the next ten years, at a time when net farm income is at an all-time high. …

New sugar program: The bill would make the government buy sugar for 2X the world price, store it, then resell it at about an 80% loss to the taxpayer. Sugar sells for about 11¢/lb on the world market. The US government would have to buy sugar for about 22¢/lb, store it, and then auction off the excess to ethanol plants. …

Using food aid $ inefficiently: Under current law, US food assistance for hungry people around the world must be spent purchasing US crops. The President proposed to allow up to 25 percent of US global food assistance to be spent purchasing food from local farmers (in the country where the people are starving). This allows US dollars to be spent purchasing food, rather than paying transportation costs.

Meanwhile, the WaPost editorial page highlights another real loser from the bill:

…the bill could authorize up to $16 billion more in crop subsidies than previously projected…

The culprit is a new program called Average Crop Revenue Election, or ACRE for short. ACRE gives farmers an alternative to direct payments, which come regardless of how much money they make, and other subsidies. Starting in 2009, farmers can choose to trade in some of their traditional subsidies in return for a government promise to make up 90 percent of the difference between what they actually made from farming and their usual income. …

[ACRE] pegs the subsidies to current, record-high prices for grain, meaning farmers would get paid if prices fall back to their historical and, for farmers, perfectly profitable norms. A program that started out as a streamlined insurance policy against extraordinary hardship has mutated into a possible guarantee of extraordinary prosperity. [emphasis added]

As the editorial makes clear, the policy change could have actually been a welcome reform, by providing a way to transition from direct subsidies to a more insurance-based model where farmers got paid in bad years. The problem is that by using record-high grain prices as the baseline for ‘usual income’, the program is insuring that farmers make bank. On the other hand, there’s always the chance that this won’t cost the government as much as we think:

The farm bill’s defenders insist that a budgetary disaster will not come to pass, because grain prices will not come down much during the five years the bill will be in effect.

Ah, what a relief! The government won’t have to pay for this program because the world’s urban poor are going to continue to be choked by food prices for the next five years. Glad we got that cleared up.

If readers are aware of other good analyses of the farm bill I’d be thankful for a pointer. Here’s Tim Haab recently on the effects of U.S. farm subsidies.

Posted in Agriculture, Bad Economics, Biofuels, Government Policy | 1 Comment »

Point Carbon gets it wrong

Posted by Rich Sweeney on April 7, 2008

Today Environmental Capital touted a new study by Point Carbon on free permit allocation. Commissioned by the WWF, the report unsurprisingly finds that free allocation has lead to windfall profits in Europe. Largely a tutorial on opportunity cost supplemented with an empirical analysis of pass through in Europe, everything seemed straight forward until the one quote the WSJ decided to pull out of the summary:

“Providing a free allocation to individual plant that is carbon intensive does reduce the
incentives provided by the scheme to invest in low emissions generation technology –
thereby off-setting one of the main aims of the scheme.”

Um, no. Firms have an incentive to maximize profits, which depends on price and cost. And as the report explains beautifully, and as I’ve said here numerous times before, what matters is opportunity cost, not nominal cost. Thus the CO2 price, and therefore the resulting electricity price, is the same in both scenarios, giving firms the same incentive to innovate as before. The only difference is that they make a lot more money under free allocation.

H/T to Anthony Paul for actually reading the summary carefully.

Posted in Bad Economics, Cap and Trade | 3 Comments »

Cob mentality

Posted by Evan Herrnstadt on October 19, 2007

According to Greenwire (subscription req’d), Barack Obama and Tom Harkin have proposed a new bill that would expand the national Renewable Fuels Standard:

The Obama-Harkin bill would require use of 18 billion gallons of ethanol and other renewable fuels by 2016, with 3 million gallons coming from “advanced” biofuels like cellulosic ethanol.

Read the rest of this entry »

Posted in Bad Economics, Biofuels, Climate Change, Government Policy | Leave a Comment »

Asking nicely may not cut it

Posted by Daniel Hall on September 22, 2007

China’s No Car Day doesn’t seem to have had much effect:

Cars have been banned on some central streets in Beijing and all drivers are being encouraged to leave their cars at home voluntarily. But correspondents say that in the capital National No Car Day appears to be making little impact. … The BBC’s James Reynolds in Beijing says that cars are coming and going as normal, and most streets in Beijing are not adhering to No Car Day.

Voluntary regulation generally won’t work without incentives for those being regulated. Those incentives don’t have to be money — you can appeal to people’s better natures and their desire to be good citizens. But generally once you start dealing with millions of people, you have a collective action problem that is going to require more than a, “Please be good!”

Posted in Bad Economics, Government Policy, Transportation | Leave a Comment »

Convincing arguments, bad economics

Posted by Rich Sweeney on September 21, 2007

This is the first in what will probably be a long string of installments describing (and hopefully debunking) arguments that sound reasonable to the lay person, but that fly in the face of widely accepted economic theory. I was originally going to call this series “Arguments rent seekers make”, but I decided to be less cynical. However, it is important to note that this is more than just some snotty academic exercise. Voters’ and policymakers’ susceptibility to these types of arguments leads to suboptimal policy outcomes and inefficient transfers of wealth. At RFF we spend a lot of time explaining (and re-explaining) the fact that “common sense” and a rational examination of actors’ incentives do not always yield the same conclusions. Maybe documenting examples of this will save all parties involved time in the future.

Ok. Today’s example is a simple one, and it has been explained many before in the popular press and blogosphere. Nevertheless, a lot of intelligent, well intentioned players in the carbon regulation arena still don’t quite get it. Do you?

Several eastern states have agreed to cap carbon emisions and now they’re working out the details of the program (it’s the Regional Greenhouse Gas Initiative, in case you’re interested). One of the main points of contention is whether pollution permits should be auctioned off or given away for free to electricity generators. Generators have been telling politicians that if they have to pay for permits, this cost will be passed on to end users. Therefore, they argue that if politicians want to keep electricity prices down, they should give the permits away for free.

Why is this line of reasoning incorrect? Assume competitive, deregulated electricity markets. And, for now, ignore any considerations of what the states could do with the auction revenue they receive. I’ll give my explanation in the first post.

Posted in Bad Economics, Cap and Trade, Electricity, Government Policy | 1 Comment »