You have to wonder about the wisdom of encouraging people with no savings to borrow more money at a time when there are no jobs.

Definitely the quote of the day!

Here we go again, John Taylor

This is the most outstanding image from John B. Taylor where he offers clear graphical evidence that the Bush stimulus did not work and the Obama stimulus did not work because as learned long ago temporary income changes do not change long term behavior.

This chart is cited in an excellent testimony by Dr. Kevin A. Hassett, Senior Fellow and Director of Economic Policy Studies, American Enterprise Institute before the Joint Economic Committee October 29, 2009. His testimony is "The Impact of the Recovery Act on Economic Growth" and is an excellent review of economic thought on how to grow the economy.

The entire Joint Economic Committee session is on video here as are links to all the testimony by each of the presenters.

WHAT: JEC Hearing: The Impact of the Recovery Act on Economic Growth

WHO: Panel I: Dr. J. Steven Landefeld, Director of the Bureau of Economic Analysis, U. S. Department of Commerce

Panel II: Dr. Karen Dynan, Vice President, Co-Director of the Economic Studies Program and Robert S. Kerr Senior Fellow, Brookings Institution

Dr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT’s Sloan School of Management, Senior Fellow, Peterson Institute for International Economics

Dr. Mark Zandi, Chief Economist, Moody’s Economy.com

Dr. Kevin A. Hassett, Senior Fellow and Director of Economic Policy, American Enterprise Institute

WHEN: 10:00 a.m., Thursday, October 29, 2009

WHERE: 2237 Rayburn House Office Building

Government purchases a 3.5% growth rate, but it may be a "clunker"

Today the BEA announced the third quarter growth of GDP of 3.5% preliminary.

The details are interesting. In seasonally adjusted chained 2005 dollars (Table 3 of the tables accompanying the official release) the GDP rose from Quarter 2 to Quarter 3 of $112.5B or 0.87% of the Q2 base GDP of $12.9T. That rate over four quarters is the 3.5% reported increase.

So what rose the most between the 2nd and 3rd quarter? I calculated those increases and the top detailed items are "motor vehicles and parts" of 11.82% and "recreational goods and vehicles" of 3.29% and nothing else comes close.

While auto sales are up over 11 percent, overall consumption is up LESS THAN 1 percent and auto sales are still less than reported in 2008. Investment is up 2.8% which is positive compared to the previous quarters, but the investment of the 3rd quarter in 2008 was over $2T and in the 3rd quarter of 2009 is less than $1.5T. That is a 25% drop in one year.

So the good news of a 3.5% growth is driven primarily by auto sales in the first part of the quarter. Since in this quarter the Cash for Clunker program was touted as so successful, one might quickly think that type of stimulus worked. Here is what you need to know. While the Clunker program did spur sales and they apparently show up in the national income accounts, Edmunds.com reports that each auto sold cost tax payers $24,000 per vehicle sold. The government offers a direct payment of $4,500 to buy, but the actual effect is $24,000 per car that was sold and influenced by the program.

Understand this, if I was going to buy a car anyway, then knowing I was getting $4,500 would be a great windfall, but would not change my behavior. So the cost of $4,500 paid to me was "wasted." So the true cost is for those buyers that were encouraged to buy the new car (and who would not have done so without the program) is basically all of the costs expended divided by the number of cars sold only because the program was offered. In short, the government can not take credit for all sales, but only the increase. And not all of the increase either, if all the program did was to encourage future sales to occur now. My read of the Edmund's.com evidence is that in the 4th quarter auto sales will not lead the way in GDP growth and may negatively contribute. so the economy will have to turn around strongly in other sectors not to see a low or negative growth next quarter.

In short, the government did indeed purchase a higher GDP. But can they keep it?

UPDATE 10/31/09

White house hits back (and links CEA report and Edmunds.com -- WH says see for yourself.)

Hot Air comments

Costs of Health Care Reform in the second ten years

I've been looking in to health care reform costs and one thing does not make sense. We get quoted that the cost of reform is under $900B for the first 10 years (CBO), but what about the next 10 years. Here is the Lewin Group's Sept. 9 , 2009 analysis of costs in Long-Term Cost of the American Affordable Health Choices Act of 2009 as Amended by the Energy and Commerce Committee in August 2009. While this is not THE BILL that will emerge the conclusions are what I believe to be instructive. The bill is essentially fully funded (or deficit neutral) from 2010 to 2019, but will add to the deficit $1,009.5T over the second ten years. And that number is with increased taxes on higher income individuals. Click above for the whole report or on the image for the relevant table. (HT Peter G. Peterson Foundation)

John Nist Nudges Behavioral Economics

The theory of games is not my field, but I appreciate many of the revelations of the games. What has always bothered me in a way I could not articulate was many of the accepted conclusions of behavioral economics. Enter John List, professor of economics, University of Chicago in this article by Tim Hartford: "How an inconvenient economist upset the cool crowd"

In the I should have known this category, consider this from the article: "List set up a baseball card trade to mimic the “gift exchange” game, and showed that baseball card traders behave just like laboratory subjects when they know they are in an experiment. But many traders didn’t know they were being watched, and they behaved far more selfishly.

So the universal result of the behavioralists that people are not rational is under attack and oddly that makes me smile.