Alan S. Blinder Isn’t Economically Illiterate

With the final passage of the Housing and Economic Recovery Act of 2008, we have officially embarked on the New New Deal. We’ve come to the end of a 30-year cycle of deregulation and are now moving into a period of expanded government involvement in the economy.

As Milton Friedman said, real change is actually quite rare, but when it does come, it generally activates whatever ideas happen to be lying around.

And all kinds of strange ones have been lying around, waiting for their turn in the sun.

Here’s one of them. It comes from Alan S. Blinder, a well-respected Princeton economist and former Federal Reserve Vice Chairman.

Blinder wants to spend your tax dollars to buy cars from low-income people.

Let’s work through this together…

Ok. The basic idea is this: Spend anywhere from $8 billion to $20 billion a year, finding people who make below a certain amount of money, and who drive vehicles that are 15 or more years old. And give those people up to $3,500 in return for their cars.

What good is that idea? Three promised benefits: First, it gets the worst polluters off the road. Second, it’s income redistribution, and we all know how badly America wants that.

Third and most importantly, it puts some cash into people’s hands, so it should act just the same as the economic stimulus we enacted earlier this year. (The effects of which are now fading, as Blinder himself acknowledges.)

Blinder’s numbers don’t really make any sense. He proposes to spend $8 billion a year to buy up two million cars. That’s $4,000 in expenditure to generate a $3,500 money input to the consumer economy.

I don’t buy that. Bureaucrats aren’t cheap. This isn’t like Social Security where computers do all the work. I think that to write a $3,500 check, the government will end up spending not $4,000 but maybe $12,000 or even more. But leave that aside.

Blinder’s point is that if you give a low-income person a check, that person will spend the money immediately. Whereas a person who’s not so strapped will do evil, un-American things like pay down her high-rate debt, or make a prepayment on her mortgage. And those activities don’t make the reported economic growth numbers look any better.

The trap that Blinder is falling into is that pure fiscal stimulus doesn’t change the incentives in the economy in any permanent way, nor does it give low-income people any way to increase their productivity (which would be a real way to put more purchasing power into their hands).

I think that Blinder, like Paul Krugman (and to some extent Ben Bernanke) believes that periods of economic weakness are just about liquidity impairment. Add a touch of inflation, just like you’d put WD-40 into a squeaky door hinge, and all will be well. Reality is considerably more complex, but let’s not go there today.

Instead, let’s put the environmental activism and the Keynesian macroeconomics to the side. What’s the real problem with buying a car away from a low-income person?

It’s that you’re taking that person’s transportation away from her. That 15-year-old pollutant-belching clunker is how she gets to work and how her kids get to school.

The Blinder program calls for giving a 20% premium over market value to the owners of these cars. Fine, so you give someone $3,500 for a car with the expectation that she’ll spend the money immediately.

But if she does that, she’s without a car. Now how does she get to work?

She’s not going to spend the $3,500 on low-end imported manufactured goods from China, as Professor Blinder may expect. And she sure as heck isn’t going to go to her local Toyota or Honda dealer and start shopping for a $15,000 replacement for the clunker.

No, she’s going to start calling her friends and neighbors and reading Craig’s List, looking for another used car in the $3,500 price range. In short, another clunker.

What the Blinder proposal will do is nothing more than to apply an artificial 20% markup to the existing market for low-end transportation. Cars that were worth $3,000 will now be worth more like $3,500. You’re inflating an asset-value without generating any additional purchasing power, because it’s not credible that people will replace the car with other kinds of spending.

And if you’re really serious about the goal of eliminating 15-year-old cars from the road, what happens if you succeed? You’ll actually eliminate the stock of affordable transportation at the low end altogether, making our low-income heroine’s life a whole lot harder than it is now.

And to do all this, we’ll spend $8 billion of taxpayer money a year. Or maybe more like $20 billion.

Alan Blinder is a very accomplished and smart guy. He knows his macroeconomics cold. But what he doesn’t know about the incentives faced by ordinary people at the margins of the economy serves to neatly point out the limits of activist government.

-Francis Cianfrocca