Implicit debate about Keynesian stimulus
I've been musing about an opinion piece in Monday's Wall Street Journal, entitled "Cash From Clunkers". It's fairly short, pointing out that a lot of the "cash for clunkers" program consists of dubious wealth transfers, from taxpayers to people who might buy cars.
It does seem, on the face of it, that destroying a working car in order to get people to buy a new one is a strict reduction in wealth (albeit paid for by someone else). But that's really at the core of Keynesian stimulus: The question of whether a recession can be combated by getting people to spend money, effectively or not. My understanding is that, among economists, it's fairly well established that an economy can get into a Keynesian trap, where people don't spend money simply because other people aren't spending money. So on that level, the piece is more or less dishonest in not mentioning Keynes at all.
That's kind of puzzling, since there's plenty of room for a useful critique of the program: It's not at all clear to me that the current crisis matches the Keynesian pattern, and the "cash for clunkers" program is not well-constructed to that end. It should really target (rather than exclude) the vehicles that are old enough to be pollution problems, and tying it to new cars is probably counterproductive.
Probably in another 30 years we'll know exactly how we should have handled this.
It does seem, on the face of it, that destroying a working car in order to get people to buy a new one is a strict reduction in wealth (albeit paid for by someone else). But that's really at the core of Keynesian stimulus: The question of whether a recession can be combated by getting people to spend money, effectively or not. My understanding is that, among economists, it's fairly well established that an economy can get into a Keynesian trap, where people don't spend money simply because other people aren't spending money. So on that level, the piece is more or less dishonest in not mentioning Keynes at all.
That's kind of puzzling, since there's plenty of room for a useful critique of the program: It's not at all clear to me that the current crisis matches the Keynesian pattern, and the "cash for clunkers" program is not well-constructed to that end. It should really target (rather than exclude) the vehicles that are old enough to be pollution problems, and tying it to new cars is probably counterproductive.
Probably in another 30 years we'll know exactly how we should have handled this.