Maybe Cash for Clunkers was the clunker

A couple of economists have calculated the Cash for Clunkers is costing us anywhere from $200-500 per ton of carbon dioxide saved.  This as opposed to the estimated $28/ton that the climate bill will cost.  I think both their estimates understates the cost and overstates the pollution savings, since you also have to take into account that cars which, while creaky, still have useful lives are prematurely junked.  Last I checked, melting down an old car and building a new one cost money and produce pollutants.

Added bonus: our auto industry, which should be slimming down, gets a false burst of demand which means resources that should be moving to industries that can use them more efficiently stay trapped within the Detroit boondongle.

NY Times article here.

Take the Subway…I mean Above Way

I love it when two existing ideas get combined to create a new one with advantages of both.  Here a bus line designed like a subway line with stations and turnstiles and multiple doors so you don’t have the painful waits as people board, yet don’t have the huge construction and maintenance costs of a subway.

Full article from the New York Times.

Cleaner Buses in Developing World May Be Key for Climate


Published: July 9, 2009

BOGOTÁ, Colombia — Like most thoroughfares in booming cities of the developing world, Bogotá’s Seventh Avenue resembles a noisy, exhaust-coated parking lot — a gluey tangle of cars and the rickety, smoke-puffing private minibuses that have long provided transportation for the masses.

But a few blocks away, sleek, red vehicles full of commuters speed down the four center lanes of Avenida de las Américas. The long, segmented, low-emission buses are part of a novel public transportation system called bus rapid transit, or B.R.T. It is more like an above-ground subway than a collection of bus routes, with seven intersecting lines, enclosed stations that are entered through turnstiles with the swipe of a farecard and coaches that feel like trams inside. Versions of these systems are now being planned or built in dozens of developing cities around the world — Mexico City, Cape Town, Jakarta, Indonesia, and Ahmedabad, India, to name a few — providing a public transportation network that improves traffic flow and reduces smog at a fraction of the cost of building a subway. (more)

Why is it popular?

Apparently some things get popular just because they’re perceived so…

Excerpt from article in the Wall Street Journal…

Psychologist Stanley Milgram demonstrated that people pop over even if everyone is looking at nothing, by sending a group of experimenters into the street to stare upwards. With a large enough group of gapers, passersby stopped to stare, too.

A more-recent study demonstrates that popularity in the music world, even unearned, breeds more popularity. Researchers enlisted more than 12,000 volunteers to rate and download songs from among 48 chosen for their relative obscurity. Some of these volunteers were lied to: At a certain stage in the experiment, popularity rankings for this group were reversed, so the least-downloaded songs were made to appear most-downloaded.

Suddenly, everything changed. The prior No. 1 began making a comeback on the new top dog, but the former No. 47 maintained its comfortable lead on the old No. 2, buoyed by its apparent popularity. Overall, the study showed that popularity is both unstable and malleable.

Some non-economic fizzle

Originally this blog was supposed to be more general then just economics, so will use this installment to discuss something more mundane: a home soda maker!

Soda Club USA
Not a world-changing thing product, but if you like carbonated water (I picked up the habit on a European bike trip) and find yourself spending .80-$1.50 for little bottles of carbonated water which run out in a few days, then you’ll love this.

The system consists of a carbonating maching, carbon tanks, and bottles.  The carbon tanks screw into the carbonator.  Then the soda making process just involves filling the bottle (about 32 oz), screwing it into the carbonating machine, and pushing the button several times.  The process takes about half a minute.  I probably fill bottles 5-10 times/week and a carbon tanks probably lasts a couple months.  I calculated the cost/bottle at about .25-.30, much less than what I was spending at the store (though I shop at Trader Joe’s not Costco). The carbon tanks (about 12 inches and light) can be exchanged by mail.

For about $100 to get the bottles and carbonator, I calculated my payback within a year.  The water tasted as good or better than most bottled water I have drunk.  Not having to lug bottles from an added bonus.  And means less wasted plastic bottles for the environmentlly conscious.  All in all a good deal.

Those Evil Bondholders!

Think that the battle for what’s left of GM is just those evil evil bondholders and hedge funds vs. the poor downtrodden workers?  Think again.  That bondholder could be the substitute teacher next door.  ( go to WSJ article )

Indivdual GM Bondholders Face Tough Choice
by Sharon Terlep in the Wall Street Journal

General Motors Corp. is trying to get bondholders to agree to a debt swap deal. Debra June, a substitute teacher from Stuart, Fla., is an example of why the offer is proving to be a tough sell.

Six years ago Ms. June invested $70,000 in GM bonds, thinking they were a safe bet. But under under the offering GM unveiled two weeks ago, all she would get is some stock worth about $280, according to her own estimate.

“I’m just going to take the bonds and hang them up in my living room. They’re more valuable as wallpaper,” the 52-year-old Ms. June quipped recently while flipping through a 200-page booklet GM sent to bondholders outlining what they could expect in the debt exchange.

Debra June at her home in Stuart, Fla., holding the GM book send to her with instructions for the exchange offer.

In hopes of staving off a bankruptcy filing, GM has offered to swap $27 billion for 10% of the company’s stock, which is now trading at its lowest level since the Great Depression. The offer, which runs through May 26, was crafted under close supervision of the Obama administration’s auto task force.

GM needs at 90% of its bondholders to accept the deal; otherwise, the company has said, it will be forced to file for bankruptcy protection by June 1.

Many big institutional shareholders that stand to lose millions of dollars on the deal have come out against it in public. An ad hoc committee representing institutions holding about 20% of GM’s debt outstanding have engaged in negotiations with the task force and GM.

But tens of thousands of individual bondholders like Ms. June could become just as significant a snag in GM’s efforts to stay out of bankruptcy court.

The Obama administration has warned bondholders they are unlikely to get more for their bonds if GM goes into Chapter 11 reorganization. This week GM Chief Executive Frederick “Fritz” Henderson acknowledged getting enough bondholders to accept the offer is a long shot and said a bankruptcy filing is “probable.”

Bondholders are roiled in part because they would sustain the deepest cuts under the GM plan. The government, which has lent GM $15.4 billion, would get 51% of GM stock in return for a 50% reduction in the money owed to taxpayers. The United Auto Workers would get 39% of the GM’s equity and about $10 billion in cash to restructure union health-care obligations to retirees.

Many individual investors feel they are being asked to bear more than their share of the sacrifice.

Dennis Buchholtz, a 67-year-old retired tool-and-dye supervisor from Warren, Mich., has $98,000 in GM bonds. Mr. Buchholtz, who gets no pension, uses interest from the bonds that amount to about $600 a month to supplement his social security payments.

About 10% of Mr. Buchholtz’s life savings is invested into GM bonds. He knew the auto maker was on a rough road, but believed company leaders as they insisted for years GM would not go bankrupt. “I didn’t think it would end like this,” she said. “I hoped to enjoy the 7% return I was promised and pass the money on to my kids.”

Chris Crowe, a retired electrician from the Denver suburb of Lakewood, Colo., planned to use the returned principal to eventually send his 13-year-old son to college. He recently flew to Warren, Mich., for a rally supporting small GM bondholders.

“”Bonds are a loan, they are not a speculative stock,” Mr. Crowe said.

Ms. June is worried she will be forced to return to a full-time job. Her loss on the GM bonds will erase about one-fourth of her retirement savings.

Until early this decade, she said, most her savings was in CDs. But with interest rates low, she sought advice on a prudent way to eek out more interest from savings pieced together from decades of work and some inheritance from family members. She didn’t want to invest in stocks because she saw them as too risky.

Bonds seemed to be the answer and Ms. June, who had been a legal secretary for GM earlier in her career, felt the company was a safe bet if not a lucrative one.

“I just figured it would be a great investment,” she said. “I said, ‘There’s no way on earth GM is going to belly up.’ ”

Foreclosure sucks, but…

is delaying the inevitable the solution?

Majority of Modified Loans Fail Again, Regulator Says (Update2)

By Alison Vekshin

Dec. 8 (Bloomberg) — Most U.S. mortgages modified in a voluntary effort to keep struggling borrowers in their homes and stem foreclosures fell back into delinquency within six months, the chief regulator of national banks said.

Almost 53 percent of borrowers whose loans were modified in the first quarter were more than 30 days overdue by the third quarter, John Dugan, head of the Treasury Department’s Office of the Comptroller of the Currency, said today at a housing conference in Washington.

“The results, I confess, were somewhat surprising, and I say that not in a good way,” Dugan said, citing a third-quarter survey his agency plans to release next week.

Lenders and loan-servicing companies have been modifying mortgages by lowering interest rates or creating repayment plans through the voluntary Hope Now Alliance. The group, which includes Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., said last month it helped 225,000 borrowers keep their homes in October.

Foreclosures rose to a record in the third quarter as one in 10 U.S. homeowners fell behind on payments or were in foreclosure, the Mortgage Bankers Association said last week.

“Our third-quarter report will show many of the same disturbing trends as other recent mortgage reports,” Dugan said. “Credit quality continued to decline across the board, with delinquencies increasing for subprime, Alt-A and prime mortgages.”

The OCC’s survey represents institutions that service more than 60 percent of all first mortgages, or 35 million loans worth $6 trillion, Dugan said.

Foreclosure ‘Timeout’

New Jersey Governor Jon Corzine, speaking at the conference earlier today, urged a three- to six-month “timeout” on foreclosures, saying keeping people in their homes is necessary to correct a “deeply troubled” market.

“Housing markets and mortgage-finance markets are the fuel for this problem,” said Corzine, a Democrat and former chairman of Goldman Sachs Group Inc. “We need a systematic protocol and process.”

House Financial Services Committee Chairman Barney Frank said today the regulator’s figures reflect a failed focus on interest rates. If the size of mortgages were reduced, borrowers would be less likely to default again, Frank, a Massachusetts Democrat, said in an interview with Bloomberg Television.

“The people who made the bad loans or bought the bad loans from others need to realize” that they would be better off with principal reductions than with foreclosure, he said.

Federal Deposit Insurance Corp. Chairman Sheila Bair said “the quality of the mods are not where they should be.”

John Reich, director of the Office of Thrift Supervision, questioned whether the federal government should be more involved in foreclosure prevention.

“I do have a concern of allocating government resources with such a high rate of re-default,’’ Reich said.

To contact the reporter on this story: Alison Vekshin in Washington at;

Last Updated: December 8, 2008 13:39 EST

Change at last?!

Well we have a new president in the wings.  Bush has been a disaster and I’m glad he’s finally going.  However I wonder how much change we’re really gonna get.  Obviously everyone’s list of things they want to change is different.  Here’s my in no particular order of importance and how much change I expect:

1.  Get rid of government support for domestic ethanol and the tariff on Brazilian ethanol or wherever else it comes from (yeah right).

2.  Get rid of farm subsidies (yeah right)

3. Get government out of the energy policy business (yeah right).  I don’t object to emissions taxes or tradable permits to capture the cost of pollution.  In fact this is the right thing to do from an economic perspective.  But we should get rid of tax breaks that favor specific technologies whether they be oil, gas, wind, solar, Priuses or whatever else.  These are almost always special-interest giveaways and once they become embedded are very hard to get rid of even if the technology in question becomes obsolete.

4. Get a government with an ingrained understanding of the benefits of trade (yeah right).  Bush supported trade when it was convenient and otherwise imposed safeguards.  Most trade restrictions, such as the safeguards or when we asked the Japanese to voluntarily restrict their exports to us in the 80s, are about as smart as asking OPEC to pump less oil so we can have more employment in our domestic oil industry.

5.  End the economic sanctions on Cuba.  Obama used to give this some play.  Hopefully he’lll revive it now that the election is over.

6.  Make the car companies compete on their own merits (yeah right).  If you had a choice between investing in the next Google or GM which would you do?  Why would you want your government to invest your tax dollars any differently?  Do I feel sorry for the workers who will lose their jobs and retirees who stand to lose benefits?  Yes, but those workers and retirees will only be increasing and if these companies aren’t profitable then their ability to help them will decrease further.  Instead of pouring more money down the hole, why not husband it and if there are bankruptcies, use the money to assist the workers and retirees (yes there may be problems with this too but better than not stopping the continual drain).

I’m sure I’ll think of more as time goes on.  I sincerely hope the next 4 or 8 years are better than the last, but I’m fearful alot of the things on my change list aren’t gonna improve soon.

Smart Economists doing Stupid Things

Princeton Professor and former Fed vice chairman Alan Blinder recently published a piece in the New York Times called Is History Siding with Obama’s Economic Plan? One of his main conclusions is that Democratic presidents are better for economic growth:

“Data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats.”

Blinder is presumably saying you should vote for Obama because Democratic presidents implement policies that cause higher growth.  When professional economists make statements like this they typically exercise alot of care.  Why?  First, because of the danger this is simply a correlation and not cause and effect.  An example is the Super Bowl Stock Market Theory which states that when an old NFL team wins the Super Bowl, the stock market will rise that year, and when an old AFL team wins, it will fall.  This has been right a stunning 85% of the time.  But would we go so far as to say an NFL team winning causes the stock market to go up?

Presidents definitely affect economic growth, but when and how much?  It is likely that economic growth is affected not only by the current president, but by his predecessors, especially in his first years in office.  The dot-com bust, for instance, had already begun when Bush assumed office.  Was the slower economic growth it caused his fault?  I looked at a GDP series and if you assumed the predecessor was responsible for the first two years of economic growth under his successor, then the result reverses and Republicans look better.  Which proves as little as Blinder’s result.

How much does an administration affect the economy?  As Professor Blinder admits:

“Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. Most economists will tell you that Federal Reserve policy and oil prices, to name just two influences, are far more powerful than fiscal policy. Furthermore, as those mutual fund prospectuses constantly warn us, past results are no guarantee of future performance. But statistical regularities, like facts, are stubborn things. You bet against them at your peril.”

Usually when an economist knows there are other factors such as Federal Reserve policy and oil prices, they try to control for them.  You might also want to look at which party controls Congress, since this affects policy as well.  Professor Blinder makes no such attempt.  Statistical regularities may be stubborn things.  But without controls they are likely to be biased.  And like the NFL Stock Market Theory they may not indicate much.

One might also question how meaningful the Democratic and Republican labels are for the policies that affect growth.  We often associate freer trade with Republicans.  Yet Bill Clinton pushed NAFTA and W. Bush implemented the protectionist steel safeguards.  We often associate Republicans with less social spending.  Yet under W. Bush we’ve had extremely profligate farm bills and handout to anyone and everyone, whereas Clinton and Gingrich sought to phase out farm subsidies and promote welfare reform.  If we label Clinton Democrat and Bush Republican, how should we label Obama?  He consistently trashes trade and every vote on a trade bill he’s cast has been against.  He is a staunch supporter of ethanol and farm subsidies.  With the exception of tax policy, his policies are alot closer to what we’ve seen under Bush than under Clinton.  I think history will eventually side with Clinton and Gringrich, but not with Obama.

And not with Professor Blinder’s analysis, which has more holes than swiss cheese. It is a sad day for economics when someone so smart and lucid (see his piece on free trade) gets so blinded by politics as to allow himself to publish something like this.

Why government spending might not be better

Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.

— Milton Friedman

Or if you gave the government $1000 to spend on you, do you really think they’d make better choices than you would?

The Grass is Always Greener

I can’t tell you how many times people have told me how great Canadian healthcare is:  its free (or cheap) and covers everyone.  Apparently, however, its not better for everyone.  According to this article, wait times are 5.5 weeks for CT scans and 14 weeks for MRI scans.  So what do Canadians do when they can’t wait that long?  Well one thing they can do is to come to the US.

I’m not saying the US healthcare system is unequivocally better than Canada’s, but the reverse isn’t true either.