Short Sighted Economic Thinking

Calendar September 2, 2009 | Posted by Michael S. Langston

Well, we’ve moved from Cash for Clunkers onto Cash for Appliances and politicians everywhere have patted themselves on the back for what a fine job the original program did.

According to most news reports, sales were up a tremendous amount due to this program.  ABC News reports Auto Sales Up in August Thanks to Cash for Clunkers, Bloomberg reports U.S. Consumer Spending Climbs on ‘Cash for Clunkers, and CNN reports 4th UPDATE: Auto Industry Posts Best US Sales Of Year.

If one just reads the headlines and do the normal drive-bys on the news, this is yet another government program which is a rousing success.

This assumes of course you only look on the surface.  Looking further, there were many consequences of this program that probably wasn’t helpful.  Listing the potential and real negatives is a worthwhile endeavor if we truly wish to analyze the situation.  Since I can’t sum up the problems with this program any better than Cato has, Chris Edwards posted on their blog:

* A few billion dollars worth of wealth was destroyed. About 750,000 cars, many of which could have provided consumer value for many years, were thrown in the trash. Suppose each clunker was worth $3,000 at a guess, that would mean that the government destroyed $2.25 billion of value.

* Low-income families, who tend to buy used cars, were harmed because the clunkers program will push up used car prices.

* Taxpayers were ripped off $3 billion. The government took my money to give to people who will buy new cars that are much nicer than mine!

* The federal bureaucracy has added 1,100 people to handle all the clunker administration. Again, taxpayers are the losers….

* The auto industry received a short-term “sugar high” at the expense of lower future sales when the program is over. The program apparently boosted sales by about 750,000 cars this year, but that probably means that sales over the next few years will be about 750,000 lower. The program probably further damaged the longer-term prospects of auto dealers and automakers by diverting their attention from market fundamentals in the scramble for federal cash.

This isn’t to say they’re weren’t positives.  This only mean that using a vision which includes more than the past couple of months to analyze the situation will objectively result in either seeing this as a smaller success than currently marketed, or more likely, seeing this as an actual failure.

This is a continuous issue with basic human thinking.  All humans due to brain wiring and evolution have certain built in biases that cause us to make ineffective decisions.  By better understanding those biases, we can seek to minimize them.  Without minimization though, this thinking results in quick based resolutions that are overreaching and often end with a result much different from intended.

A few easy recent examples come to mind.  Sarbanes-Oxely, the Patriot Act, and McCain-Feingold.

Using SOX, lots of new regulations were added to company finance reports due to Enron, MCI, and other companies.  However the regulations can’t possibly prevent what took place nor can they do any better than what happened.  In Enron’s case, corrupt management ruined a business and they went to jail.  SOX will not prevent another Enron and I think the incentives against doing it again already exist when CEOs, CFOs, and others lose their business and their freedoms.

The true result of SOX?  A new industry of people and millions and millions spent by companies to ensure compliance, which is passed on to consumers that will not prevent future fraud (Bernie Madoff?).

Another example – even small decisions made too fast can turn out to be completely wrong.  Here in St. Louis, MO, they renamed a part of I70 after Mark McGwire due to his home run record.  It was a travesty to begin with as the road used to be named after Mark Twain, but after the steroid scandal included Mr. McGwire the idiocy and quickness of the decision was easy to see.

Additionally, the economy; lots of us still wish for the 90s when jobs were extremely plentiful, pay was high, and the economy was moving forward with lots of momentum.  Long term view?  It turned out to be a ponzi scheme that was mostly paper profits which resulted in a bubble that, as with all bubbles, burst.   Indeed, there was no new business cycle or new business rules that changed the economy in such a way as to guarantee no more downturns.  Several very large companies declared bankruptcy, CEOs went to jail, and millions of individuals lost a lot of their retirement money as their 401Ks nosedived.

In some ways though, making quick decisions makes complete sense.  In our very quick world, we are forced to make decisions quickly and lots of times, make those decisions based upon partial information.  In business, product innovation, management decisions, battlefield tactics, and in many other places this is necessary and having the skill to do this well is a requirement in most aspects of today’s professional life.

However, even though quick decisions on partial information are required in today’s world, we must still be cognizant of potential long term ramifications if we truly intend to leave a world for our children and grandchildren that is better than we found it.

Otherwise, we can continue to only contemplate things in small slices of time and we will certainly continue down the road of bad decisions.

Of course that’s just my two synapses rubbing together… I could be wrong.

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