Discussion of “The Effects of Fiscal Stimulus: Evidence from the

2009 Cash for Clunkers Program”by

Atif Mian and Amir Sufi

NBER Public Economics Program MeetingNovember 4 2010, Cambridge MA

Jonathan A. ParkerKellogg School of Management, Northwestern University

Outline

1. Summary2. Kick the tires3. Is this consistent with what we know?4. Did CARS work?

1. Summary of paper

1. Summary of paper

1. Big effect on impact– Reasonably precise estimation– CARS caused 360,000 purchases about half of

CARS purchases2. Reversed after a few months

– Big standard errors: 95% confidence interval can’t reject no reversal

1. Summary of paper

1. Big effect on impact– Reasonably precise estimation– CARS caused 360,000 purchases, about half of

CARS purchases2. Reversed after a few months

– Big standard errors on cumulative3. There is a shred of evidence on the next direct

step in the multiplier and it is big (needs work)– Auto employment is 0.6% higher in the year

following CARS

2. Kicking the tires

1. Rules complex, measurement of clunkers not• Ratio of clunkers to cars averages either 0.5 or 0.17

2. Scaling purchases and clunkers a concern•

3. Estimation of total effect assumes no effect in bottom decile of

4. Heterogeneity in responses rural/culture

Rural and Northern

Southern and small/urban

2. Kicking the tires

1. Rules complex, measurement of clunkers not• Ratio of clunkers to cars averages either 0.5 or 0.17

2. Scaling purchases and clunkers a concern•

3. Estimation of total effect assumes no effect in bottom decile of

4. Heterogeneity in responses rural/culture• If Southern and rural states dislike green cars and like

light trucks for doing farm work, they have lots of clunkers and low responsiveness to the program

2. Kicking the tires

1. Rules complex, measurement of clunkers not• Ratio of clunkers to cars averages either 0.5 or 0.17

2. Scaling purchases and clunkers a concern•

3. Estimation of total effect assumes no effect in bottom decile of

4. Heterogeneity in responses rural/culture5. What causes the identifying variation?

– eg: Florida, Nevada, Arizona vs S. Dakota

Farm states booming U-rates: N and S. Dakota lowest

Subprime sand states . .U-rates: Nevada highest and Florida 4th highest

2. Kicking the tires

1. Rules complex, measurement of clunkers not• Ratio of clunkers to cars averages either 0.5 or 0.17

2. Scaling purchases and clunkers a concern•

3. Estimation of total effect assumes no effect in bottom decile of

4. Heterogeneity in responses rural/culture5. What causes the identifying variation?

– If “controls” imperfect (or endogenous), need a theory of what generates identifying variation

3. External validity (related evidence)

1. Incidence: Probably on consumer– Busse, Silva-Risso, and Zettelmeyer (AER 2006)

Customers get 70-90% of dealer rebates that the customer knows about (but only 30-40% of those they do not)

2. Reversal

1. Incidence: Probably on consumer2. Reversal

– Busse, Simester, Zettelmeyer (MS 2010): “Best Deal You’ll Ever Get”

3. External validity (related evidence)

1. Incidence: Probably on consumer2. Reversal

– Busse, Simester, Zettelmeyer (MS 2010): reversal– Parker, Souleles, Johnson, and McLelland (2010):

no reversal   Non-durable spending

Total spending Spending on new cars

 Fraction of ESP spent during three

months of arrival0.254 0.757 0.342 (0.110) (0.360) (0.221)

 Fraction of ESP spent during

subsequent three months of arrival0.157 0.479 0.315

(0.178) (0.568) (0.350)   

Cumulative fraction of ESP spent over bopth periods

0.411 1.236 0.657(0.273) (0.892) (0.551)

3. External validity (related evidence)

4. Did CARS work?Complaint: the paper mixes discussion of the micro evidence, which is has,

with discussion of general equilibrium effects on prices and output, which it does not. The paper’s tone is that CARS did not work.

“Given the very swift program reversal associated with CARS, our results suggest that the net impact of the stimulus program – a program that cost $2.85 billion - is far smaller than initial gains in auto purchases suggest.” Only a little smaller and much bigger than the $2.85 billion.

“The inter-temporal “crowding out” effect that we document in this paper is consistent with models that incorporate the Ricardian equivalence hypothesis, such as Barro (1974, 1979).” Yes, and with New Keynesian models, for example Christiano, Eichenbaum, Rebelo with huge multipliers at the ZLB.

“Our findings do not warrant the claim that all forms of fiscal stimulus fail to boost long-run economic output.” The findings also do not warrant the claim that CARS failed to boost . .

“. . .any argument that the CARS program had [a positive aggregate effect] must be consistent with (a) the sharp relative reduction in auto purchases we find in high CARS exposure cities after the program, and (b) the lack of any discernable relative impact on employment, house prices, or household defaults in high versus low CARS exposure cities.”

(b) is consistent with a big aggregate effect in a small open economy, so lets see about the plausibility of (a)

4. Did CARS work?

2007-III

2007-IV

2008-I

2008-II

2008-III

2008-IV

2009-I

2009-II

2009-III

2009-IV

2010-I

2010-II

2010-III

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%Annualized Real Growth Rates

GDP PCE

4. Did CARS work?

2007-III

2007-IV

2008-I

2008-II

2008-III

2008-IV

2009-I

2009-II

2009-III

2009-IV

2010-I

2010-II

2010-III

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%Annualized Real Growth Rates

GDP PCE

NBER dates recession as over!!!

4. Did CARS work?

2007-III

2007-IV

2008-I

2008-II

2008-III

2008-IV

2009-I

2009-II

2009-III

2009-IV

2010-I

2010-II

2010-III

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%Annualized Real Growth Rates

GDP PCE CARS

1. Big bang for buck: Cost $2.85 caused $38 billion in demand– Mian-Sufi: CARS cost $2.85 billion and caused

360,000 car purchases– If average new car cost $25,000 then estimates

imply that CARS increased “demand” directly by $38 billion

– Implies CARS increased PCE directly by 0.4% in 2009 Q3 and decreased PCE directly by 0.2% in 2009 Q4 and 2010 Q1 for only 2.5 billion

4. Did CARS work?

2007-III

2007-IV

2008-I

2008-II

2008-III

2008-IV

2009-I

2009-II

2009-III

2009-IV

2010-I

2010-II

2010-III

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%Quarterly Growth Rates

GDP PCE CARS

1. Big bang for buck: Cost $2.85 caused $38 billion in demand

– Aside: roughly half of purchases (360K/677K) would have occurred anyway

– Could have other benefits: greener world2. The multiplier can be huge at the ZLB!

– Or less any price effects (crowding out)

1. Big bang for buck: Cost $2.85 caused $38 billion in demand

– Aside: roughly half of purchases (360K/677K) would have occurred anyway

– Could have other benefits: greener world2. The multiplier can be huge at the ZLB!

– Or less any price effects (crowding out)

3. But lots in ERRA besides CARS going on, no?

Source: Figure 10 in Cogan and Taylor (2010) , NBEER WP 16505

“Considering both the federal and the state and local sector, we find that the effects of ARRA on purchases to have been remarkably small for the first six quarters of the program despite the large overall size of ARRA.”

Cogan and Taylor (2010)

“Considering both the federal and the state and local sector, we find that the effects of ARRA on purchases to have been remarkably small for the first six quarters of the program despite the large overall size of ARRA. . . . Basic economic theory implies that temporary increases in transfer payments have a much smaller impact than government purchases.”

Not for CARS . . . CARS is about temporary price variation for an asset – intertemporal substitution strong

Cogan and Taylor (2010)

1. Big bang for buck: Cost $2.85 caused $38 billion in demand

– Aside: roughly half of purchases (360K/677K) would have occurred anyway

– Could have other benefits: greener world2. The multiplier can be huge at the ZLB!

– Or less any price effects (crowding out)

3. Not lots in ERRA besides CARS going on, so CARS potentially useful– Temporary low price is a good way to generate

demand (like investment tax credits)– But, reversal does take demand from the future

Mian-Sufi: CARS caused a large amount of spending reversed in 6 months to a year

Does not imply CARS did not significantly help stabilize the economy

Quite plausible that CARS was highly successful and also plausible that it was not worth the expenditure