David R. Henderson  

Obama's Economics: Bad and Good

Schleicher's Model of One-Part... Alternative History...

On Meet the Press last Sunday, President-elect Obama showed some of his fuzziest thinking and some of his clearest thinking on economics.

First the bad. In a discussion of the auto industry, interviewer Tom Brokaw said:

As soon as gas prices began to drop, consumers moved back to the larger cars once again, to SUVs and the big gas consumers.

Obama answered, "Right."

I don't know if that is correct, but it doesn't matter for what follows because what Obama was saying was that people want those big cars when gasoline prices are low. Yet just a few minutes earlier, Obama had said, "If, if they want to survive, then they better start building a fuel-efficient car." By "they" he meant the auto industry or, more correctly--and this is a distinction he refused to make--Chrysler, Ford, and General Motors. (Other parts of the U.S. auto industry--Toyota, Nissan, etc.--are doing much better.)

So which is it? Is it that they need to produce cars people want or do they need to produce high-fuel-economy cars? His own claim is that people want low-fuel-economy cars but he didn't seem to be aware of the contradiction.

Second, the good, although even this is mixed with bad. In discussing housing, Obama stated, "So I think a moratorium on foreclosures remains an important tool, an important option." If he meant using force to impose a moratorium, as he appeared to, that's bad. But then he went on to say:

We don't want what you just described, a moral hazard problem where you have incentive to act irresponsibly.

He actually used the term "moral hazard" correctly. Have you ever heard George W. Bush use that term?

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CATEGORIES: Regulation

COMMENTS (7 to date)
John Thacker writes:

No, though I have heard him give a pretty good explanation of how consumer behavior reacts to prices with regards to gasoline, and why regulation such as CAFE is less efficient than response to prices, as different people have different transportation demands.

T Hicks writes:

The first issue about consumer preference for large vehicles, fuel prices and auto company survival is not necessarily a contradiction. I work in the oil business in Houston and we universally believe here, along with the EIA and IEA, that the current slump in oil prices is temporary. People may be wanting larger gas guzzlers right now, but within a year or two there will again be a very durable and strong preference for fuel efficiency.

A car company wanting to make profits in early 2009 will make large SUVs. One that wants to survive to 2019 will need to commit to fuel efficient products.

My biggest worry is not that Obama has it wrong so much as he's not willing to let the others that do have it wrong go out of business. I never understand why the left, with all their rhetoric about change, oppose it so firmly when it comes to labor and trade.

RubberCity Rabble writes:

Looking at the transcript, Obama appears periodically to say "Right" where others might say "mmm-hmmm" or nod their heads - more an affectation to signal they're paying attention than real agreement. Obama also often begins with "Well..." - like Reagan!

Regardless, the contradiction you see may be less in Obama's thinking than in what consumers want. During a decade of relatively low gasoline prices, modest real interest rates, and rising home prices serving as ATMs, consumers were happy to borrow to acquire ever-larger urban assault vehicles laden with DVD screens, GPS, back-up cameras, etc - price be damned, just tell me the monthly payment! Then over a short period the price of gas more than doubled, bubble-driven home equity faded, and the perception of job security was shaken. Poof! Consumers turned on a dime (much snappier response than an SUV's steering) and started saying "we want fuel efficient cars now, and they better be cheaper be too."

While consumers can change their wants very quickly, Detroit is unprepared to change its product so quickly. The 3-formerly-known-as-Big seem to have little beyond concept cars and sketchy ideas for a couple years down the road. After Gulf War I, they chose to ignore the clear reminder that mid-East oil would be unreliable, sticking with their unsustainable model: bigger, heavier, more loaded. Consumers, equally oblivious, happily jumped on - "riding with Osama."

Please remember too that we frequently want things that are mutually exclusive. Surely this irrationality is no surprise; Dr. Caplan wrote a book about it! We want a thriving economy and jingoistic protectionism. We want to fix the mortgage crisis and prevent a recurrence and we want the value of our homes restored to their peak (and to resume growing!). We want to invest in wildly speculative instruments we don't really understand and we want no risk. I'm not contradicting myself when I say these things. I'm just reporting the contradictory nature of the world we're in... and welcome to it!

Roland Manarin writes:

Like any politician, events will drive Obama much more than Obama will drive events.

Scott Wentland writes:

I don't think the first point is necessarily contradictory. All else equal, many foreign cars are more fuel efficient (even comparing big cars to big cars, small cars to small cars). And, fuel efficiency is desirable as long as the price of gas is non-zero.

It's true that it is MORE desirable when the price of gas is high, but even when the price is low (but has the potential to be high in the future), I would still want a more fuel efficient car if all the other characteristics are the same.

This may just be a simple point that he did not make very clear, but it seems reasonable to infer.

MattYoung writes:

Brian is looking pretty good with his past defense of the gas tax holiday, if we could counter-cyclically raise gas taxes now.

See Robert Lawrence advocating a policy of a variable, counter-cyclical gas tax.

HT Mankiw

Hugo Pottisch writes:

Look... if there had been only one half-a-brain at GM higher hemispheres - they would be kings now.

but it is not only the management. normal car workers and suppliers too in the US who are involved with the Big Three have also supported the "efficiency and climate change scam". so there was no bottom-up and grass-root pressure for the management to listen to. very disappointing on all fronts when it comes to "vision".

The slogan "lets never change and innovate" is not american... buying into that is not american. american create the future and do not depend on the past.

what am i getting at? the big three produce the biggest cars on the planet. guess what is really good for making electric cars cheaper and more attractive? yes - lots of room and weight for storing lots of batteries. the more room - the cheaper the EV gets (as batteries are only expensive when they have to be small and light).

In 2001 Toyota, who else, introduced a car in California. not just any car but The Car. the best car on the plant so far, period. an electric SUV with a top speed of 78 mph and a range of up to 120 miles on a single charge. The RV4 EV. One could never buy it but only lease (it's price would have been $40,000 - as much as GMs only crappy hybrid in the making, not on market, today 10 years later). But as Google states some University research - it would have made up tp $3000 in profit for the owner in California where one can sell power back to utilities during peak times.. etc. So in 10 years you can make up to $30,000 in earning. The real price of the car shrinks to $10,000. charming.
Here an old TV ad. Here another strange ad which followed later.

At the same time GM introduced a crappy small, hippie car - the GM EV1. what the freak was that? Toyota, famous for small cars, arrives with the big SUV car - which makes sense for EVs. GM, famous for big cars, arrives with the crappy small one - which does not make sense for EVs. This was the first time I got worried about GM and the big Three in 2001.

then they both, Toyota and GM, discontinue those pearls in from of pigs.. eh humans for strange reason. Keywords: fear of CA, lobbying by the big three in DC!!! Then I got more than worried. this was more than killing - this was murder. now they have self-destructed and want to have artificial life-support? (what is the government doing to my put-options now and who will pay me for being right?)

instead of a cheap and efficient management buy-out we have a bail-out. with half the money one could build not three but 5 EV companies here and now. right now we are subsidizing gas further and not taxing it! Well - we are actually not? Right - the congress has.. rightly?... i have to stop - I could go on. but I would buy an H3 EV here and now.

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