How Long is the Long-Run?

The arguments for fiscal stimulus are essentially short-run. Most Keynesian economists concede that fiscal stimulus is not free and that we pay for it in the long run (here is one estimate of the tradeoff between short-run gains and long-run costs; here is another). Because fiscal stimulus relies on a short-run/long-run tradeoff, many in Washington are trying very hard right now to extol the virtues of short-sightedness. We should worry about boosting the economy today, their argument goes, and worry about the economic cost of that boost at some later, unspecified, date (presumably when the laws of public choice are repealed and politicians have all become far-sighted, benevolent omniscients).

A new study, however, suggests that the long-run may not be all that long in coming:

We examine the ability of the government to increase consumption by evaluating the impact of the 2009 “Cash for Clunkers” program on short and medium run auto purchases.  Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009.  However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended.  The effect of the program on auto purchases was significantly more short-lived than previously suggested.  We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.