Dr. Sherry Jarrell

Update: Real cost of Cash for Clunkers Program

In an earlier post, I noted that I thought that the real cost of the cash for clunkers program went well beyond the $4500 rebate per car.  Edmunds.com just came out with an analysis that shows that the cost of the program, once purchases that would have occurred during that period without the rebate are taken into account, at $24,000 per car!  http://content.usatoday.com/communities/driveon/post/2009/10/620000657/1  

Clunker program a failure? Where's your proof?

 I was asked by a reader recently about my claim that the Cash for Clunkers program was a failure.  He said, and I quote, "And your proof is...?"  Here is my response:

Hello Ramon, Thanks for the comment. My conclusion that the Cash for Clunkers program was a failure was based on three factors. One, it did not have the intended consequences on the environment; for those folks who purchased a marginally more fuel efficient car now, rather than later, the added fuel efficiency was likely more than offset by the pollution generated by destroying the old car, and by the loss in additional fuel efficiency they would have enjoyed had they waited a year or two to replace their current vehicle with an even later, even more fuel efficient model year. Two, the costs of the program, which are much greater than the $4500 rebate, far exceed any benefits generated (Abrams and Parsons in the Economists' Voice (http://www.bepress.com/ev/vol6/iss8/art4/) estimate that the costs of the program exceeded the benefits by about $2000 per car, which I think is an underestimate.) The list of costs include but are not limited to the additional paperwork and private and public workers needed to administer the program, the interest costs to dealerships of financing the rebate program while awaiting the government checks (some less capitalized dealerships actually went out of business because of the program), the costs of destroying the old vehicles, and the cost of lives lost and injuries sustained in accidents in smaller, less safe but more fuel efficient cars, just to mention a few. Last, this "injection" into the economy -- which, in reality, is the blatant substitution of private consumption choices with public policy, and an affront to our economic freedom -- costs the economy untold sums by putting off the inevitable failure of automobile companies that fail to produce cars the population values sufficiently to keep the auto companies in business without being propped up by the government. Case in point: GM's plunge of 45% and Chrysler's fall of 43% in the months following the rebate program; Honda and Toyota also reported double-digit slides, while Kia and Hyundai had double-digit increases. New car sales fell in September as the predicted post-"cash for clunkers" slump dragged the U.S. market down to its lowest levels in seven months (http://www.allvoices.com/news/4286397-clunkers-letdown-slump-auto). I wish it weren't so, but I'm afraid that good business is not the strong suit of our policymakers. Thanks again for your question. I hope you find my comments useful. Sherry Jarrell

Zombie Stocks: Not for the Faint of Heart

[http://in.sys-con.com/node/1157066#. By Eric Frazier, Advancement: University Relations, Wake Forest University.]

Two weeks before Halloween, the Securities and Exchange Commission again warned investors against buying shares of bankrupt companies, but like those creatures in horror films that rise from the dead, so-called "zombie" stocks--shares of companies that failed during the financial crisis--are still on the march.

Take, for example, Washington Mutual and Lehman Brothers. At the end of last year, their stocks traded at 2 cents and 3 cents per share, respectively. With no future earnings in sight, shares of Washington Mutual recently traded around 20 cents, and Lehman Brothers shares have hovered around 15 cents--spectacular gains fueled by what many consider nothing more than gambling.

Critics have called on the SEC to halt the trading of such stocks to protect unsophisticated investors who might be lured into unwise trades. But Lecturer of Finance Sherry Jarrell, who teaches a graduate-level class on investments and portfolio management in the Wake Forest University Schools of Business, disagrees.

While Jarrell doesn't think investing in zombie stocks is a sure-fire profitable strategy, she doesn't consider it gambling either, because there is an expectation of gain. Jarrell also doesn't believe those who are trading zombie stocks are ignorant or unsophisticated. "To outlaw these stocks means that you've truncated an avenue for people to express their different risk preferences," Jarrell says. "If someone wants to go on that haunted trail, let them. It's not like they're taking advantage of people on the other side of the trade."

Washington Mutual and Lehman Brothers lost their standing to be listed on stock exchanges, so traders have to keep up with prices through a quotation service known as the Over the Counter Bulletin Board, which unsophisticated investors are unlikely to access. Other troubled companies, such as Fannie Mae, Freddie Mac and AIG, whose shares are widely considered to be zombie stocks, are still listed on major exchanges. The federal government's own backing of those companies weakens any argument against allowing individuals to invest in them, if they dare.

One project Jarrell assigns her students is to identify a publicly traded stock they believe the market has significantly mispriced. By definition, she says, the exercise requires the same calculation made by traders of zombie stocks--reaching a different conclusion about a stock's future cash flows and risks than that of the market.

Jarrell points out that all investments carry a degree of risk proportional to potential returns, and investors have varying tolerances for risk. Some hide from risk; others seek it out. She recalls a study some years ago that found striking similarities in the blood chemistry of day traders on Wall Street and jet fighter pilots. "It turns out they need a certain amount of danger to feel normal," Jarrell says. "They seek risk in order to feel comfortable."

Let's Limit TARP Legislator Pay!

Seems that Congress is hell bent on replacing the best-functioning labor market in the world with their own unique brand of wisdom.  Well, I have a better idea.  Why don't we slash in half the pay of all those Congressional leaders who came up with the TARP idea in the first place, since they are spending our money, and I think it is clear that they are spending our money unwisely, which is precisely the logic they use to confiscate the salaries and bonuses of the bail-out executives.

Moral of the story?  Government should not be in the business of trying to run a business. The TARP bailout should have never seen the light of day.  With no TARP bailout, Congress would not have had it's latest excuse for grabbing up yet more of the private economy's resources for trying to put this country back on track toward improved productivity, output, jobs, income, and security.

A tax is a tax is a .... COST !!!

We've talked a lot about taxes as revenue to the Government and the inefficiency of government spending on this blog, but a far more important issue is the impact of taxes on the costs and output of businesses.

Any imposed cost to business is a "tax," whether it's called that or not.  And any tax is an additional cost to that business, which lowers its output, reduces employment, and raises prices of goods and services to you and me.  

How does a manager or business owner decide on the optimal level of production?  How does a manager decide whether to hire one more person, expand operations to a third shift, ship its product to a distant market, or to outsource?  By comparing the additional costs of that decision to the additional revenues it generates.  If the revenues cover the costs, then the manager forges ahead.  If they don't, the company can't expand without incurring losses and eventually going out of business.   Our desire or need for goods and services, along with our ability to pay, creates demand.  A company's costs of production (labor + capital equipment) along with any taxes or fees imposed by local, state, and the federal government, create the supply.  The two sides -- supply and demand -- are totally independent of each other; they come from two entirely different places in the economy.  But where they meet is where prices are determined:  prices determine the revenue of business, and thus the level of costs that can be covered, and thus the level of production and employment and consumption that can be sustained by private industry.   Taxes are a REAL cost of doing business; they are a REAL drain on productivity, innovation, and entrepreneurship.

The press is spilling over with reports of new taxes being considered by Congress and the White House: Cap and Trade, Value Added taxes, increases in capital gains taxes, higher minimum wages, sin taxes, additional costs of health care....  each and every one of these taxes pushes the costs of doing business higher, reduces the output of the economy, reduces employment, and raises the prices of goods and services.  It squeezes the private economy, it suffocates entrepreneurship, kills commerce, and it idles people and factories and local businesses.  It hurts everyone.   New taxes should be challenged and fought like our economic lives depended on it.....because they DO!

No actual gains from Clunker program

It should come as no surprise to anyone that the U.S. car companies are slumping once again.  The Cash for Clunkers program was a wasteful, inefficient publicity stunt or, worse, an actual attempt by the Federal Government to stimulate the economy.  The worse part is that the program cost the economy jobs: many healthy, profitable dealerships had their company taken away from them by government edict under this program, never to return.  It's almost criminal.