Karl Smith sees signs of recovery in the aging of America’s automobile fleet:
The center of the distribution is moving rightward. This means not only is our vehicle fleet rapidly aging but that if vehicle production actually fell the scrappage rate would skyrocket in the coming years. You would have the mass of cars headed towards obsolesce. Is this what is going to happen? Its hard for me to see how it is.
Here’s how I see the current state of things. We’ve been chugging along with unemployment in the 9-10 percent range for a while now. Aggregate demand is inadequate to fully utilize our productive resources. We are also buffeted by shocks to demand, both positive and negative. In principle, a positive shock (such as a whole bunch of people realizing their car is getting mighty old) should boost output and employment. But the United States is a very large and very oil intensive economy, so my expectation is that any substantial increase in the level of economic activity will lead to a spike in the price of oil and other key commodities. It will also pull Treasury yields to an extent out of their current absurdly low rate. Given the preferences of policymakers, I think this would lead immediately to monetary contraction and increased interest in fiscal austerity. Consequently, we’ll return to equilibrium.
In other words, firms and households should expect the total level of demand to keep plugging along at its current low rate and thus maintain a level of total economic activity that’s consistent with a roughly 9 percent unemployment rate. It’s possible that spending on automobiles will go up and people will spend less at restaurants. Or that people will spend more on housing and less on automobiles. Or something. It seems absurd that a country would led its capital stock age, deteriorate, and decline out of aversion to a one-off surge in commodity prices but three years ago it would have seemed absurd to say we would have 9 percent unemployment today. Meanwhile, as the share of the unemployed who are long-term unemployed continues to grow, policymakers will increasingly be able to gesture at “structural” explanations and “labor market rigidities” as excuses for inaction.
As for historical support, note that not only has Japan never fully recovered from its depression, but the United States didn’t really recover from the Great Depression either until the war came. World War II became such an overwhelming political imperative that idleness wasn’t an option. But pre-war, even the Roosevelt administration stopped its “bold, persistent experimentation” to achieve full employment phase well short of the goal, shifting focus to more humanitarian issues like ensuring that old people would have money to retire on. To get out of the funk, policymakers need to want to get out of the funk.
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Karl Smith sees signs of recovery in the aging of America’s automobile fleet: The center of the distribution is moving rightward. This means not only is our vehicle fleet rapidly aging but that if vehicle production actually fell the scrappage rate would skyrocket in the coming years. You would have the mass of cars headed [...]
Karl Smith sees signs of recovery in the aging of America’s automobile fleet: The center of the distribution is moving rightward. This means not only is our vehicle fleet rapidly aging but that if vehicle production actually fell the scrappage rate would skyrocket in the coming years. You would have the mass of cars headed [...]
Matthew Yglesias is a Fellow at the Center for American Progress Action Fund. He holds a BA in Philosophy from Harvard University. His first book, Heads in the Sand, was published in May 2008. Read more.
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