Freedom Line Blog

This one has to be read to be believed. Nearly three years after passage of the stimulus package, the horror stories of fiscal malpractice continue to emerge. From Reason:

Palladian Partners, a communications firm in Silver Spring, [Maryland has] received $97.5 million dollars in government contracts over the past 12 years. The National Insitutes of Health (NIH), which is Palladian’s biggest client, tacked $363,760 stimulus dollars on to an existing contract, and then followed it with two more awards totaling $431,333. Palladian was to spend the money collecting and disseminating information about how the NIH was spending stimulus money.

And what did NIH get for this money? According to the Reason piece, Palladian’s “main activities have included building a website, and publishing 29 short articles for the site.” That’s over $27,000 per article if you’re playing at home.

With the end of the year only about a month away, Republicans on Capitol Hill are stuck in a bit of a quandary. Under current law, the dawning of 2012 will bring with it the expiration of the payroll tax cuts passed last year, which dropped employee rates from 6.2 to 4.2 percent.

As I’ve written before, the payroll tax cuts get you less bang for your buck than virtually any alternative. The  savings for an average American are about $40 per paycheck — not nothing, but certainly not enough for even the most dyed-in-the-wool Keynesian to think aggregate demand will shift, particularly because the program’s temporary nature means that it is not altering long-term plans. Also, remember that the payroll tax is there to finance Social Security and Medicare, so pulling money out of those accounts only hastens the day of fiscal reckoning for both of those programs. Finally, there’s the fact that there’s only a cut to the employee’s chunk of the payroll tax, not the employer’s. That means it does absolutely nothing to galvanize hiring.

Savvy congressional Republicans have made these points, but voting to end the break would put them in the unusual position of defending an increase in taxes at a time of extreme economic weakness. While the payroll rate will eventually have to return to the status quo, the GOP is thus stuck looking for something to plug the hole in in the interim.

Kudos, then, to the Republican leadership, who, according to Politico, are looking to pay for the continued tax break by extending a salary freeze for federal employees and lawmakers, a move that would save about $100 billion. While the country’s biggest economic need is a wholesale overhaul of tax policy and regulatory policy combined with a dramatic reduction in federal spending, that won’t happen in the current atmosphere of political polarization in Washington. If we have to muddle through in the interim, this is a fairly reasonable way to do it — don’t increase the debt and let the Washington crowd foot the bill for the everyday Americans they’ve so badly misserved.

We’re way overdue for a Chris Christie video here on Freedom Line. Thankfully, the New Jersey governor is back in the saddle and he’s seemingly competing with Newt Gingrich to see who can blister the sitting Commander-in-Chief more thoroughly. This is a thing of beauty:

That was the topic taken up by two of the nation’s finest economic journalists over the weekend.

Newsweek’s Robert Samuelson, one of the few legitimate talents left on that particular sinking ship, says yes:

… What’s missing [to promote a global economic rebalancing] is a sizable revaluation of China’s currency, the renminbi. Fred Bergsten of the Peterson Institute thinks the renminbi may be 40 percent undervalued against the dollar. This gives China’s exports a huge advantage and underpins its trade surpluses. Other Asian countries fear altering their currencies if China doesn’t change first. “They’ll lose ground to China,” notes Hensley. The European Union, Brazil and India all feel threatened by the renminbi. President Obama wants U.S. exports to double in five years. That’s probably unrealistic, but it’s impossible if the renminbi isn’t revalued.

Samuelson is rarely deserving of a public refutation, but gets one (though it’s not targeted at him) from a recent column by the always-insightful Steve Forbes, who lays the China hysteria to rest:

… A decade and a half ago China fixed the yuan to the dollar. If there had been any mistake in the exchange rate it would have been flushed out in trade patterns fairly quickly. Again, to simplify: If you sell a bottle of wine for four loaves of bread but suddenly notice you’re getting only two loaves, you’ll adjust your price pretty quickly to ensure you’ll get those four loaves again.

 By fixing the yuan to the dollar Beijing outsourced its monetary policy to the Federal Reserve. And for this “manipulation” Washington politicians and policymakers are in a lather of outrage. This fixing of a measure of value has enormously facilitated commerce–and thus prosperity. During the last 15 years U.S. exports to China have increased 650%, China’s exports to the U.S. almost 670%.

As I noted in my criticism of Obama’s exports fetish in this year’s State of the Union, a focus on so-called “trade deficits” is meaningless. Forbes gives an excellent explanation:

The notion that a trade deficit or surplus indicates anything about an economy’s health is also mistaken. The U.S. has had a trade deficit with the rest of the world for some 350 years out of the 400-plus since Jamestown was settled in 1607. Focusing on deficits and surpluses ignores equally important flows of capital, as well as the phenomenon of supply chains and the intracompany trade that crosses borders.

Americans will survive Beijing’s economic policies intact. Whether we can say the same about Washington’s is another question altogether.