When Paul Krugman and Niall Ferguson agree on something, it's worth paying attention. In recent weeks, both the liberal New York Times columnist and the free-market Harvard University historian have penned op-eds calling on China to allow the renminbi to appreciate against the dollar. Here's Ferguson:

Right now, Chimerica clearly serves China better than America. Call it the 10:10 deal: the Chinese get 10 percent growth; America gets 10 percent unemployment. The deal is even worse for the rest of the world — and that includes some of America’s biggest export markets and most loyal allies. The question is: What can the United States offer to make the Chinese abandon the dollar peg that has served them so well?

The authorities in Beijing must be made to see that any book losses on its reserve assets resulting from changes in the exchange rate will be a modest price to pay for the advantages they reaped from the Chimerica model: the transformation from third-world poverty to superpower status in less than 15 years. In any case, these losses would be more than compensated for by the increase in the dollar value of China’s huge stock of renminbi assets.

It is also in China’s interest to kick its currency-intervention habit. A heavily undervalued renminbi is the key financial distortion in the world economy today. If it persists for much longer, China risks losing the very foundation of its economic success: an open global trading regime.

Does Obama have the pull to convince the Chinese that something like the arrangement Ferguson describes is in Beijing's interest? I'm not so sure. Which is why Chinese currency manipulation, which helped fuel the U.S. real-estate bubble in mid-decade, may be fueling a much larger asset bubble today. No one will be happy when it pops.

In yesterday's Wall Street Journal, Michael Boskin made the case for a payroll tax cut:

My Stanford colleague Pete Klenow and Rochester economist Mark Bils estimated that cutting the payroll tax by six percentage points (of the 12.4% Social Security component) would, under standard assumptions, increase employment by three million to four million workers—an amount equal to all the job losses since the stimulus was passed.

The payroll tax cut would have reduced firms' costs by roughly the same amount as from the entire decline in employment. It would have cost less than half as much as the stimulus bill, gotten far more income into paychecks quickly and, most importantly, greatly reduced incentives for firms to lay off workers. In fact, it would have created incentives to hire.

Even using the administration's claims of one million jobs "created or saved," the stimulus program passed in early February is millions of jobs short of what a cheaper payroll tax suspension would have delivered (see nearby chart).

Interestingly, Sarah Palin also has some kind words to say about the payroll tax cut in Going Rogue: "And if we really want to help the poor and middle class get through this recession, how about cutting their payroll taxes?"

Sounds good to me!

Are any of the Obama administration's numbers about so-called "saved or created" jobs accurate?

Yesterday, the Chicago Tribune reported:

More than $4.7 million in federal stimulus aid so far has been funneled to schools in North Chicago, and state and federal officials say that money has saved the jobs of 473 teachers.

Problem is, the district employs only 290 teachers.

"That other number, I don't know where that came from," said Lauri Hakanen, superintendent of North Chicago Community Unit Schools District 187.

The Obama administration last week released the first round of data designed to underpin the worthiness of its economic stimulus plan, which so far has directed $1.25 billion to Illinois schools. That money has helped save or create 14,330 school jobs in the state, the administration claimed.

But those statistics, compiled initially by the Illinois State Board of Education, appear riddled with anomalies that raise questions about their validity, according to a Tribune analysis of district-by-district stimulus spending and other state data. Many local school officials were perplexed by the stimulus data attributed to their districts.

In the official report, Wilmette Public Schools District 39 was credited with 166 jobs saved by stimulus aid. Superintendent Raymond Lechner said the number should be zero.

At Dolton-Riverdale School District 148, stimulus funds were said to have saved the equivalent of 382 full-time teaching jobs -- 142 more than the district actually has.

A similar discrepancy was found in data for Kankakee School District 111, where the stimulus report logged the equivalent of 665 full-time jobs saved. "That's impossible," a top Kankakee school official said, adding that the entire payroll -- full and part time -- is 600 workers.

Some of the mistakes, however, might point in the other direction. According to the government tally, there were no jobs "saved or created" in Chicago public schools, something that seems unlikely after the district received $293 million in stimulus funding. But, as many experts predicted in advance, most of the money went to the state for help on budget shortfalls.

It appears the state treasury -- not students or school districts -- was the prime beneficiary of the education stimulus jackpot in Illinois. In great measure, funds simply were used to replace general aid payments already owed to local districts by the state. That gave Gov. Pat Quinn breathing room in his struggle to rein in a whopping two-year budget deficit of more than $10 billion.

There is more. Today's Milwaukee Journal-Sentinel reports:

A stimulus job report that says more than 10,000 jobs were saved or created in Wisconsin is rife with errors, double counting and inflated numbers based more on satisfying federal formulas than creating real jobs, a Journal Sentinel review has found.

In one case, five jobs were mistakenly listed as 50 - and then counted twice. In another, pay raises to workers were listed as saving more than 100 jobs. And in another, jobs were listed as saved even though the money had not been received and no work on the project had begun.

The problems mirror those surfacing around the country, as the federal numbers claiming 640,000 jobs created or saved by stimulus money are being scrutinized.

Among the Journal Sentinel's findings:

Double-counted jobs: About $7.3 million of federal money will flow to the Parkland Sanitary District in Douglas County to replace its sewer system, a project listed as creating or saving 100 jobs even though work won't start until this spring, federal recovery data shows.

But that number is inflated by 95 jobs, Parkland Sanitary District treasurer Eric Shaffer admitted.

When reporting to the U.S. Department of Agriculture's online reporting system, Schaffer meant to type "5" but mistakenly added a zero - and that 50-job figure appears twice in the federal data because it was a combined grant and loan. He tried to correct the error, but was told it was too late for the federal reporting deadline.

"We are volunteers, and we made a mistake," Shaffer said. "It was a simple typographical error, and we tried to fix it. Now that we understand the system, it will be much easier."

Reihan Salam and Ross Douthat, the authors of Grand New Party, sat down with the Winston Group's Kristen Soltis to discuss the GOP and the middle class. Check it out:

Salam and Douthat propose 1) a federal re-insurance plan, 2) a payroll tax cut, and 3) for GOP politicians to model themselves after Tennessee Sen. Bob Corker. Good ideas all.

Niall Ferguson has a must-read report at the Centre for Policy Studies on the dangers of the Too Big To Fail (TBTF) mentality. Ferguson writes:

It is not often that I quote Lenin approvingly. But one of the lessons of the recent -- and in my view continuing -- financial crisis is that not everything the Marxists said was wrong, even if the normative conclusions they draw from their observations certainly were. As a believer in what Lenin disapprovingly called 'the capitalism of free competition,' I regard the emergence of excessively large, government-guaranteed financial conglomerates in a very different light - not as a prelude to socialism but as a massive distortion to the market, similar to that which Adam Smith deplored when he considered the role of quasi-governmental monopolies like the East India Company in his own time.

It was the East German communists, Ferguson observes, who identified "State Monopoly Capitalism," or Stamokap, as a "way-station on the road to 'real existing socialism.'" The danger today is that, through regulatory capture and the insidious relationship between Wall Street and the Treasury Department, policy makers and market incumbents are working together to enshrine Too-Big-To-Fail into law. Here's hoping the president and Congress read Ferguson before they make a mistake that's too big to undo.

The program started late, cost $50 million to administer, crashed computers and ran out of money. All to see people spend money now that they would likely have spent later.

Now, this story says dealers are becoming frustrated that the government hasn't paid them for their deals - so frustrated that some believe it is no longer worth it to participate.

A growing number of auto dealers say the process of getting paid under the government's "cash for clunkers" plan increasingly resembles some of the wrecks accumulating on their lots as part of the program.

The slow payments coming from the federal government are reinforcing the paradoxical nature of the program for dealers: It has generated the most showroom traffic they have had in months while at the same time heaping unease, frustration and worry onto the industry's worst-ever downturn.

As of the close of business Friday, there was talk in the industry that some dealers are considering pulling out of the clunkers program altogether.

These dealers say they're counting on the money to cover expenses and that payments aren't coming as quickly as the government had promised.

"Dealers say they want to see at least some sign that they will be able to recoup that money. Still others need the money to pay bills and meet payroll," the story notes.

"They rolled the program out and told us we'd get paid in 10 days. It's been three weeks," said Jim Griffin, who owns dealerships in Milwaukee, Waukesha and Menomonee Falls.

AP: "Bad Bridges Passed Up for Stimulus Cash."

Barack Obama, discussing deficits and the stimulus, in an interview with the Washington Post's Fred Hiatt: "The reason that it hasn't been at the forefront of my agenda is because I walked in when we were about to slip into the Great Depression -- or the next Great Depression. And so I had to start off, coming out of the box, with a recovery package that, whatever arguments may be made by the critics at this point, there was no economist out there who thought we didn't need to do."

Right. Except for these 200, a list that included several Nobel laureates. What makes this fib by our president especially galling is that the content of the ad taken out by the Cato Institute that listed these economists. It began by correcting Obama's claim, on January 9, that "there is no disagreement that we need action by our government, a recovery plan that will help jumpstart the economy."

The economists wrote: "With all due respect, Mr. President, that is not true."

It's still not true, however many times he says it.

Rich Lowry posts what he calls a "shrewd" email on Republican positioning on the economy.

It would be a blunder of the highest order for the Republicans to make the case that the economy won’t recover if Obama persists with his policies. The credit markets have improved dramatically, the economy will recover late this year and the jobs will start coming in the spring. Obama will claim credit and blame those awful Hooveresque Republicans for trying to stand in the way of recovery.

The Republicans should right now be saying that the economy is going to recovery despite of Obama’s spending; both because of the actions that the Fed has taken to help heal the credit markets and because of the inherent dynamism of the economy itself (throw in something about hard working American workers and entrepreneurs). The GOP should focus on restraining spending, preventing tax hikes and calling attention to the unnecessary fiscal hole that the President and Congress have blown into the nation’s fiscal position. They should also make the case that the tradeoff of high Obama spending and inevitable huge tax increases will not help the economy in the long term. But again, it’s a mistake for the GOP to go out there and ask “where are the jobs Mr. President?” every month. If that’s all they have to say, it will be a rough 2010.

If on the other hand, harping on the weak economy is a way of drawing attention to the fact that the President isn’t focused on the voters’ primary concern right now, fair enough. But the GOP should be anticipating the economic rebound and planning its tactics accordingly.

I'm not sure I agree with his correspondent's thoughts on the timing of the full recovery, but the broad analysis strikes me as smart. It is indisputable that the credit markets have "improved dramatically," and there are many reasons to believe that such a recovery is on the way. Scott Grannis, whose blog is terrific on these matters, thinks we may already be there. "We have definitely seen the worst of the economy, and I would be very surprised if the economy has not been in recovery mode for the past month or two." Why does he say this? See here, here, and here for just a few examples.

The Times's Joe Nocera reviews the Obama administration's financial regulatory overhaul: "[I]t’s not even close to what Roosevelt accomplished during the Great Depression."

Meanwhile, Peter Hart and Bill McInturff's polling shows that the president's approval rating is below 60 percent.

And health-care reform is running up against hurdles in the Senate.

And flies are attacking the White House.

The presidential honeymoon? It's over.

One of the reasons health care costs have risen so dramatically in recent years is the absurdly large torts that the trial bar extracts from juries and judges in medical malpractice cases. "It will be hard to make some of these changes if doctors feel like they're constantly looking over their shoulders for fear of lawsuits," a prominent Democrat said the other day. He continued, "I understand some doctors may feel the need to order more tests and treatments to avoid being legally vulnerable."

The prominent Democrat expressing concern about excessive malpractice settlements was President Obama, speaking to the American Medical Association yesterday. The White House transcript notes that the audience, filled with doctors, erupted in applause when Obama brought up liability reform.

The AMA opposes the public option, the government insurance program at the heart of ObamaCare. So you would think that a cap on malpractice settlements would be the sort of sweetener Obama might include in a compromise plan in order to bring the opposition into the fold.

You'd be wrong, though, because Obama immediately curbed the AMA's enthusiasm: "I want to be honest with you," he said. "I'm not advocating caps on malpractice awards." Rather, Obama went on, he wants to "explore" a "range of ideas" regarding "how to put patient safety first." In other words, Obama has no specific proposal on this important issue to doctors that might make them think twice about opposing his overall plan. Maybe he'll leave all that to the unelected technocrats at MedPAC, as David Brooks suggests today.

With the possible exception of cuts in Medicare that Republicans have said are necessary for more than a decade, has the administration given conservatives any reason to support ObamaCare?

UPDATE, JUNE 17, 9:21 A.M. A reader notes: "The word "tort" is defined as "a civil wrong for which a remedy may be obtained" or, in the plural form, "the branch of law dealing with such wrongs" (Black's Law Dictionary, 7th ed, p. 1496). The trial bar does not extract "large torts" from the court system. Lawyers do, however, frequently extract large awards of damages FOR torts defendants are found to have committed." Noted.

David Smick has a Washington Post op-ed today that is well worth your time. Here's a taste:

The United States may be undergoing a subtle economic shift. World governments should listen carefully to President Obama, a leader with an uncanny ability to make activist, even radical, proposals sound benign. At the Group of 20 summit in London, for instance, Obama said that the United States cannot be the world's consumer. On the surface, this sounds like a statement about the temporary condition of the business cycle.

Actually, Obama was talking about something far more significant -- not outright Smoot-Hawley-style protectionism but a coming policy of small tax, spending and regulatory changes that will encourage this quiet trend toward deglobalization. Like it or not, this shift reflects a growing Washington mind-set that globalization has gone too far. Witness the Buy American provisions on Capitol Hill. Obama is playing not only to his union supporters but also to a segment of the U.S. corporate community whose enthusiasm for the global supply chain and "just-in-time" inventory management is waning.

And the coming rise in shipping costs has the potential to turbocharge this deglobalization process. The U.N. agreement last October on sulfur-burning levels for ships (not to mention California's own restrictions on ship emissions) are expected to send shipping costs skyrocketing. A decade from now, it may be profitable to send by sea only items with relatively high value to weight, such as laptops. Analyst Philip Verleger argues that the net result could well be that a lot of low-wage jobs that moved to China, India and other emerging markets will move back to the West. This is already happening in the furniture industry.

That Barcalounger you're sitting on may be the shape of things to come.

James Capretta had an excellent post on the Corner yesterday analyzing the letter President Obama sent Sens. Kennedy and Baucus before departing for the Middle East and Europe:

For starters, President Obama unequivocally endorses the creation of a new government-run insurance option for working age Americans and their families. For weeks, Senator Baucus has hinted that, well, maybe such an option isn’t necessary. That led many on the left to put pressure back on Democrats in Congress to deliver what they had promised — or else. With the president’s re-endorsement of the idea (he supported it during his campaign), it is now inconceivable that the Democrats won’t include a heavily price-controlled government-run plan in the bill they try to pass.

The Obama letter also endorses a so-called “individual mandate” — a requirement that everyone enroll in some kind of insurance or pay a penalty. During the 2008 campaign, then-Senator Obama made a big deal of opposing this idea — which was the centerpiece of Senator Hillary Clinton’s reform agenda. Now, however, he has flip-flopped — as Politico reported — and endorsed it, so long as “hardship” cases are exempt.

The outlines of the Obama plan are clear: a public option and an individual mandate, with costs policed by the Medicare Payment Advisory Commission, or MedPac, an unelected body with oversight over a huge swath of the economy. The White House continues to obfuscate on where the money for all this will come from, though it's likely to support some taxation of health care benefits and, way down the road, a national sales tax. It all amounts to a complicated and expensive government intervention in the economy that will have unforeseen consequences.

Why does Obama want to implement his plan as quickly as possible? Because he understands that, the longer he waits, the more unpopular ObamaCare will become.

The Republicans are in a terrible position. The party is at its lowest ebb since Watergate. They no longer control an elected branch of the federal government. President Obama remains popular and has the public's trust. And while the public is ambivalent about some of Obama's policies, that still doesn't translate into support for Republicans. Americans liked Ronald Reagan more than they liked his policies. He was reelected in a landslide.

There's a temptation for Republicans to content themselves with short-term victories. After all, they've offered some sharp criticisms of Obama's tax and spending plans. They've been able to sideline card check for this year. Obama's cap-and-trade scheme is probably a no-go in this Congress, too. And the GOP will have more luck than people think in fighting the Medicare-for-all "public option" when the Democrats unveil their health care bill this summer.

What the Republicans are missing is a sense of where they'd like to take the country. They lack a vision of community. Or, if they do have one, they haven't articulated it very well.

Obama doesn't have this problem. His April 14 speech at Georgetown University not only gave a compelling explanation of how we ended up in this economic mess. It also presented a set of principles that, Obama claims, will carry the country into a new era of durable and equitable prosperity. Obama calls them the "five pillars."

What are the five pillars? Regulation, education, alternative energy, health care, and budget cuts. Obama's entire agenda boils down to these five things. He wants tighter regulation of the financial industry, more spending on education, alternative energies, and health care, and cuts for those few government programs that conservatives like (namely, Defense). It all adds up to a superficially appealing vision of where the country ought to be in 20 years.

The Republicans' job is to 1) point out the flaws in Obama's vision and 2) offer their own. The smart choice would be to focus on energy and health care. A cap-and-trade system that raises energy prices across the board and offers multiple opportunities for rent-seeking and corporatism is a messy and expensive way to deal with climate change. And Obama's health plans rest on a non sequitur: He wants to cut costs while expanding government insurance. It's a leap in logic that makes zero sense. As we see in Massachusetts, universal coverage is a fiscal nightmare waiting to happen.

Those are the criticisms. What about the "vision thing"? Michael Barone suggests one possible message in his Examiner column today. Obama's vision rests on the attractive but unwieldy ideal of rational (i.e., government) control. Liberals assume that reality will bend easily to their mechanisms for building what they see as a better society. But the world doesn't work that way. The best laid plans ... paved with good intentions ... don't count your chickens before they come home to roost (or something like that) ... and so on.

The problem with grand visions is that they end up producing unintended consequences which often create bigger messes than those you started with. The alternative? Trust in the productive capacities of the American people. Build (properly regulated!) markets and create incentives for citizens to save, invest, trade, and prosper as they choose. It's possible that Americans are so fed up with the GOP that they'll back Obama anyway. But something tells me they'll eventually be drawn to a vision of society where responsible families make their own choices without the supervision of busybodies and know-it-alls. Sure, it may take 28 years. But it could come sooner. You never know.

Credit is the lifeblood of an economy. But too much of a good thing can lead to excess and disaster. That's the lesson you'll draw from Steven Gjerstad and Vernon L. Smith's excellent piece in yesterday's Wall Street Journal.

Gierstad and Smith want to know why some asset bubbles (i.e., tech stocks) pop without bringing broader economic collapse, while others (i.e, real estate) do. Their provisional answer:

In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.

In an important paper in 1983, Ben Bernanke argued that during the Depression, severe damage to the financial system impeded its ability to perform its economic role of lending to households for durable goods consumption and to firms for production and trade. We are seeing this process playing out now as loan funds for automobile purchases have withered. Auto sales fell 41% between February 2008 and February 2009. Retail and labor markets too are now part of the collateral damage from the housing debacle. Housing peaked in early 2006. Losses from the mortgage market began to infect the financial system in 2006; asset prices in that sector began to decline at the end of 2006. Meanwhile, equities and the broader economy were performing well, but as the financial sector deteriorated, its problems blindsided the rest of the economy.

Consumer and institutional indebtedness, in other words, were the means by which losses in the real estate sector were transmitted throughout the economy. And something similar happened 80 years ago:

The events of the past 10 years have an eerie similarity to the period leading up to the Great Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential mortgage debt was 10.2% of household wealth; by 1929, it was 27.2% of household wealth.

The Great Depression has been attributed to excessive speculation on Wall Street, especially between the spring of 1927 and the fall of 1929. Had the difficulties of the banking system been caused by losses on brokers' loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash. But the banking system did not show serious strains until the fall of 1930.

Bank earnings reached a record $729 million in 1929. Yet bank exposures to real estate were substantial; as the decline in real estate prices accelerated, foreclosures wiped out banks by the thousands.

The difference between now and then is that the Depression-era Federal Reserve contracted the money supply, whereas the Obama-era Fed has greatly expanded it. Gjerstad and Smith appear skeptical that increases in the money supply, or "quantitative easing," will be enough to stop the contraction. America spent the last 20 years piling up debt - personal, commercial, public - and the bill has come due. Nothing changes that fact. The Great Deleveraging has begun.

Last night, President Barack Obama expressed confidence in the dollar and declared: "I don't believe that there's a need for a global currency."

Normally, that would settle the issue. But in the past 24 hours two of Obama's top economic advisers have signaled an openness to such a new global currency -- in one form or another. What's going on?

Politico's Ben Smith reports that Treasury Secretary Timothy Geithner said this morning that he was open to a new global currency to replace the dollar, as proposed by a Chinese central banker. Geithner, according to Smith, said that the proposal -- which he has not yet read -- is less transformative that headlines have suggested. "We’re actually quite open to that suggestion – you should see it as rather evolutionary rather building on the current architecture rather than moving us to global monetary union," Geithner said.

Later, the moderator, per Smith "apparently sensing a gaffe," asked Geithner to clarify his remarks. Geithner walked back his earlier comments and said he does not see the dollar being sidelined by a new currency.

But Geithner wasn't the only top Obama adviser who refused to rule out a transition to a global currency. White House economic adviser Austan Goolsbee said much the same thing yesterday afternoon in an interview with CNN's Wolf Blitzer. Although he characterized such a change as "unlikely," Goolsbee twice declined to rule out such a global currency despite being pressed by Blitzer. "I haven't seen the details of the proposal," Goolsbee said. The entire exchange follows:

BLITZER: The Chinese suggesting today, this dollar, U.S. dollar, should be replaced as international currency, because they are beginning to have concerns that you are printing, the U.S. government is simply printing too many of these dollars and will lose its value as an international currency.

What's your reaction?

GOOLSBEE: It strikes me as probably unlikely.

Different people have in the past argued for world currencies or new -- new currencies before. I believe the U.S. at this point is the safest place to invest in the world. And it's likely to remain that the dollar is a critical currency in the years ahead.

BLITZER: So, you -- you don't like some new international currency that some Chinese are proposing?

GOOLSBEE: Well, look...

BLITZER: I assume that's right, right?

GOOLSBEE: I haven't seen the details of what they are proposing.

I mean, the dollar is the dollar. If people don't want to buy it, they don't buy it. But I think you have seen sort of a flight to the dollar in -- in times of trouble.

I don't know enough about monetary policy and currency to analyze the potential benefits and drawbacks of such a change, though several people I've spoken to believe it's an idea that's as undesirable as it is unworkable. But as a matter of instilling confidence in the U.S. economy at a time when such confidence is critical, it seems that Obama's answer was much better than the mixed messages coming from his top economic advisers.

Recently Congress revoked a pilot program allowing a small fleet of Mexican trucks passage into the United States. This was a violation of NAFTA, and the Mexican government promised retaliation. That didn't stop Congress!

Unsurprisingly, Mexico has retaliated and placed duties on 89 U.S. products.

In a statement, John McCain points out that the whole matter began with an amendment inserted into the recent obmnibus spending bill. The amendment's sponsor, North Dakota Democrat Byron Dorgan, is an avowed protectionist.

The first thing Dorgan would like to see is America build up trade barriers to promote domestic industry, even if that means higher prices for consumers, loss of U.S. market share in the global economy, and harm to North Dakota oil seeds exports.

The global trading system hit a wall last year with the collapse of the Doha round. Now it is unraveling. And the American president? He isn't lifting a finger to stop it.

At his bizarre town hall last night, President Barack Obama joked that "Washington is in a tizzy" over AIG and the $165 million in bonuses to be paid to its executives. The New York Times yesterday quoted White House chief of staff Rahm Emanuel complaining that the whole affair was a "distraction." At Tuesday's press briefing, White House press secretary Robert Gibbs could not even provide a rough timeline of the administration's handling of the AIG affair.

Yes, it's true that the bonuses represent less than one percent of the total bailout money that has gone to AIG. And yes, there are legitimate points to be made about retention bonuses in general and (though less persuasive) retention bonuses for these AIG employees. But it has been clear for a while that something -- an event, a comment, a cable news tirade, a speech -- was going to focus the growing public anger over bailouts and government giveaways.

This is it.

And if the White House doesn't understand that, Congressional Democrats certainly do. “I think in general the administration is underestimating the rage and frustration that people are feeling about the shenanigans on Wall Street,” Sen. Bernie Sanders (I-Vt.) told Politico. “I think they need to be more aggressive in standing up to Wall Street and representing the taxpayers.”

Other Democrats are taking shots, too.

Absolutely nothing, says union boss James Hoffa: "Since when is the secret ballot a basic tenet of democracy?"

Answer: since the early nineteenth century. But who's counting?

Hoffa criticizes the secret ballot because he supports card-check, which would unionize workplaces once a majority of workers sign a card in support of a union. President Obama supports card-check. Last week legislation was introduced into Congress that would make it the law of the land.

But it's nowhere near a done deal. Two Blue Dog congressmen, Dan Boren and Travis Childers, both announced recently that they oppose the legislation.

On the Senate side, The Hill reports that the fight may come down to four senators up for reelection in 2010: Arlen Specter (PA), Blanche Lincoln (AK), Michael Bennet (CO), and Harry Reid (NV).

Keep an eye on this quartet. Their votes will have far-reaching consequences for the American economy and workplace democracy.

AIG's bonus bucks continue to stir outrage. Up next: AIG executive Edward Liddy testifies before Congress today. Cue the sanctimony!

Secretary Geithner said yesterday that the Treasury will deduct the amount of the bonuses from the most recent AIG bailout. (Total spent propping up AIG so far: $200 billion.) But Geithner's policy isn't stopping congressional Democrats from plotting to tax the bonus money at absurdly high marginal rates.

Krauthammer:

When you get politicians ahead of the mob running companies, you get madness and idiocy here. The contracts are legal contracts, and it wasn't as if these bonuses were unknown or sprung at the last minute. They were written into these agreements over a year ago, long before AIG was even nationalized or partially nationalized.

And the problem here is that by the Congress now trying to break the contracts by a ruse, essentially a 100 percent taxation or confiscation, they're going against a few hundred years of common law where you don't do retroactive confiscation or bills of attainder, which are laws aimed at particular individuals. It's just not done.

And to sacrifice all of those principles of democracy and business and contract over, as Rich indicated, a tenth of one percent of the bailout, is absurd, particularly in a Congress which just a week ago signed a bill with enough pork to fund these bailouts for about 20 years.

John Fund wrote something similar in yesterday's "Political Diary" (subscription only):

The government, in a desperate attempt to avoid political pain caused by its own foolish economic mistakes and lax oversight, has poured billions into bankrupt companies. Then when those companies pass out bonuses they claim are necessary to retain qualified workers, the political firestorm leads government officials to propose tax rates that would make even British socialists of a half century ago blush. We are slipping into debates that have nothing to do with a free economy and everything to do with the government calibrating how to balance the favors it hands out with the inevitable moral outrage those favors engender.

Ugh. Someone stop this ride. It's no fun anymore.

Before joining the mob headed towards AIG headquarters, stop and think. The company is contractually obligated to pay these employees some $165 million in bonuses. Contractually obligated. So before applying the tar and feathers, ask these questions.

First, do we want to be a society in which contracts mean nothing when the government decides they are inconvenient, imprudent, or impolitic? Probably not. Otherwise, we undercut American values, tearing up inconvenient contracts with foreign investors, and arranging for bad things to happen to people who object.

Second, did the government do adequate due diligence when it set a price for the 80 percent of AIG that it bought? It will certainly argue that it did. In which case it knew about the potential liability created by these impending bonuses, and should have reflected that in the price it paid for the company. If that is so, it now wants to double dip -- get the benefit of the lower price, and rescind the bonuses.

Third, do we want to live in a country that would do what some Democrats are suggesting: retroactively tax away these bonuses? The possible abuses of such a policy are too many to list here.

Finally, do we want all of this fuss to take our eyes off the main prize -- the eventual long-term reform of a misshapen system of executive compensation -- one that is opaque instead of transparent, unrelated to some even rough measure of performance, executed by directors whose interests are often not coincident with those of the shareholders who own the business?

Yes, there is something obscene about the AIG bonuses. But one obscenity does not justify the larger obscenity of government abrogation of contracts that were legal at the time they were negotiated. Nor does it justify diverting energies from tackling the real question: How should executive compensation be set in an economy in which the owners of leading enterprises are not in control of the compensation-setting process, and in which shame is not as serious a constraint on executive behavior as it once was?

The Employee Free Choice Act, otherwise known as "card-check," was officially introduced into Congress last week. The bill would allow workplaces to unionize once a majority of employees sign a card supporting unionization. Secret-ballot union elections would fall to the wayside.

Card check will likely pass the House. That means the real legislative fight will be in the Senate. The Republicans have named South Dakota senator John Thune as their point man on the issue. Thune will have to keep Republicans from supporting the bill. Tough job, but somebody has to do it. Card-check is already affecting Arlen Specter's political future.

There is an economic argument against card-check, which the Wall Street Journal's editorial page made ably the other day. Some highlights:

In the last session of Congress, Democrats tried to: Raise the notice period required for certain layoffs at private companies to 90 days, extend health benefits for laid-off workers for up to a decade, and increase penalties for noncompliance (the expanded WARN Act); reclassify certain managers as employees who can be unionized, forcibly in non-right-to-work states (the Respect Act); facilitate class action suits for alleged gender-based pay discrimination (Paycheck Fairness Act); and much more. None passed, but now they might.

In the Obama revolution, unions are the vanguard force. Contrary to promises of moderation, the Administration has so far sided firmly with the union left. On the day after the Inauguration, the Department of Labor stopped the implementation of new union financial disclosure rules that provide greater transparency about union finances. A fortnight on the job, President Obama issued four executive orders, on federal contracting and political spending, demanded by Big Labor. Mr. Obama this month endorsed card check and vowed that it "will pass."

In Euro-terms, a "social market economy" offers state-provided health care, generous unemployment benefits, long holidays, various job protections and a prominent role for unions. Sounds good, you might say. But consider that the Europeans have spent the past two decades struggling to wean themselves off entitlements that are a huge drain on the overall economy. These welfare states leech off the productive parts of the economy through onerous taxes, debt and regulations.

Everyone ends up paying. Consider just one measure: the tax wedge, the share of labor costs that never reaches an employee's wallet but goes straight to state coffers. In Belgium, Germany and France, the tax wedge is around 50%; in America, it was 30% in 2007. (See the nearby table.) Not coincidentally, salaries and job opportunities are better here, especially for the least-skilled. The Obama budget, universal health care and now the union-revival effort known as the Employee Free Choice Act would steer America toward the Continent. That's good for the unions, but not for the public good.

Persuades me! But that's probably not enough. In the current economic climate, people are more likely to favor approaches that emphasize labor over management. And since so few workers have any actual experience with unions (only 7.8 percent of private-sector workers are unionized), they are unfamiliar with the economic and political downsides to organized labor. It's therefore unsurprising that 53 percent of respondents would tell Gallup that they favor a law that "would make it easier for labor unions to organize workers."

Ask respondents whether or not they want to join a union, however, and the answer is different. Just 9 percent of non-union workers say they want to join, and 61 percent say the secret ballot is a fair method of union organizing. According to the U.S. Chamber of Commerce, more than 70 percent of respondents prefer the secret ballot to signing a card.

Economic arguments are great for enterprising folks who worry about over-burdened entrepreneurs, a calcified labor market, and higher prices. But a lot of other folks, because they aren't troubled by economics, are inclined to look the other way. It's the civic argument, the defense of the secret ballot, that will motivate such people to oppose card-check.

I mean, it even convinced George McGovern.

Yesterday Iowa Senator Charles Grassley suggested in a radio interview that AIG executives "come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide." Foot, meet mouth!

The Grassley episode illustrates the perils of populism. Grassley, like most national officeholders, saw the outrage brewing at AIG's awarding of bonuses to the folks who almost threw capitalism off the rails, and wanted to express his anger. But, because he is a Republican and his political sense is a little off, Grassley's anger - joke? - comes across as way, way over the top. Outrage only gets you so far. It ends up being counterproductive. Anger doesn't tell you how to solve problems. It lets you stew in resentment.

Don't get me wrong, I'm all for stewing in resentment. It's something of a hobby. But AIG is also a serious public policy issue. Last September the United States embarked on a massive program of corporate welfare. We call it "the bailout." But it is welfare. And, like welfare to individuals, welfare to bank holding companies and insurance giants produces unintendences consequences and social pathologies. Among them: rewarding failure, stoking popular outrage, and politicizing the economy. More than a decade ago the United States Congress enacted a great welfare reform that encouraged recipients to get off the rolls and into the workforce. Isn't it time Congress enacted a welfare reform for the banks and AIG? The administration sure isn't taking up the slack.

Be sure to check out Bill Kristol's post on the AIG bonuses over at "Post Partisan":

Can capitalism survive the behavior of some capitalists? It's always been an open question. But if capitalism is to survive, shouldn't the Republican party, the party that defends democratic capitalism, be particularly vehement in denouncing its excesses? Isn't this a pretty spectacular one? And isn’t this a moment for the GOP to separate itself from the Bush administration as well as the Obama administration, who together have been responsible for an incompetent and improvident bailout? Figuring out the right policy going forward with respect to toxic assets and the rest is, of course, a major intellectual task. But being on the side of a healthy populist reaction to the AIG situation is at least a good political start.

During the Bush era, the Democrats embraced economic populism (wages, tariffs, progressive taxation) while the Republicans took hold of cultural populism (social conservatism, standing up for the common man against cultural elites). We may be about to see Republicans embrace a newfound economic populism. Not the sort that calls for higher taxes on upper income earners. But the sort that criticizes public dollars spent for private profits.

Douglas Holtz-Eakin gets it:

The financial crisis is the greatest threat to the U.S. economy. The right thing to do is to apply the principles of responsibility and competition, and the lessons of history to get this right. The most important lesson is that failed, insolvent banks cannot be permitted to continue to operate using taxpayer subsidies. Letting these “zombies” walk the financial system was at the heart of the savings and loan crisis and the slow Japanese recovery from its financial crisis. These institutions should be taken over, their management and shareholders made to suffer the consequences of their failure, and the assets re-sold to private sector entities as fast as is feasible. That’s good policy: discipline failure, promote real competition, and use assets effectively in the private sector. Yes, it will be costly – but not more costly than continued propping up of failed big banks. And, yes, it will raise the specter of “nationalization,” but it is really about re-allocating financial assets in the private sector. The bottom line: no more taxpayer resources without real use of discipline and effective workouts.

So does Paul Krugman:

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.

Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.

But would it be enough to make the banking system healthy? No.

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) Realistically, it’s just not going to happen.

Holtz-Eakin's a conservative. Krugman's a liberal. The Obamans are "pragmatists." How can the ideologically grounded understand the crux of the financial crisis, but the "postpartisans" cannot?

Be sure to check out the front-page story in today's Times on Japan's decade-long experience with massive government spending to combat economic downturn. Here are the numbers:

In total, Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. The spending peaked in 1995 and remained high until the early 2000s, when it was cut amid growing concerns about ballooning budget deficits. More recently, the governing Liberal Democratic Party has increased spending again to revive the economy and the party’s own flagging popularity.

According to the Times, public debt in Japan is now at 180 percent of the country's $5.5 trillion GDP. Did the massive deficit spending grow its economy?

In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan’s Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.

The argument for infrastructure spending, the piece goes on to argue, is that it prevented a full-scale collapse of the Japanese economy. Interestingly, however, one study found that government spending on health care and education produced a greater return than spending on infrastructure.

Japan certainly got a lot of new buildings and roads and tarmacs out of its stimulus. Consider

Shimane, a rural prefecture about the size of Delaware where Hamada is located. Each town seems to have its own art museum, domed athletic center and government-built tourist attraction like the Nima Sand Museum, a giant hourglass in a glass pyramid. The prefecture, with 740,000 residents, even has three commercial airports able to handle jets, including the $250 million Hagi-Iwami Airport, which sits eerily empty with just two flights per day.

In Hamada, residents say the city’s most visible “hakomono,” the Japanese equivalent of “white elephant,” was its own bridge to nowhere, the $70 million Marine Bridge, whose 1,006-foot span sat almost completely devoid of traffic on a recent morning. Built in 1999, the bridge links the city to a small, sparsely populated island already connected by a shorter bridge.

“The bridge? It’s a dud,” said Masahiro Shimada, 70, a retired city official who was fishing near the port. “Maybe we could use it for bungee jumping,” he joked.

Obama faces three economic problems. The first is the correction in housing markets. The second is banking trouble. The third is rising unemployment and declining consumer demand. The first two problems caused the third, but so far Obama has spent all his political capital on addressing the symptoms, not treating the causes. If the stimulus passes, as it likely will, Obama soon will have to reckon with budget-hawks telling him to raise taxes to lower the deficit. He'll say sure. And then we'll be in the stimulus trap. How do you say "Lost Decade" in Japanese?

Greg Mankiw delivers his policy recommendations. They include a payroll tax cut!

Here's Mankiw on tax-cuts versus spending:

Some traditional Keynesians would object that government spending has a larger multiplier than tax cuts. Even though that is the prediction of standard Keynesian models, the evidence is not completely consistent with that conclusion, as I have discussed here in previous posts. In addition, given the lags inherent in large spending projects, and the risks inherent in hasty spending at the federal level, the case for taxes over spending as the fiscal instrument of choice is compelling. To me, at least.

And here's the takeaway:

None of this should be viewed as a substitute for fixing the banking system and trying to come up with a better process for homeowners and banks to work out mortgage loans in default. Housing and finance are the real sources of the macro problem. Any fiscal stimulus, such as the one I propose above, is only an attempt to mitigate the symptoms. Those symptoms are severe, so mitigation is fully appropriate. But fiscal policy is not a panacea for what now ails the economy.

Secretary Geithner is expected to announce the details of the Obama administration's bank rescue plan on Monday. The cost will be hundreds of billions of dollars. That is on top of what has been spent already in TARP money, on top of the stimulus package, and on top of the FY 2010 federal budget that the Obama administration has yet to deliver to Congress. We are talking trillions of dollars in spending at a time when federal revenues are sinking like a stone. Something's gotta give, no?

We live in a service economy. There are more people providing business and professional services and working in retail than there are making goods or building things. The Democrats' stimulus package is, in a way, more oriented toward the economy America used to have - a manufacturing and industrial economy - than the information economy it has today. That's one reason why the plan is flawed, and why it probably won't do much to spur economic growth.

That's also why public sector unions like the plan, and National Retail Federation does not. The Federation wants three national sales tax holidays instead, with the federal government refunding the money the states lose as a result. Not a bad idea, especially if paired with the payroll tax cut.

Ed Glaeser:

One attractive, Reagan-like alternative to the stimulus package is to focus on a temporary reduction in the payroll tax, particularly for less wealthy Americans who are most likely to spend the money quickly. Such a tax cut would give people a strong incentive to work by letting them keep more of the money they earn. It would be both libertarian and egalitarian.

A second alternative is to be like Ike and embrace public investment in human and physical capital. Republicans could distinguish themselves from their opponents by insisting that investment put national interest ahead of parochial politics. Republicans could insist on cost-benefit analysis and emphasize investments that will make it more likely that the U.S. will remain an economic leader in the world.

The rest of Glaeser's piece is an argument against Mitch McConnell's mortgage-refinancing plan, reportedly developed by former Bush economic adviser and current Columbia Business School dean Glenn Hubbard. The proposal is extremely controversial and a lot of folks -- including me! -- aren't sure what to think about it. Larry Lindsey outlined a similar plan in our pages several months ago. But the refinanced mortgages in the Lindsey plan would be "full recourse" loans:

That is, if the borrower fell behind in the payments, the government could use any means necessary to get repaid. That means not only foreclosing on the house (as under current mortgages) but also collecting any remaining unpaid sums after the house was foreclosed on by garnishing the wages, bank accounts, and other assets of the borrower. Think of it as the IRS providing the loan on the same collection terms as it does on taxes, or perhaps using the powers the government now has to collect on student loans.

Not sure if that is the case with the McConnell plan.

The larger point, however, is that these refinancing plans are intended to help banks and mortgage lenders get rid of the uncertainty plaguing their balance sheets. A lot of the bad mortgages would be refinanced with an explicit government subsidy under the new plan. That might help quell the price uncertainty surrounding the mortgage-backed securities at the center of the financial crisis. In other words, regardless of the merits of his proposal, McConnell is making a good-faith effort to get to the heart of the problem. Where are the Obama administration's housing and bank-rescue plans again?

UPDATE, 9:17 a.m.: Greg Mankiw has more on the GOP mortgage plan here.

Here's a disturbing bit of agit-prop from President Obama that's not gotten enough attention:

“There will be time for them [Wall Street Bankers] to make profits, and there will be time for them to get bonuses,” Mr. Obama said during an appearance in the Oval Office with Treasury Secretary Timothy F. Geithner. “Now’s not that time. And that’s a message that I intend to send directly to them, I expect Secretary Geithner to send to them.”

He's right that the bonuses are "shameful." But profits? The bonuses are shameful because they're being doled out in the midst of record-breaking losses. Now would in fact be an exceedingly good time for them to make profits--the sooner the better, the more the better. Unless you're what Arnold Kling aptly terms a "folk Marxist."

The silliest line of attack against Republicans for voting against the House stimulus bill is that they did so for no good reason. The pro-Obama echo chamber must be so loud as to drown out all of the many reasonable critiques of the House plan -- most of which point out that there's nothing necessarily wrong with the idea of a stimulus package. So we have Eugene Robinson write today that the House GOP vote was

a triumph of discipline over reason, of doctrine over observation. There is abundant evidence suggesting that we are in a new political era with new rules and a new lexicon. Those who ignore that evidence will have only themselves to blame if, like the air traffic controllers, they end up losing their jobs.

This despite the fact that Rasmussen's numbers have support for the stimulus falling.

Rather than explain why theirs is the best of all possible plans, the Democrats have fallen back on chest-thumping, emotional appeals, and name-calling. When the bill first ran up against Republican criticism, the Democrats had a very simple answer. To the victor goes the spoils. Pelosi: "Yes, we wrote the bill. Yes, we won the election." Obama: "I won." This is the same logic you find throughout the recent writings of the Obamaphiles. Victory forecloses debate. Remind me where that's mentioned in the Constitution?

Be prepared for the inevitable backlash to the House GOP's unanimous rejection of the stimulus package. Goldfarb has already noted the Huffington Post's response. A savvy observer writes this morning that the vote may turn the GOP into the "party of no" when "hard-working, God-fearing families are losing their health insurance and watching dreams of college disappear."

Not quite. Yes, economic circumstances are dire. But the Democrats are using those circumstances to force through a bill that will do relatively little to stimulate the economy and a lot to stimulate liberalism. It's entirely appropriate for Republicans to criticize this bill and, ultimately, vote against it. And as long as they criticize constructively, as long as they put forward a reasonable alternative - as long as they do not obstruct a popular president - Republicans will do themselves little harm. Especially if the bill doesn't work. Which is a strong possibility.

So far, to my knowledge, the Republican leadership has criticized President Obama's bill politely. They wish him success, which is appropriate, but they also point out the flaws in his ideas. What's wrong with that? Meanwhile, there is a Republican alternative plan -- and, though it's pretty unoriginal and needs revision, at least it exists. All the House Republicans did last night was register their opposition to the stimulus. They didn't hold it up. Senate Republicans may be tempted to filibuster the bill when it reaches their chamber. That would be a bad idea. It would turn the tables and allow the Democrats to scapegoat the Senate GOP. Instead, if the bill isn't significantly revised, Sen. McConnell should aim to replicate the House's unanimous No vote.

Comity, reason, and no filibusters. Score one for the loyal opposition.

Lawrence Lindsey:

And what of the plan being put forward now? As crafted, it is unlikely to produce the desired results. For a similar amount of money, the government could essentially cut the payroll tax in half, taking three points off the rate for both the employer and the employee. This would put $1,500 into the pocket of a typical worker making $50,000, with a similar amount going to his or her employer. It would provide a powerful stimulus to the spending stream, as well as a significant, six percentage point reduction in the tax burden of employment for people making less than $100,000. The effects would be immediate.

Which political entrepreneur in the Senate is ready to pick up this idea?

Conservative economist Martin Feldstein made waves last year when he declared his support for a fiscal stimulus bill to combat the recession. Last December, Feldstein wrote in the Wall Street Journal that "a temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays." Thus the idea of defense stimulus was born.

Today, Feldstein looks at the House stimulus bill and calls it "an $800 bill mistake":

The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.

It's up to Senate Republicans to argue in good faith for a better bill.

Deficit hawks need to take a deep breath and stop squawking. The national debt is in bad shape, true. And it's going to get worse, thanks to TARP and the stimulus bill and other baseline spending. But, for the next two years at least, the national debt will remain within its historic boundaries. David Leonhardt, as always, has the numbers:

Surprisingly, the debt that the federal government has already accumulated doesn’t present much of a problem. It is equal to about $6 trillion, or 40 percent of G.D.P., a level that is slightly lower than the average of the past six decades. The bailout, the stimulus and the rest of the deficits over the next two years will probably add about 15 percent of G.D.P. to the debt. That will take debt to almost 60 percent, which is above its long-term average but well below the levels of the 1950s.

America survived the debt that World War II produced (at 120 percent of GDP) and the debt in the 1950s. We grew our way out of it. All things being equal, with the right policies the United States can grow its way out of its current debt as well.

Except all things aren't exactly equal, as Leonhardt points out:

[T]he unfinanced parts of Medicare, the spending that the government has promised over and above the taxes it will collect in the coming decades requires another decimal place. They are equal to more than 200 percent of current G.D.P.

Not good. James Capretta writes up a possible Medicare reform here. President Obama has pledged to reform entitlements, which really do pose a long-term threat to American solvency. The trick is to finance the welfare state in a way that allows the maximum possible amount of individual liberty and economic growth. Is Obama up to the task?

In the Washington Times, national security analysts William Hartung of the New America Foundation and Christopher Preble of the Cato Institute argue against increasing defense spending in the stimulus package:

Decisions on how many Humvees to buy, or how many bases to refurbish, should rest on military necessity, not economic expedience subject to political chicanery. When military procurement becomes nothing more than a series of thinly veiled pork-barrel projects, it risks exposing our troops to unnecessary risks, and ultimately undermines our security.

But Hartung and Preble don't exactly explain how having more Humvees, more soldiers, or more fighters would “expose troops to unnecessary risks” or “undermine our security.” The case for a defense stimulus rests not only on the argument that there are plenty of 'shovel ready' defense projects to fund, but also that there are military investments we need.

Preble and Hartung do not see this convergence of economic and military interests. They give the impression that hiring people to build the Virginia-class submarine, the V-22 Osprey, and the F-22 is the equivalent of hiring people to dig holes and then fill them in. Capping the F-22 program is sensible, they write, because "our most dangerous adversaries are al Qaeda terrorists and Taliban insurgents that don't possess even a single aircraft."

But, as Stuart Koehl wrote last month, it would be myopic to cede U.S. air and sea superiority to China. Furthermore, Koehl pointed out that the V-22 Osprey is "one of the few new high-tech systems that really supports low intensity operations (by virtue of its ability to insert troops very rapidly at long distances from base)."

The current debate in Congress is not whether there will be a jobs program, but about what kind of jobs program we will have. Is it an NEA jobs program for artists? Or is it a DOD jobs program for heroes?

That's David Leonhardt's description of America's economic troubles: "[T]hink of the debt-fueled consumer-spending spree of the past 20 years as a symbol of an even larger problem. As a country we have been spending too much on the present and not enough on the future. We have been consuming rather than investing. We're suffering from investment-deficit disorder."

If you look at the Democrats' spending plan through this prism, you begin to see what they are up to. They want to increase government "investment" in energy, healthcare, and education to cure economic inefficiencies and produce long-term returns. One problem with this is that their investments will probably create a whole new set of inefficiencies. Look at what subsidies for corn ethanol got us. More spending on education? Unlikely to produce better-educated students unless the money is coupled with accountability, testing, and curricular reform. Shoveling money into Medicare? It could help states through these rocky budgetary times. But, absent reform, the program is still an entitlement disaster in the making.

"Investments" in updating and expanding the nation's electric grid and increasing broadband access make sense. Says Leonhardt: "[A] smaller share of households in the United States has broadband Internet service than in Canada, Japan, Britain, South Korea, and about a dozen other countries." That shouldn't be the case. But otherwise the Democrats' plan is weak brew. Why not invest in defense stimulus instead?

Douglas Holtz-Eakin joins Larry Lindsey and John H. Makin in supporting a payroll tax cut:

[A] 1-year, 6.2 percent reduction in the payroll tax should be at the center of discussion. It is a tax that impacts all Americans. Cutting the payroll tax will target the labor market and have real impact on the marginal incentives for employment. And it is large enough that even if some of the cut is “saved” this will simply serve to shore up the weakened balance sheets of households and lower risks facing our banks and financial institutions.

The political and economic benefits are clear. All it needs is a political champion.

Ian Bremmer and Nouriel "The Glass is Half Empty" Roubini write:

We enter the new year grappling with the most serious global economic and financial crisis since the Great Depression. The U.S. economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the postwar period. Credit losses of close to $3 trillion are leaving the U.S. banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.

Worse, all of the world's advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global "stag-deflation": a toxic combination of economic stagnation, recession and falling prices. We're likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.

And it only gets worse:

Politics will make matters worse, primarily because governments in both the rich and the developing worlds are intervening in their economies more broadly and deeply than at any time since the end of World War II. Policy makers around the world are hard at work crafting stimulus packages filled with subsidies and protections they hope will breathe new life into their domestic economies, and preparing to rewrite the rules and regulations that govern global markets.

Why is this dangerous? At the G-20 summit a few weeks ago, world leaders pledged to address the crisis by coordinating their economic policy responses. That's not going to happen, because politicians design stimulus packages with political motives -- to satisfy the needs of their constituents -- not to address imbalances in the global economy. This is as true in Washington as in Beijing. That's why politics will drive the global economy more directly (and less efficiently) in 2009 than at any point in decades. Its politics that is creating the biggest risk for markets this year.

Read the House stimulus bill, and you aren't likely to feel any better about the shape of things to come. The bill's "tax cuts" are stimulus checks that the Feds will send to you in the mail - just as they did last year, to no substantial macroeconomic effect. A huge chunk of the remaining money is aid to states to help them balance their books. That isn't exactly "stimulus." What's left will go to infrastructure -- good! -- but also to pork projects, government make-work that doesn't increase demand, and subsidies for alternative energies that only further distort price mechanisms and hence the economy. The "tax cuts" aren't stimulative, in other words, and the spending probably isn't great enough to boost demand. Congress needs to go back to the drawing board. Be afraid.

It's an idea that conservatives should rally behind. The intellectual work for a cut in the payroll tax -- amounting to an instant raise for millions of American workers and relief for employers torn between layoffs and going under -- is well underway. Lawrence Lindsey wrote about it for us here. Lindsey's American Enterprise Institute colleague John H. Makin has a longer paper here.

When you study the current congressional plan closely, you quickly realize it's unlikely to have a major stimulative effect on the economy and will probably lead to a larger national debt without real investment in national infrastructure and growth in aggregate demand. Which means it's probably going to lead Obama into the stimulus trap.

The problem is that Republicans are out of power and conservatives seem to have a disposition toward pouting. But that needn't be the case. They could rally behind an alternative stimulus bill that permanently cuts the payroll tax and combines spending on road- and bridge-building with repairing and expanding the American military. This would put them on the side of the American worker and the American soldier. Sounds like a good place to be as the age of Obama begins.

Jagdish Bhagwati sounds the alarm.

Martin Wolf, who wrote the book on our current economic troubles, has a thought-provoking and extremely worrying column in the Financial Times. Everyone should read it. Here's the basic argument:

We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, large-scale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary – albeit necessary – expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.

Which might be a problem. Because:

What makes rescue so difficult is the force that drove the crisis: the interplay between persistent external and internal imbalances in the US and the rest of the world. The US and a number of other chronic deficit countries have, at present, structurally deficient capacity to produce tradable goods and services. The rest of the world or, more precisely, a limited number of big surplus countries – particularly China – have the opposite. So demand consistently leaks from the deficit countries to surplus ones.

In times of buoyant demand, this is no problem. In times of collapsing private spending, as now, it is a huge one. It means that US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world. This was a burden that crisis-hit Japan did not have to bear. ...

Given the persistent structural current account deficit, how large does the fiscal deficit need to be to balance the economy at something close to full employment? Assuming, for the moment, that the private sector runs a financial surplus of 6 per cent of GDP and the structural current account deficit is 4 per cent of GDP, the fiscal deficit must be 10 per cent of GDP, indefinitely.

Obama is making the right move by telling the country now that the deficit is going to get a whole lot larger, and that it will have to be like that for a while if we're to avoid serious economic consequences. Thing is, he's already encountering mild resistance to his $775 billion proposal. And that proposal might not be big enough.

Don't miss Martin Feldstein's Wall Street Journal op-ed calling for additional defense spending as part of next year's economic stimulus bill.

"World Markets Plunge as U.S. Auto Bailout Fails."

In other news, the dollar has fallen to a 13-year low against the Yen. Have a great day!

Jim Lindgren has two interesting ideas on how to reduce the gigantic federal debt. The most interesting: selling off large swaths of federal land to private owners. Individuals would develop the land, and the government would get a new revenue stream. What's not to like?

Chicago Bears fans are shoveling snow at Lambeau Field for money. That's a bad sign. (H/T Cheesehead.tv)

From Holman Jenkins in today's Wall Street Journal:

Maybe Washington will succeed in forestalling a deep and prolonged recession. Maybe all the money ($8 trillion by one count) being printed to acquire or insure mortgages, student loans, credit card receivables, commercial paper and banking shares will be seamlessly withdrawn once those assets are sold back to willing parties in the private sector when the panic has passed. Maybe taxpayers will even make a profit on the deal.

As Doug Flutie can testify, sometimes a 65-yard pass into the end zone lands in the hands of your own receiver.

Read it all.

The lead story in today's New York Times is headlined, "Recession Began Last December, Economists Say." The story reports that yesterday the National Bureau of Economic Research announced that the U.S. economy has been in recession since December 2007. Then you get to the second paragraph (emphasis mine):

"In declaring that the economy has been in a downturn for almost 12 months, the National Bureau of Economic Research confirmed what many Americans had already been feeling in their bones."

How does the Times know what many Americans have been "feeling in their bones"? Does Edmund L. Andrews, who wrote the story, also cover orthopedics? And isn't the appropriate saying here that Americans have been feeling recession pains "in their pocketbooks," not their bones? Based on anecdotal evidence, I can report that all that most Americans feel in their bones is the onset of arthritis and maybe a strange tingling right before a thunderstorm.

The National Bureau of Economic Research announced today that the economy has been in recession since December 2007.

Robert J. Samuelson on the many economic challenges facing Obama:

The temptation will be to press ahead with a 'bold' legislative agenda - to ape the New Deal. This would be a mistake. The psychology of bruising legislative battles will not bolster confidence. The country does need to face its health and energy problems as well as deficit-ridden federal budgets. But trying to do too much too soon risks doing none of it well. We - and he - are caught up in a web of contradictions. In the long run, we need to discipline our appetite for health care and energy; we need to reconcile our desire for government benefits and our willingness to be taxed. But Obama's first job is to avert an economic freefall.

Samuelson is right (as usual). But he provoked a raised eyebrow when he mentioned "bruising legislative battles." Two factors - Obama's honeymoon and the decrepit state of the congressional GOP - suggest that there won't be a "legislative battle" over Obama's stimulus plan next year. For the GOP to oppose Obama so early on in his presidency, at a moment of national economic crisis, would further degrade the public's impression of the party. Not that this would stop the GOP, of course.

In his column today, Paul Krugman notes that trying to budget-balance in the middle of a "liquidity trap" is a bad idea. He gives two examples (emphasis mine):

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

So, in both cases, government cut spending and prolonged a recession. But that's not all! In both cases, government also raised taxes and prolonged a recession. Funny, Krugman doesn't focus much - doesn't focus at all, in fact - on this part of his evidence.

A "liquidity trap," according to Krugman, is a situation in which "the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity." A situation a lot like today, in other words. The chances that the Bush tax cuts remain in place after 2010 just got a little bit higher.

Is Tim Geithner, Barack Obama’s choice to succeed Hank Paulson at Treasury, worth 500 points on the Dow? So it seems. No surprise say the professional traders: Markets hate uncertainty, and by making up his mind about this key economic post, Obama has removed a great deal of uncertainty. Plausible, but not persuasive.

One thing was certain since the day Barack Obama became our president-elect. Someone would replace Paulson, and that person would implement the Obama agenda. Whether that person turned out to be Paul Volcker, Larry Summers, Timothy Geithner or some reincarnation of Adam Smith, that person would be an implementer of policy. Yes, he--no plausible “she” was ever in the frame--would also be a key adviser to the new president. But would the advice of Larry Summers be very different from that of his long-time buddy, Geithner? Not likely. So where was the uncertainty that was dispelled by the naming of the new secretary of the Treasury?

Also, just what uncertainty has been eliminated? We knew no more about Obama’s plans and priorities on Friday afternoon, after the Geithner appointment was announced, than we did that morning. There will be a stimulus package of undetermined amount, there will be a GM bailout containing undetermined conditions, there will some day be an end to the secret ballot in union elections but we have no idea when--all known for some time. No uncertainty eliminated, no certainty substituted for the vagueness that has so far been the Obama hallmark.

The real significance of the market pop on the Geithner announcement is that we are shifting, at least for now and for the foreseeable future, from a market-driven economy to a government-policy driven economy. When Hank Paulson announced that he had changed his mind and would not buy the rotten IOUs that litter bank balance sheets, the market tanked. Nothing about the prospect for the economy changed--earnings will be whatever they will be in this recession, so will unemployment and other variables. Only policy changed.

So, too, on Friday. The economy was in as bad shape in the afternoon as it was in the morning. But a new policy player was inserted into the game. It didn’t take a genius to understand Paulson when he said that he would put the remaining $350 billion into a lockbox, to be opened by his successor--or sooner, with the blessing of that successor. Nor did it take a genius to figure out that this weekend’s deliberations about what to do about the sinking ship that is Citigroup--some wags are suggesting that CEO Vikram Pandit ask for a bailout by cash-rich Somali pirates who undoubtedly would like to move from their Mafia-like existence to financial respectability as the Corleones did when they shifted to Las Vegas--would now include Geithner as the “decider”, rather than merely as an advisor.

In short, policymaking changed on Friday afternoon, and the market likes what it thinks is the new direction more than it likes Paulson’s recent moves. The economy is no different. Obama might have intended to keep his hands off policy until he is inaugurated so as to distance himself from the Bush administration. But the policy-driven economy waits for no man, not even one who claims to be able to cool the planet and turn back the flood waters.

We are now in an era in which Washington trumps New York. When the economy is creating wealth, Wall Street and Main Street are the centers of the action; Washington has little or nothing to contribute. When attention shifts to redistributing wealth, the center of the action shifts to Pennsylvania Avenue, Capitol Hill and K Street. That’s where it is now.

The New York Times editorial page endorses the Colombia Free Trade Agreement.

Miami -- In an interview after her speech at the Republican Governors' Association meetings here today, Alaska Governor Sarah Palin criticized the Bush administration for exacerbating voter "distrust" by shifting money from the $700 billion bailout from buying bad bank assets to purchasing additional stock in banks. In response to the proposed changes, announced yesterday by Treasury Secretary Henry Paulson, Palin expressed frustration on behalf of a weary electorate and offered a stern warning.

"No more surprises," she said. "I think the surprises make the electorate distrust elected officials and their ability to appoint people who are to be looking out for the public’s interest."

The brief interview took place in a meeting room at the Miami Intercontinental Hotel. I asked her the question today because when Wolf Blitzer asked her a similar question yesterday, she struggled to give him an answer.

She initially told him that "there is going to come a point here where absolutely the federal government must play an appropriate role in shoring up some of these industries that are hurting and will ultimately hurt our entire economy and the world's economy if there aren't some better decisions being made." But then she spoke of the need for "personal responsibility" and worried about setting a bad precedent. Blitzer pressed her:

Blitzer: So, sorry, I'm still waiting for the answer, should the government bail out the big three automakers?

SP: Well, that -- it's in debate right now and I'm listening closely to the debate and there is a lot of information that even you and I certainly aren't privy to, to understand all of the ramifications if federal government were going to step in and bail out.

But we do know that the auto industry is that important that certainly it needs to be considered. But, you know, I'm not getting to ignore the debate again that I think needs to lead to the personal responsibility, the management decisions that have been made in some of these companies and corporations that have also led us to where we are.

Blitzer: So I hear you saying you need more information right now.

SP: Yes, I do. Yes.

In her speech this morning, Palin alluded to the bailout and voiced her growing concerns about Washington's addiction to, as she put it, "opium" -- O.P.M. - other people's money. During a panel discussion following her speech, TWS editor Bill Kristol lamented the fact that there had not been a serious alternative to the $700 billion bailout and Congressman Mike Pence explained his opposition to the bailout. In her interview with TWS, Palin seemed more skeptical of the a potential bailout of the automakers than she had been yesterday. The exchange with Palin follows.

TWS: Where are you on the possible bailout of the automakers?

SP: Not real enthused about looking at this next package if this entails additional dollars – beyond the $700 billion – and if it at all would suggest in this new proposal that these would be grants, not loans. And because Paulson just came out yesterday and again this morning kind of shifting gears on Americans in terms of what had just been proposed in the first bailout. It kind of lends to some distrust to the solution here that’s being proposed. So we all need more information on what exactly is it this time – the second bailout package that would evidently be very beneficial for manufacturing, for the auto industry. If that’s important we have to consider it. But no more surprises. I think the surprises make the electorate distrust elected officials and their ability to appoint people who are to be looking out for the public’s interest.

TWS: Given that reality…

SP: And the other Republican governors, too. I don’t hear a whole lot of them real enthused about the second idea.

TWS: Given the changes – and the fact that they’re suddenly shifting – do you have any regrets for supporting the initial bailout?

SP: No, because I think that we had to do something there. And Bill Kristol and others up there were saying also there had to be action taken by the federal government to start shoring up some of the elements here of the economic collapse – especially in the housing market. But now, with talk of a second, a third, a fourth stimulus or bailout package that’s being considered right now without all of the details – and was suggested up there also, all three pages of the $700 billion bailout. Well, not regret for the action that was taken. But certainly Americans need to know what we’re talking about when we’re talking about these solutions that aren’t obviously solely based on free enterprise solutions. We need more information.

And we also need to get to the point where we’re not reacting in crisis mode but we can be proactive here. That entails of course greater oversight of the entities and the players involved in all this. But with this second bailout plan that would evidently exclusively assist one segment of the manufacturing industry we want to know – Americans want to know that there is accountability here also. And if there were poor management practices and actions taken by the corporations and companies themselves that led to this collapse – it shouldn’t be about a blank check handed to them as a reward for perhaps some poor judgment and poor decisions made. There’s got to be accountability, otherwise, you know, there’s going to be a line of entities, states, people with their hands out sayin’: ’I want some of that, too.’ And what about those who have been wise and made sound decisions based on the circumstances that they were in?