Moody's downgrades US and German sovereign debt. The Chinese start selling dollars and Euros and bring down the value of both currencies. While we can buy less Cheap Chinese Crap our ability to purchase domestic goods and services remains intact. We all buy more domestic output, employment increases and our trade deficit declines.

Meanwhile the Chinese are stuck with piles of devalued dollars. They have to get rid of them by buying stuff from us.

What about the deficit? Plenty of domestic savings here folks. All the government needs to do is to appeal to our patriotism and greed by offering two or three percent real return on small denomination recovery bonds. Better return than a bank and a whole lot safer.

Besides, Wonks Anonymous wants to see Lady GaGa do a "buy bonds" pitch.

        

Reviewing Paul Ryan's tax proposals - ever so popular with sensible conservatives everywhere - Wonks Anonymous is struck by the ongoing Republican obsession with removing all taxation from property income while increasing the taxation of income from labor. This from The Center on Budget and Policy Priorities:

The Roadmap would give the most affluent households a new round of very large, costly tax cuts by reducing income tax rates on high-income households; eliminating income taxes on capital gains, dividends, and interest; and abolishing the corporate income tax, the estate tax, and the alternative minimum tax. At the same time, the Ryan plan would raise taxes for most middle-income families, . . .

Wonks Anonymous has noted that another part of the changes - removal of the tax exemption on employer provided health insurance a work related benefit - would bring in over $1 trillion dollars in payroll taxes in the next decade.

Now Wonks Anonymous has been tempted to write this off as simple greed and class warfare but lately he has not been so sure.

He thinks that Republicans are closet Marxists. You see Marx thought that labor was the only source of value and that all the income of the propertied classes and of the state was surplus extracted from workers who were paid less than the full value of their output. If the state wants to extract surplus in Marx's world it had best go directly to the source, the workers and peasants who actually produce things.

Taxation of property income is inconvenient, indirect and inefficient. Furthermore it does nothing to increase the amount of surplus extracted from workers and does not help to further the prosperity of the propertied classes.

Of course payments for services delivered to workers or former workers also make little sense in this scheme. Why waste valuable surplus raising the living standard of working people?

        

Ross Douthat is angry at liberals who do not understand Paul Ryan and accuse him of redistributing income to the rich:

This strikes me as an overstatement, to put it mildly. Ryan’s proposed changes to the tax code — his reduction in the highest rates, and his addition of a consumption tax — would shift the tax burden down the income ladder, just as Chait says. But nearly every other major element of the roadmap would make the American welfare state more redistributionist, rather than less so.

Because we do not see how Ryan's reforms will help the poor by eliminating the tax exemption on health benefits - half of which goes to households that have over $75,000 in income which would mean that the other half goes to households who make less than $75,000. That would mean that poor and middle income people with employer provided health insurance would pay the same income and payroll taxes that poor and middle income people without employer provided health insurance now pay. This would be progressive because it would make all poor and middle income people more equal.

And Ryan wants to make dramatic cuts to Social Security and Medicare:

Then continue to entitlements. Right now, Social Security is funded through a payroll tax that’s reasonably described as regressive, even as it pays out benefits to retirees irrespective of their wealth and income. The Ryan plan would means-test the program instead, indexing richer beneficiaries’ benefits to prices rather than wages and making the system considerably more redistributionist along the way.

A paragraph of description follows but really it boils down to this: There will be an increase in benefits for people at the bottom of the income ladder - those who earned minimum wage their entire working lives - at the same time benefits for everyone else will grow more slowly than they have in the past and eventually get close to benefits for those at the bottom of the ladder.

In Wonks Anonymous estimate this leaves benefits capped at about $6,400 per year adjusted for inflation. That would be 32% replacement of an income between $15,000 and $20,000 per year. Lets be generous and say 32% replacement of a $30,000 income: $9,600.

Everybody gets the same low social security check. See how redistributionist Paul Ryan is.

If this were used to cut the onerous and regressive payroll tax Wonks Anonymous might concede a point here but the payroll tax remains intact bringing Social Security into a surplus by 2070.

Instead the savings will be used to balance the budget if there is anything left over from massive changes in the tax system;

The Roadmap would create an alternative federal income tax system, with a broader tax base and a lower, two-rate tax structure. It would eliminate all current deductions and credits and exempt income from interest, dividends, and capital gains from the individual tax. Flow-through business income (i.e., income from sole proprietorships, partnerships, and S corporations) would only be taxed to the extent that it represents wage income.

In other words, tax changes which favor the rich over the lower and middle classes and which exempt property income from all taxation would be financed by a value added tax and by large cuts to social insurance programs which provide retirement security to the lower and middle classes.

But cuts would have their greatest impact on the better off members of the inferior classes. The gap between us and our betters would increase, as it should, but we could all console ourselves in our new found equality down here at the bottom.

        

David J. Gelb thought that Wonks Anonymous was in need of a good laugh and sent this article from the U.K.:

Chief exorcist says Devil is in Vatican

The Devil is lurking in the very heart of the Roman Catholic Church, the Vatican's chief exorcist claimed on Wednesday.

Father Gabriele Amorth said people who are possessed by Satan vomit shards of glass and pieces of iron.

He added that the assault on Pope Benedict XVI on Christmas Eve by a mentally unstable woman and the sex abuse scandals which have engulfed the Church in the US, Ireland, Germany and other countries, were proof that the Anti-Christ was waging a war against the Holy See.

"The Devil resides in the Vatican and you can see the consequences," said Father Amorth, 85, who has been the Holy See's chief exorcist for 25 years.

"He can remain hidden, or speak in different languages, or even appear to be sympathetic. At times he makes fun of me. But I'm a man who is happy in his work."

While there was "resistance and mistrust" towards the concept of exorcism among some Catholics, Pope Benedict XVI has no such doubts, Father Amorth said. "His Holiness believes wholeheartedly in the practice of exorcism. He has encouraged and praised our work," he added.

The evil influence of Satan was evident in the highest ranks of the Catholic hierarchy, with "cardinals who do not believe in Jesus and bishops who are linked to the demon," Father Amorth said.

Wonks Anonymous would start with the pope whose pride and willful blindness prevent him from moving away from a Medieval understanding of sexuality and a rigid and inhumane moral code that leads more people astray than it saves.

        

The CMS - that would be the folks who administer Medicare - has proclaimed that the Barium Enema is an important preventative service and should be free to all Medicare recipients.

This procedure, which had its heyday a few decades ago, involves making an image of the colon by forcing a solution of barium - a somewhat toxic element - into the anus and then exposing the patient to x-rays. It has been replaced by the sigmoidoscopy - a much more humane procedure that involves forcing a flexible plastic tube equipped with a camera up into the anus.

The procedure is no longer used for diagnosis of colorectal cancer because: "If you found anything you would still have to do a sigmoidoscopy to see whatever it was you found," to quote Wonks Anonymous doctor.

So we have one more rule, designed to make sure that we charge fees for medical services that consumers should be discouraged from using while we charge no fees for the "good" medical services that we want to encourage people to get.

Maybe we should try prepaid group practices. Pay integrated medical groups a fixed payment to provide care. Get rid of most point of service payments and trust the doctors to decide which care is effective and efficient.

        

Phillip K. Dick did not write this movie but he would have loved it.

        

Wonks Anonymous once graded macroeconomics papers for Janet Yellen, nominated to be vice chair of the Fed who is a fine economist.

Noted in the article in this morning's SF Comical by Carolyn Said and Tom Abate

Charles Calomiris, a professor of financial institutions at Columbia University, said in an e-mail that while Yellen is a good economist, "It strikes me that these appointments (none of which is known as a monetary economist) have more to do with the Obama administration's desire to pack the Fed with political loyalists rather than monetary policy experts."

Except that Yellen has been the president of the SF Fed for ever so long and during her tenure has no doubt gathered much more banking experience than the good professor could imagine.

Wonks Anonymous speculates that what we really mean here is not monetary economist but Chicago School Monetarist which species has appeared far too frequently in our recent experience.

Not to worry, while the Chicago School does not understand anything but its own theories and pronouncements Yellen is quite capable of understanding both sides of the issues.

        

Marilyn Geewax who appears to be NPR economics editor weighs in on the problem of low interest rates on Weekend Edition today:

Interest rates have been at very low levels ever since the financial crisis hit in the fall of 2008. The shock caused the stock market to plunge, credit markets to freeze up and housing sales to stall. To help bolster the economy, the Federal Reserve decided to drive down interest rates.

Low-cost loans helped make housing more affordable, and made it easier for businesses and consumers to get loans. But the strategy of propping up borrowers came with a cost — and savers had to pay it.

When borrowers are paying low interest rates, the banks that lend them money aren't getting much in return. So in late 2008, savers who put money into financial institutions in the form of CDs did something good for the economy: They helped make cash available for loans. But they did not get much of a reward in the form of interest payments.

In the radio story this is followed by much pissing and moaning about how it was the evil borrowers who got us in to this mess in the first place and how the virtuous savers are being punished now.

The villain in this drama is the Fed which has lowered rates and robbed savers of their due rewards. The implied solution: Now that the economy has stopped shedding jobs - well almost stopped shedding jobs - and the financial sector is doing just fine we need to raise interest rates.

Now Wonks Anonymous is a saver himself and feels the pain, particularly since everyone is telling him that he should start putting his assets in investments that are heavy on the bonds, certificates of deposit and so on.

Wonks Anonymous also believes that the Treasury and the Fed are showing a disturbing lack of imagination and good sense in their handling of the whole recovery thing.

What we have here is a failure of capital markets. Everyone, particularly banks, wants to hold cash or extremely liquid assets - that would be short term Certificates of Deposit such as Marilyn Geewax herself recommends. We have considerable savings - in Wonks Anonymous humble opinion we could use more - the problem here is that our financial markets are not doing their job.

Although the bonuses continue and New York City is just fine, the financial markets are not moving savings to investors who would spend them on profitable projects that would produce high returns to reward savers.

As a result we have a slow economy, low returns to savings and high unemployment. All that the Fed and the Treasury can think to do in this situation is to cram even more money down the throats of the banks in the hopes that some of it will pass through.

Wonks Anonymous has a better idea which he originally proposed here. Someone needs to use the savings that are piling up as cash. We cannot just take our money and bury it in the fields as someone in the New Testament did. if no one else will do it, there are plenty of worthwhile public investment projects that the Government can undertake.

Of course the administration allowed itself to weigh in with an absolutely anemic stimulus package, mainly to satisfy the likes of Senator Gregg and others who suddenly developed a fear of deficits caused by Democrats. We can't run a deficit because that will put us in the debt of Chinese.

Guess what.We have plenty of savings. We do not need to borrow from China. All we need to do is sell government bonds directly to the public. We need small denomination, long term bonds that offer say 3% real return which would probably be a better deal than most of us are getting with our current retirement savings.

Or we could just raise interest rates and idle more workers and factories. That will return us to prosperity for sure.

        

Alan Tonelson and Kevin L. Kearns, representing small manufacturers in the US provide an interesting, if incomplete critique of our recent prosperity and productivity growth:

In reality, though, wage gains for the average worker have lagged behind productivity since the early 1980s, a situation that free-traders usually attribute to workers failing to retrain themselves after seeing their jobs outsourced.

But what if wages lag because productivity itself is being grossly overstated, especially in the nation’s manufacturing sector? Then, suddenly, a cornerstone of American economic policy would begin to crumble.

Productivity measures how many worker hours are needed for a given unit of output during a given time period; when hours fall relative to output, labor productivity increases. In 2009, the data show, Americans needed 40 percent fewer hours to produce the same unit of output as in 1980.

But there’s a problem: labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures.

The result is an apparent drop in the number of worker hours required to produce goods — and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

Which is actually an interesting insight, although they have not got the economics quite right. Productivity is measured by the difference between the value of inputs and the value of the output. Right now we buy cheap inputs, mostly goods ready for market or goods that need only a small amount of final manufacturing. After some processing - mainly taking the goods off the ship and getting them on the store shelves - our corporations sell them for considerably more than they paid.

The difference between the price of the inputs and the final sale price, divided by the amount of labor employed, is productivity.

Which means that the driver of this productivity is actually buying cheap and selling dear which requires control of a national and international supply chain as well a sophisticated financial network and a great deal of capital. Rewards go to those who are in control of these things while workers wait for something to trickle down.

Wonks Anonymous supposes that this would all be wonderful if it were built on a sustainable international financial system and on international prices that reflected the true scarcity of inputs.

This is not sustainable. We buy cheap because the Capitalist-Stalinist government of China keeps its currency at a low value. Effectively the Chinese government is forcing its manufacturers to sell their output at a discount on international markets. Ultimately this means that the Chinese government is forcing its workers to sell their labor at a discount.

This can only be sustained by continuing Chinese purchases of dollars. Any amount of dollars will buy more goods if the dollars are converted to Yuan. Our current international trade consists of buying Yuan with dollars, buying Chinese goods, selling them for more dollars and then buying more Yuan.

In ordinary circumstances this would increase the demand for Yuan and eventually increase the price of the Yuan in terms of dollars. As the price of the Yuan increased the profits to be made by buying Yuan would drop and manufacturing elsewhere in the world would revive.

Instead the Chinese government has held the price of the Yuan low by buying dollars which it ultimately converted to US debt. We collaborated with this, allowing ourselves to be seduced by unrealistic estimates of the value of our assets, but this illusion has been shattered along with most of our financial markets. We save and world demand declines.

Meanwhile the rulers of China still seem to think that they can find someone, anyone but their own citizens, to borrow from them and buy their output.

Time for an intervention.

        

It is always sad to see a prominent public figure taken down by our festering homophobia. Which seems to be happening right now in Sacramento according to Wyatt Buchanan of the SF Comical:

Republican state Sen. Roy Ashburn of Bakersfield has taken leave from his elected position until at least Monday after his arrest on suspicion of drunken driving started a firestorm over his sexual orientation.

Ashburn, 55, has served in the Legislature since 1996 and consistently has voted against bills that would expand legal protections for gay, lesbian, bisexual and transgender Californians. The single father of four is among lawmakers with the staunchest records against those issues.

Ashburn was arrested and booked into Sacramento County jail on suspicion of driving under the influence of alcohol just after 2 a.m. Wednesday. A Sacramento television station cited unnamed sources in reporting that Ashburn had spent the evening at Faces, a large gay dance club a few blocks from where police stopped him. Ashburn was driving his state-issued vehicle. Sacramento station KOVR reported there was another man in the car with Ashburn.

There has been no confirmation of Ashburn being at the club that night, which drew large crowds for a Miss Gay Latina Sacramento competition. But, three sources have told The Chronicle that they have seen Ashburn regularly at gay clubs and bars near Faces. Capitol staffers say it is an open secret that Ashburn frequently visits Sacramento's gay establishments.

Still Wonks Anonymous is laughing through his tears because there is some justice here when a man who has spent his career trying to force others back into the closet suddenly has his own closet explode in a big hot mess. It would seem that the powers that be have decided that it is time for Senator Ashburn to experience a little tough love. Wonks Anonymous prays that it does not drive him to one of those ministries that "cure" gay people.

Of course this all gives the lie to the supporters of Proposition H8 who argued that gays are accepted and powerful and not subject to discrimination particularly by the folks who supported Proposition H8.

Hide yourselves and we will agree not to hunt you down and persecute you. What more do you want?