• Grassley amendment–make Obama, political appointments, members of Congress, Congr. staff enroll in Obamacare. http://bit.ly/aNDcIW #

China CPI – February 2010

(The charts below are courtesy of Andy Rothman at CLSA. Andy is by far the most knowledgeable person I know on Chinese inflation issues.)

The worry that rising inflation in China will provoke the government to tighten sharply, which would slow growth and push commodity prices lower is unfounded.

China’s February CPI was up +2.7% from a year earlier after showing deflation for most of 2009. As the chart below shows, however, it’s all food prices. 2.06% of the 2.7% headline number came from food. Another .44% came from residence expenses, which were pushed up by a one-time increase in utility costs last year. Other goods and services accounted for only 0.2% of the 2.7% increase–about one-fourteenth of the total increase in consumer prices.

Food prices make up a much larger share of the CPI basket than they do in the U.S. or Europe. Food prices in February were +6.2% higher than a year earlier. Most of the increase was due to the 25.5% increase in fresh vegetable prices and +19% increase in fresh fruit prices, as shown in the chart below. Both were caused by severe weather and the New year holiday, which fell in February this year. Together, fruit and vegetable prices accounted for about one-third of the total CPI increase in February.

Rising incomes in China make the CPI increase negligible, as shown in the chart below. In fact, rising food prices drive higher income growth for China’s farmers. This is exactly the kind of relative price/wage pattern we expect in a country with fixed exchange rates and sharply rising productivity. Traded goods prices are constrained by global competition and rising productivity. But wages grow strongly to reflect rising output levels. It is important in this situation not to confuse rising wages with inflation when setting overall economic policy.

Internationally traded industrial input prices, however, are rising sharply to reflect the strong China growth and strong construction activity following last year’s stimulus program, as shown below. With input prices rising and end-user prices (CPI) constrained by intense competition and overcapacity the worry is not inflation, it is the profit margins of the industrial companies that make up a large part of China’s stock market.

Bottom line: China is not going to tighten policy aggressively to try to control cabbage prices. The exit from China’s stimulus program will continue in a gradual and orderly way over the next year.

JR

The vote is scheduled for Sunday, when most people are not watching the news–I wonder why? This weekend, House Speaker Pelosi is going to try to end-run the Constitution to pass the largest piece of legislation ever enacted–multi-trillion dollar healthcare reform–without a vote. My friend and constitutional law and health care scholar Betsy McCaughey  has written two books on the Constitution. Betsy says the Pelosi gambit won’t survive a constitutional challenge in the Supreme Court. You can read Betsy McCaughey’s analysis by clicking here.

A number of House Democrats do not want to go on record as having voted for the controversial and unpopular health care bill so Pelosi has crafted a way they can vote for the bill on Sunday and tell voters they “never voted for the health care bill” in November. The tactic is called “deemed as”. Members vote on an innocent-sounding budget reconciliation bill that “deems as passed” the Senate bill (i.e., assumes the Senate Bill has already passed by the house even though it has most definitely not been passed by the house). Members then only have to vote on a series of reconciliation amendments. They then send both the Senate bill and the House reconciliation package to the President for signing.

Confused yet? Good. That was the purpose of the maneuver. They hope voters in November are to be confused too.

Betsy says the Pelosi tactic won’t suvive a constitutional challenge. ” In recent years, the U.S. Supreme Court has twice struck down attempts to abbreviate the lawmaking process required by Article 1, Section 7 of the U.S. Constitution.” In both cases the Supreme  Court ruled that neither the President nor Congress may can depart from “finely wrought procedure commanded by the Constitution to make a law.” The language of the Constution is black and white on this issue.

Article 1 of the Constitution states: “The votes of both houses shall be determined by yeas and nays, and the names of the persons voting for and against the bill shall be entered on the Journal of each House respectively.”

“The Senate health bill raises $500 billion in new taxes over the next decade.” writes McCaughey. “…if Pelosi has her way, these taxes will be “deemed” enacted without any house vote at all.”

When Ben Franklin was asked after the Constitutional Convention what kind of government the founding fathers had created, he answered “a republic…if you can keep it.” That’s the question on the table this weekend in the House of Representatives.

JR

The Consumer Price Index for January 1020 was released today. On the surface, it showed momdest inflation of 2.1% over the past 12 months, as the table below shows. Beneath the surface, in its components, the CPI shows that the real situation is very different. There is a 45.2% difference between the highest annual inflation figure (36.8% for gasoline) and the lowest figure (-8.4% for gas utility costs). Five of the figures are above 10%. Six of them are below zero.

The job of the Fed is price stability–to keep prices stable so people will be able to predict their revenues and expenses and make long-term decisions. No rational person could look at these figures and make any long-term decision.

This is important to keep ttrack of because the direction of future inflation is the wild card for the economy and the stock market. The Fed’s bailout efforts have increased the stock of bank reserves by more than 1200% in the past 18 months, which screams future inflation. The Fed’s announcement this week represents that inflation is under control and they will be able to extract the reserves from the market before inflation shows up. I am skeptical of their qbility to do that.

JR

• @gloriachou yes, in NB for a few days, then Switzerland again. #

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The Reid Bill ($15B) is better than either the December House bill ($154B) or the Baucus/Grassley Senate Finance bill ($85B) simply because it has a smaller price tag. But, like the other bills, it will have very little impact on jobs.

The central piece of the bill is the temporary payroll tax cut (employer portion 6.2% of the 12.4% payroll tax) for the rest of 2010 if a company hires a person who signs a statement they have been unemployed for at least 60 days, with a $1000 bonus if the worker is still hired at end of one year. The 60 day unemployed requirement is both troubling and counterproductive. It creates tremendous incentives for fraud and abuse. It will force the government to create an enforcement mechanism, potentially going after both workers falsifying statements (including those legitimately unemployed for less than 60 days) and the companies that hire them. It favors some workers over others. It tries to influence who a company hires, not just whether it hires a new worker. And it will be an administrative nightmare, forcing the government to create an enforcement mechanism, potentially going after both workers falsifying statements (including those legitimately unemployed for less than 60 days) and the well-intentioned companies that hire them.

We need jobs–all jobs–not just jobs for certain people. The government has no business telling companies who they should hire.

The temporary, selective payroll tax reduction will have very little impact on jobs. In my experience, companies don’t hire people based upon a small, temporary tax break. That means most of the money will go to companies that already had plans to hire and most of the impact, if any, will be to influence who the company hires, not how many people they hire. But don’t take my word for it. Let’s look at the estimates from the Congressional Budget Office (CBO.)

The CBO released testimony today to the Joint Economic Committee (JEC) on impacts of different jobs measures. You can read the full testimony by clicking here. The chart above is from their report. CBO analyzed impact of the same payroll tax cut for 2010 but applied to ALL NEW HIRES (not just > 60 day unemployed).

Each dollar of government spending will increase TOTAL GDP (including the $1 of govt spending) by $0.40 to $1.30 over the next 5 years, only half of which will happen this year. That means each dollar of govt spending will impact private spending by $-0.60 and $+0.40, an average of $-0.10 over the full five years.
Conclusion: Somewhere between no bang for the buck and negative bang for the buck. Would be better off handing the unemployed guys $100 bills.

That makes the net cost per job between $100,000 -$200,000 for 2010. These are jobs that will pay $30-$50K per year. Very wasteful use of taxpayer money.

And remember, these CBO estimates are for cutting payroll taxes on ALL NEW HIRES, not just those > 60 days unemployed. The Reid bill have a much smaller impact than that because not all new hires will qualify for the tax cut. If half of new hires do (half of new hires have been umemployed for at least 60 days)–a gross overestimate–the cost would be $200K-$400K per job.

The jobs problem in America is concentrated in small businesses, which are always where new jobs come from. Their problem is that they have no access to working capital to meet payroll, buy raw materials and hold inventories and receivables. The reason is that banks have effectively red-lined small business loans in America ever since the government stimulus plans started compensating banks for doing certain things (e.g., loan modifications). Jobs won”t return until banks start lending to small businesses again. That’s where policy makers should concentrate their efforts.

JR

• RT @viewsflow U.S., China, Iran and oil. http://vf.cx/ABs #

Fed discount rate yesterday not a big policy event and good to do. It is part of their sweeping up exercise, trying to encourage banks to repay some of the $1 trillion (1100%) increase in bank reserves they added to banking system during crisis a year ago. You can read the Fed’s press release here. Worth noting–the quarter point increase, times today’s reserve base,  will reduce bank earnings by about $3 billion over 12 months.

It is imperative that the Fed extracts those additional l reserves this year before they show up as inflation down the road. Left as is, the reserve increase is more than enough to than double the US price level.
What they are trying to do is a little like putting a genie back in a bottle. I don’t think they can do it without knocking something over but sure hope I am wrong.
JR

You have to see this. My friend Mark Swenson, Arizona Deputy Treasurer, has shown me their new website. Arizona State Treasurer, Dean Martin, has put Arizona’s financial system online for all to see. Dean’s purpose was to provide Arizona taxpayers with a searchable, user-friendly website that discloses all revenues and expenditures for Arizona State government.

The site has daily cash balances the the entire state government (the figure above is from today’s front page) plus detailed information on all outlays and revenue sources as you can see below. It is the most transparent government site of any kind I have ever seen.

Now all we need is to get Washington to do the same. And Mr. Geithner, if you are going to say we can’t afford it, I’ll pay for it myself. My friend Mark Swenson in the Arizona Treasury tells me they did theirs for 5 weeks of programming and $13,000.

Three cheers for Dean.

JR