Spending Freeze – Say What?

I spent much of the time since I first heard about Obama’s proposed freeze on Federal discretionary spending trying to pretend I had misheard. After that failed to make the whole thing disappear, I began to wait for details that would reveal something that wasn’t a nightmare.

No luck.

This is just rotten economics.More to the point it is both rotten and Republican.We may just as well admit it: that 41 GOP caucus in the Senate is running the country. So much for majority rule. And so much for change.

Imposing a lid on discretionary spending sounds very well to the populist ear. After the loss of that Massachusetts senate seat the administration has gone into populist overdrive and has thrown out any semblance of consistency in its politics. It looks an awful lot like panic to me.We still don’t know exactly what a freeze would look like, and whether there will be any exceptions – other than the sacred defense spending budget of course. America must not give up its swagger after all.

From a purist standpoint putting a limit on government spending just when the government is the only reliable consumer in the economy is a about as close to being Hoover as one can be. The economy is not well. The private sector is hampered by fear and by an obsessive need to be frugal – either by way of debt reduction, or by way of limited spending. I have said it a hundred times – and you all are surely bored of my words: it is the government that currently stands between us and further recession.

So what does Obama propose doing?

Stop the government. Well kind of. The really odd thing about this proposal is that it affects such a small part of the budget. It ignores all the areas where the problems of run away spending lurk: entitlements and defense. In other words it is a joke: it curbs our ability to deal with recession and does nothing about the long term deficit. It is nuts.

Huh?

It makes no sense.

What makes my skin crawl even more is that it carries with it an implicit surrender to the Bush strategy. Recall that Grover Norquist, the evil ’eminence grise’ of right wing politics, advocated starving the beast. His objective was to drain funding from the Federal budget and so prevent the implementation of any left of center entitlement programs – like health care reform. His ultimate goal was to reduce the Federal government to such poverty that it had to contemplate cutting hated [by him] New Deal programs like Social Security and the later Medicare. The Bush tax cuts were, in part, a cynical attack on Federal revenues designed to plunge the nation into years of deficits. The end result of which would be a forced debate about cutting spending.

So here we are. Caving in to the Republican agenda.

As I said above the freeze exempts entitlements and defense for now. I have my doubts about Obama’s commitment to maintaining that exemption as well: he has fallen for the right wing proposal to set up a commission to examine ways to reduce the deficits. Presumably if defense spending is allowed to maintain its sacrosanct status, and if there is no attack on health care run away costs via reform, such a commission will be forced to cut into entitlements too.

Oh and by the way: the curbs on health care spending embodied in the bill languishing on the Senate floor contain the largest cuts in Federal spending ever contemplated by the Senate. If we are worried about cutting the deficit, the first and most significant thing we can do is to pass health care reform. Is that likely? Don’t hold your breath.

Instead, Obama has opened the door to Republican rule.

Let’s just reiterate the basic economics: the nation’s debt is very high. It is not at record levels in percentage terms. It will start to fall of its own accord as the economy recovers simply because revenues will rise again – employed people pay more taxes. The bond market is showing no concerted signs of fear about US debt levels, despite all the fuss in the media. The stimulus plan is the only large bulwark we have against more recession. State governments are cutting jobs and spending furiously and therefore adding to the crisis. Why? Because they face hard budget limits. In other words strict balanced budget rules at the state level are helping plunge us further into trouble. We have the equivalent of fifty Hoovers beavering away to undermine the country, why add another?

Rational and calm policy right now is to maintain the Federal deficit at a high rate to offset the state retrenchment and the lack of private sector activity. It is a policy that is working. We avoided depression only because of it.

So Obama decides to toss it out and channel Hoover.

And yes, there is no doubt that we need to reduce the deficit once the storm has passed. Don’t forget – how could you? I have written it here before – that over half the current deficit is due to the Bush tax cuts which were not offset by spending cuts or by extra revenues generated by induced growth. On the contrary and like Reagan, after slashing Federal revenue Bush raised spending by record amounts. We are we sinking under a sea of red ink before the crisis. No one seemed to worry about freezing spending back in 2003 through 2009, why now? Our budget is a mess. That’s the great Reagan/Bush legacy. We overspend on everything. In particular we overspend on defense and entitlements. We cannot entertain a credible budget balancing policy that excludes defense spending. We spend as much as the next ten largest nations added up, plus some. What for? To bankrupt ourselves? To prevent our construction of schools? Our priorities need to be examined carefully and in the light of a longer term view of our role in the world. A panicked response to a near depression is not the best way, or time, to undertake such a review. In any case credible deficit reduction also has to include revenue increases – new taxes of one form or another so the entire burden doesn’t fall on spending cuts.

Our generation’s legacy is in danger of being only war and the debt it created. And a weaker nation as a result. The best security comes from having a vibrant domestic economy that generates sufficient revenue that we can accommodate a variety of aims simultaneously. We can afford a strong safety net and a strong security system at the same time only when we have rebuilt our economy. Getting back to growth should, therefore take priority over balancing the books near term. Establishing a budget freeze is exactly counter to this approach. It puts faux frugality first and jeopardizes the long term in favor of short term window dressing.

Is that what we want? It isn’t what we need.

Addendum:

In response to a couple of questions from you: the ‘discretionary’ part of the Federal budget currently amounts to about $477 billion in spending out of a total of around $3.7 trillion. The other big chunks of the budget are entitlement programs like Social Security and Medicare; defense; and interest on the national debt. As I mentioned above any credible deficit reduction program has to open up all these areas to scrutiny – except the interest payments of course.