A Few Thoughts On The "Freeze"

Tuesday, January 26, 2010

I've got a few thoughts on President Obama's proposed "freeze" on non-security discretionary spending. [See UPDATES below]

1. The devil's in the details.
As Matt Yglesias points out, this is "not a blunt across the board freeze." Instead, "some agencies will see their budgets go up and others will go down, producing an overall freeze effect." That means the devil's in the details; namely, which programs' budgets will go up and which will go down? Here's a chance to cut some really bad programs, like subsides on corn and sugar. If that happens, the "freeze" could actually have a beneficial effect. If not, it probably won't.

2. This isn't the "big freeze".
The freeze exempts entitlements and national security expenditures (Pentagon, Veterans Affairs, Homeland Security), meaning that the vast majority (nearly 90%) of the federal budget won't be touched. Also, in large part since the vast majority of the federal budget is off limits, we're talking about very low levels of deficit reduction here, around $25-$35 billion per year or perhaps 4%-5% of the overall deficit. Meh.

3. The "freeze" will be more than offset by other spending.
While the "freeze" saves about $25-$35 billion per year, Congress is already moving to spend as much as $156 billion on a package "intended to lower the nation's 10 percent unemployment rate."

4. This will have almost no impact on the economy.
In the context of a $14 trillion gross domestic product, a cut of $25-$35 billion amounts to just 0.2% of the economy. Also, as noted above, this cut will be offset by a $156 billion employment package. Thus, the "freeze" will have almost no impact on the U.S. economy, especially if it eliminates counterproductive (aka, "profoundly stupid") spending, such as on corn and sugar subsidies. This certainly is not "Hooverism," as I've seen a few people charge. Instead, it's a tiny bit of fiscal austerity in a sea of entitlement, defense, and national security-related spending.

5. It's a signal on the deficit..
What this really all comes down to is sending a signal to bondholders that the government is serious about addressing the budget deficit. Here's the thinking.
...there is a logic to Orszag’s gambit, which runs roughly as follows: It’s almost certain that Congress will pass, and the president will sign, a jobs bill early next year, probably in the neighborhood of $100 billion to $200 billion. Given that, and given the difficulty of doing anything about the long-term deficit next year, the administration needs some signal to U.S. bondholders that it takes the deficit seriously. Just not so seriously that it undercuts the extra stimulus.

The Orszag approach just might accomplish that. Given the amount of domestic discretionary spending in the federal budget--about $700 billion this fiscal year--we’re talking about cuts of, at most, several tens of billions of dollars if Orszag holds the line on spending (and probably less once Congress weighs in). Which means the cuts wouldn’t come close to offsetting the likely stimulus. But they just might buy some credibility in the bond market, which could defer the day when the real deficit cutting has to start. “It’s a little bit of form over substance,” says Michael Granoff, a money manager who served on the advisory council of the Brookings-based Hamilton Project when Orszag ran it. “But, if you show resolve, that you care about this stuff, it gets into the psychology of bond traders.” The laws of psychology may prove easier to finesse than the laws of economics.

6. It's politics.
Last but not least, obviously this is about politics. Specifically, the Obama administration is looking to rebut criticism from the tea partiers, etc. that it's allowed "the spending" to get out of control. Whether or not that charge has any merit - and other than the previous administration's wars and huge tax cuts, I don't think it really does - the perception is out there. Thus, a high-profile, State of the Union "spending freeze" announced by the President. Let the Republicans try to torpedo this and see how that plays out. Or, let Congressional Democrats torpedo it, and let the president "triangulate" above them. That seems to be what they're thinking in the White House political shop.

UPDATE: Paul Krugman calls the spending freeze "appalling on every level," adding that it's "bad economics," "bad long-run fiscal policy" and "a betrayal of everything Obama’s supporters thought they were working for." Other than that, Krugman just looooooves it! Ha.

UPDATE #2: So far, there's no sign that Republicans are giving Obama any credit on this (surprise, surprise!). To the contrary, their comments so far have been along the lines of, "after running up gazillion dollar deficits, Obama now proposes an inadequate, phony 'freeze,'" blah blah blah. True, it's totally dishonest on the Republicans' part, but that never stopped them before and it's not stopping them now. Meanwhile, on the left, there's not much love for the "freeze" either, whether on the merits or on the politics (short-term OR long-term) of it. Liberals are definitely not happy with the "framing," which they see as Clintonian triangulation/government bashing at its worst. Not good.

UPDATE #3: Nate Silver says that the "most likely effect [of the spending freeze] is to confuse voters, and in the long run, it'll probably either be forgotten about or become Another Broken Promise™."