The Budget Non-Freeze Freeze, and its Implications

Even if you think that Congress will agree to every request by the Obama Administration on discretionary spending, which they won’t, the policy announced today on “freezing” the budget for these non-security related items doesn’t look like much of a freeze. Some discretionary programs can go up, others can go down. Overall outlays can still rise, because this just impacts authorizations. And because extensions to the Recovery Act and other short-term initiatives like a jobs bill would be outside the scope of this policy, authorizations can rise, too. The amount of money “saved” by this policy amounts to 2-3% of total budget deficits.

In fact, this doesn’t look all that different than some of the rhetoric around last year’s budget. Then as now, OMB slated programs for elimination, and raised other spending based on Presidential priorities. On a conference call just now, OMB Deputy Budget Director Rob Nabors said that the President is “still focused on creating an economy that will work in the 21st century – and at the same time eliminating things in the budget that don’t work.” That’s not functionally different than previous years. Obama talked about “going through the budget line by line” and finding things that aren’t working during the campaign. Asked about whether this is an example of Clintonian triangulation, positioning the President in the political center, Nabors said:

No. We look at this as an effort to balance competing economic initiatives. We need to be in a position where we are balancing the budget and spending money wisely. Liberal criticisms will be somewhat muted when they see the details.

So, if the spinmeisters are going out of their way to classify this freeze as not a freeze, er… WHY CALL IT A FREEZE???

Jed Lewison is absolutely right here, it’s a pretty cheap rhetorical gimmick, and yet consequential all the same:

So the good news is that it doesn’t sound like the proposal will really be a calamitous disaster for the economy. The bad news is that not being a calamitous disaster is probably the best thing you can say about this. And for this economy to recover, we need more than not a disaster.

In a way, Bernstein’s argument is that the freeze isn’t really that much of a freeze. But if that’s the case, why do it all? It runs the risk of looking like a political gimmick, and even if it is a narrowly crafted as Bernstein argues, isn’t it hard to square the spending freeze proposal with the need to pass the health care bill? And isn’t the administration making it harder than ever to request the kind of funding that we’ll need to invest in rebuilding our energy economy? Perhaps more than anything else, this is intended to be a signal that with the stimulus under its belt and health care almost on its way, the administration is done thinking big.

Exactly. And it’s actually worse than that. This would be bad enough rhetorically during good economic times, a ceding of the battlefield and a validation of the Republican worldview that government is the problem. But because we’re in the midst of high unemployment numbers, net cuts (this is a hard freeze without accounting for inflation) are precisely the wrong way to go, because they depress demand. As Brad DeLong writes:

And what do we get for these larger output gaps and higher unemployment rates in 2011 and 2012? Obama “signal[s] his seriousness about cutting the budget deficit,” Jackie Calmes reports.

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit–either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits–come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.

Nabors was asked on the call if he expects unemployment figures and the larger economy to completely turn around in the next 9 months before this freeze hits the budget in October, and he basically said “yes.” That’s an even more unserious and ahistorical answer. It also doesn’t align with CBO predictions of a slow recovery.

What could cross this over from a political gimmick into even more unserious territory is the kind of mentality at work in this Noam Scheiber piece:

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.

The “psychology of the bond traders” won’t just rub off on a ten-block area in Lower Manhattan, but the entire country. This is an effort to prepare the ground for longer-term reductions – there’s no other reason to call it a freeze. On the conference call, Nabors discussed this as part of a three-pronged strategy: 1) this discretionary freeze, 2) the deficit reductions from the health care bill (“health care reform is entitlement reform” is an oft-heard mantra), and 3) the Conrad-Gregg deficit reduction commission to “look at revenues and mandatory programs.” He said that, with these three programs in place, the President has a “solid strategy to put the country back on a sustainable path.”

That’s the rhetoric of every fiscal scold in Washington, and during this jobless recovery, that’s just poisonous. As benign as this budget policy may be, it’s a prelude to essentially the return of the pain caucus.

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