Tuesday, January 26, 2010

Obama Proposes Spending Freeze

From the NY Times:

President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday.


The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, including air traffic control, farm subsidies, education, nutrition and national parks.

But it would exempt security-related budgets for the Pentagon, foreign aid, the Veterans Administration and homeland security, as well as the entitlement programs that make up the biggest and fastest-growing part of the federal budget: Medicare, Medicaid and Social Security.

The payoff in budget savings would be small relative to the deficit: The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional deficits the government is expected to accumulate over that time.

Why are they doing this?

“A lot of our caucus won’t like it but I don’t think we have any choice,” said an adviser to Congressional Democratic leaders, who would only speak on condition of anonymity about internal party deliberations. “After Massachusetts and all the polls about independents’ abandoning us for being fiscally irresponsible, we can’t afford to be spending more than Obama.”

Here are a few points, in no particular order of important.

1.) We're in the middle of a recession -- the worst recession of the last 60 years. We have to spend money now to alleviate the effects of the recession and get us out of the recession. That's standard Keynsean economics 101. And so far it's worked -- the economy grew 2.2% in the third quarter, largely thanks to government spending.

2.) The cuts are in fact pretty small and therefore mostly symbolic.

3.) Notice there is no talk about getting out of Afghanistan. While I am loathe to inject my political thoughts into this process, suffice it to say I believe trying to win a war in a country that has been at war for a very long time is a pointless task. I view this effort in similar terms -- no win.

4.) There is the possibility that he is playing to the bond market in an attempt to keep interest rates lower.

5.) A lot of the problems I have with this is a matter of timing. Is this he right time to be talking about deficit reduction? I don't think so. Given the US has a 10% unemployment rate this is really the time to spend to get people employed. To that end, I would propose a public works project that employs all the unemployed construction workers we currently have. That would be a really good idea.