Finance President

A Spending Freeze

» President Obama’s appeal to fiscal conservatives is likely to result in little substantial change, but it’s exactly the wrong message.

On Wednesday, President Obama will give his State of the Union address to the Congress, and next Monday he will release his proposed budget for fiscal year 2011. Late yesterday, staff aids leaked the news that the speech would include a pledge to veto any budget that didn’t freeze non-defense and non-security discretionary spending at $447 billion. The freeze would be set for three years, followed by spending increases limited by inflation. The goal would be to reduce federal spending by around $250 billion over ten years.

Discretionary spending does not affect mandatory programs like Social Security, Medicare, or Medicaid, which are financed through other funds.

Mr. Obama has no direct control over the budget; final decisions about the funding of federal agencies are made after months of negotiations between the two houses of Congress. As a result, the President’s proposals are unlikely to see the light, since Democrats on the left will balk at the idea of cuts in departmental financing and Republicans have proven themselves unwilling to compromise on almost anything.

But the message the President is planning to send on Wednesday with his proposed spending freeze — a policy close to that advocated by John McCain during the campaign — makes very clear the kind of government he wants to lead; one can’t help but note a similarity with President Clinton’s 1996 announcement that “the era of big government is over.” Mr. Obama seems willing to compromise the political ideals he may have held at the beginning of his Presidency and replace them with an appeal for conservative support. Any hope for an American political realignment following the 2008 election has been firmly put to rest here.

For those who would suggest that the U.S. has done too little to support its flailing economy, specifically through major investments in infrastructure, the President’s statements will be a major let-down. His, and his party’s, unwillingness to force through tax increases for the purposes of financing important social legislation this year foreshadowed this new move. If the best this “progressive” president can do is call for a spending freeze in the middle of a recession — exactly the opposite policy from what economists suggest creates jobs — what can be expected from the conservatives who will inevitably follow him?

In the short term, what’s most depressing about Mr. Obama’s efforts to regain financial accountability — the U.S. debt is exploding as I write — is that even if the Congress does agree to budget cuts, they will likely be aimed towards policies that affect the most vulnerable. The House and the Senate have had decades to lower Washington’s commitment to expensive and wasteful spending on things like agriculture subsidies, but, if anything, politicians on both sides of the aisle have only worked to increase them. Mr. Obama may suggest reasonable reductions, but the Congress will pick programs that have little electoral support, and that usually means aid for the poor. The Senate is likely to reject a non-partisan deficit task force this week, solidifying the sense that elected officials are likely to work for projects that “objectively” might be considered wasteful.

It is possible that the Administration chooses to increase funding for the DOT in this budget, with corresponding cuts elsewhere; we’ll have to wait for the budget release on Monday to find out more.

The negative effects of Mr. Obama’s spending freeze on the transportation sector may not be immediately apparent, but they will be important nonetheless. As the chart at the top of this piece shows, total U.S. discretionary spending as a percentage of gross domestic product has been decreasing basically uniformly since the 1960s. Spending on non-defense programs peaked at around 5.5% of GDP in the late 1970s and now represents around 3.5% of the economy. The consequences of this long-term reduction in financing social and infrastructure programs is obvious: increasing economic inequality and huge deficits in the maintenance and upgrade of transportation and other public utilities.

In other words, the spending freeze solidifies the current problems with the government: it does nothing to reduce massive defense and security expenditures and it makes no attempt to tackle the much larger financial problems related to “mandatory” spending on commitments like Medicare. It’s a blatant attempt to calm populist fears of too much government, while doing nothing to actually address the structural issues relating to long-term financial obligations to social programs. Meanwhile, the agencies that are to be sacrificed, including likely the Department of Transportation, contribute little to the deficit and, even better, are best suited to creating jobs — exactly the policy for which the Administration is claiming to be working.

Investments in projects like new transit or high-speed rail can be efficient in creating jobs and reorienting the society towards a sustainable lifestyle — but they require large government allocations. The President must demonstrate confidence in the ability of these programs to be effective, but his “spending freeze” will encourage the idea that federal spending is wasteful. How can transportation advocates push for more financing of such projects when Mr. Obama is solidifying their opponents’ claims that they are pork?

This announcement makes it difficult to believe the Administration is going to take adequate steps towards developing new revenue sources for the transportation program. Over the past year, it has proven itself increasingly susceptible to compromising its initial aims by diluting policy objectives to the benefit of conservatives — despite the fact that Democrats hold major majorities in Washington and Republicans are simply not interested in working with the President.

Update: Note Paul Krugman’s post this morning.

Image above: Discretionary spending as a percentage of gross domestic product since 1962, from Congressional Budget Office, with minor edits.

19 replies on “A Spending Freeze”

Seems like you let your imagination run a little wild here. I can’t imagine Obama dumping his program Wednesday night. Moreover, there is plenty of opportunity to re-order current priorities and develop new strategies for accomplishing infrastructure goals.

Based on what I’ve read so far–there has been a gigantic progressive overreaction to all of this.

The amount of the freeze is not substantial, as a fraction of the overall budget–it ain’t as though Obama has announced that the government is only going to buy guns and not butter.

Obviously, I reserve the right to change my mind if more details come out, and it looks though the administration is going conservative. But right now this looks like more of a symbolic act than anything else.

EngineerScotty –

Indeed, the point of this post, very specifically, was that the freeze will not mark substantial change but rather is specifically designed as a symbolic act, as you put it. The Administration is hammering away at the idea that it is conservative, intentionally dashing the hope that it would be progressive.

That is the problematic part because it reinforces the argument on the part of anti-spending types that government investment is wasteful. And that’s very difficult for the transit proponent in me to accept from this president.

I think it’s incredibly poor politics by the administration. It’s sort of Clinton Mark II in that it is purely a talking point. The right can see right through that, and it sets the left off. So the right, which created the current crisis, gets to look responsible by pointing out what a drop in the bucket this spending freeze actually is; the left immediately yells “betrayal” with the calmer ones explaining how cutting spending is bad policy.

Better for the administration to have said nothing, and simply moved forward on Jobs, healthcare and banks. After all, there’s no way of finessing a $1.3 trillion deficit, so best to just do it your way and get it over with; allow the tax cuts to expire, get the spending priorities right, and wield the knife on every operating expense you can find. The administration’s framing and presentation of this is the worst of all possible worlds.

On transit the only thing that’s going to work in this country is oil price hyperinflation. There is no other alternative. We’re so politically disjointed that only an outside shock that flushes us out of the undergrowth like a duck hunter will get us to flock in approximately the right direction.

I’d like to think that Yonah is over-reacting, but I’m afraid that he is right on target.

What we are getting right now is at least on the atmospherics, a President pandering to the tea party worldview. How many people do you meet on the street who worry about the deficit? Seriously. Maybe 2 a year?

The country is worried about the healthcare bill because of the ridiculous, picayune parlor game process that is how legislation gets made in the Senate. After Obama’s prime-time address on health care, the polling was pretty good. Months more of Senate talking and angst killed that good will. People are tired of Washington fiddling while their friends worry about losing their jobs.

Obama should have been on the Senate’s case since the Baucus committee finished work in August, telling people over and over again what key components of the bill should be and why they were good for the country. Then the narrative in the press would be about the idiot Republicans and right-wing Dems who would prefer to see the country burn instead of solve problems.

But back to transport. Since Obama is not making a progressive case for health care, his signature proposal of his first year that he chose to spend his political capital on, do you really think he’s going to go to bat for “livable communities” reforming federal transport funding formulas to be mode-neutral, and TOD? No way.

With unemployment so high, deficit spending to stimulate employment through durable infrastructure construction is probably one of the best short-term and long-term structural things that we can do. Keynes was right on this decades ago, and he’s right today. Krugman and others said the first stimulus was too small, and that seems to have proved correct. Obama should be out there making the case even harder for these ideas. Instead, he’s retreating.

Let’s be more cynical and say that Obama really wants to make a feint on the spending freeze and then tsk-tsk Congress later for sending him bloated budgets, but will sign them anyway.

In doing so, even if he passes the bills, he gives away the opportunity to continue a bold narrative for progressive ideas and infrastructure building, and that’s the most important thing that was lost this week.

Forget transit, this could lock the New Starts door for 4 more years. I’m waiting with a sinking feeling in my stomach to see if this also kills the HSR program that was about to get off the ground.

I’m so disappointed in the President. I thought he was a guy who fought for what he believed in; I’m just not sure anymore.

I don’t believe the Stimulus was too small I think it was the right size that was used for the wrong projects. The monies should have went for planning and developing infrastructure projects which require these wonderful little mountains of paper called Environmental Impact Reports, which would have made it easier to have a second “stimulus” of projects that are ready to build to put people to work and building our infrastructure improving our economic quality of life.

I forget to add that the key reason the first stimulus should have been for planning projects that the Bush Administration chopped down during their 8 years in office.

The very first part of the post, the graph, tells part of the underlying story about why the U.S. is not really not ready to increase discretionary spending, as well as why new taxes are really not part of the solution.

Discretionary spending, as a percentage of GDP, has decreased by about 50% since 1965 (key year)

Federal tax revenues, as a percentage of GDP, have fluctuated on a flat trend since 1965, and are slightly higher today than in 1965.

The debt has ballooned, and we all know why. The Social Security Act of 1965 introduced Medicare and Medicaid. That’s the national debt. That’s why discretionary spending has shrunk. This is why Health Care reform is so critical, from a macroeconomic perspective.

As I see it, new tax revenues will only delay the day of reckoning. Its a way for Congress to avoid addressing the national debt.

Far more important than fighting for slight long term increases (anything more in the current environment is a fantasy, aside from the possibility of more short term stimulus) in transit funding, reversing the GDP% cost of Medicare and Medicaid will allow the national debt to slowly shrink, and for discretionary spending to slowly rise.

If discretionary spending was eventually increased by 4% of GDP, that would be more than a half trillion per year for various programs. That’s some real money, and that’s what all of us should really be fighting for. Instead this is often forgotten, and we fight for a few crumbs amidst an economy with a projected future that is increasingly stressed.

“His, and his party’s, unwillingness to force through tax increases for the purposes of financing important social legislation this year foreshadowed this new move. If the best this “progressive” president can do is call for a spending freeze in the middle of a recession — exactly the opposite policy from what economists suggest creates jobs — what can be expected from the conservatives who will inevitably follow him?”

Yonah, I find a serious inconsistency in the above paragraph. Yes most economists think that reducing or freezing spending in the current environment (BTW, the “Great Recession” is over, but the recovery will take some time) is a very bad idea, most economists also think that new taxes in the same environment is also bad. Paul Krugman has frequently cited 1937 as an example.

New tax revenues will stunt new job creation, while new stimulus spending will facilitate new job creation. This is just robbing Peter to pay Paul. What I find particularly counterproductive about such an arrangement is that new private sector jobs are more likely to be permanent than those from stimulus funded economic activity.

Paul Krugman has said that new taxes right now are bad, but that in a few years, after the economy’s returned to growth, the government should balance the budget by increasing taxes.

Yeah, but part of Yonah’s grievance, as I read it, is that Obama is not pushing for tax increases now.

Russell –

I admit that from the perspective of economists looking for maximum job growth, it would be damaging to argue for tax increases, even as you’re increasing spending. That said, I never suggested that I was working from the same perspective as claims the president. Rather, I was suggesting that there are arguments to be made for both tax increases and spending increases, and meanwhile Mr. Obama is pushing for neither.

while everyone was analyzing the MA senate race and viewing that as a conservative mandate they have overlooked Oregon’s voter approved tax increases today. what does that say about voters?

unless you touch defense or SS/medicare/aid you wont fix the deficit. this is what got me about bush (made a big deal about cutting $3B and at the same time increased spending by $50B) and mccain whom made such an issue over the smallest pork projects while ignoring the biggest culprits. how about we shrink our military so that it is still the biggest in the world, just not twice every military in the world combined and then some. i have never seen more government waste than that of the military and yet they always get a free pass on any criticism (largely because they hide behind national security secrecy).

i always find it funny that those who bitch about the deficit are all angry old geezers who have their SS and medicare and got their low taxes over the last 30 years (while underfunding our once great K-12 education system). you dont hear any cries over the deficit from the younger generations who likely wont get their SS and medicare bcs it will be broke and will also have to pay higher taxes to make up for all the unfunded entitlements for todays geezers.

Reducing defense spending won’t have a significant effect on our national debt. This year’s deficit is greater than the entire defense budget. Also, defense spending, as measured by GDP%, has been on a downward trend for years, and it is currently low by post-WWII standards. US defense spending, as a percentage of GDP, is far from the highest in the world. A nation like China currently spends more than the U.S. does, as a percentage of GDP, but much less when measured in dollars. When you pay your personnel very little, and when your contractors also pay labor very little, the comparison becomes very distorted when it is done in dollars. This is why macroeconomic discussions work best when discussed in GDP%.

Most of the DoD’s budget goes to personnel. They’ve been working to reduce manpower requirements for years, but it takes time as equipment tends to have a fixed need for manpower. Next generation equipment is needed to employ equipment that is less labor intensive.

Now, if you want to reduce defense spending without necessarily shrinking the size of the military, address the DoD’s inability to control equipment acquisition costs. Check out this post on Information Dissemination, a pro-military blog that focuses on maritime security. My guess is that the U.S. DoD probably spends tens of billions of dollars each years on runaway costs. Unfortunately, this is not something that can be fixed in a few months. Also, all equipment acquisition programs can’t simply be shut down until it is fixed without decimating the industrial base.

Back to what is driving the National Debt, it is Medicare and Medicaid. They have been exploding, and it is these programs with costs that are on an upward trend. This is exactly why we have a structural deficit.

Nobody actually knows how much China spends on defense. The official figure is a lower percent of GDP than the US, in PPP, but the unofficial figure may be higher. But how much PPP adjustment should be done when military spending is a combination of labor (which should be adjusted) and advanced weapons system (which should not) is another matter.

Total US defense spending is a little less than health care. But developed countries can cope fine with one third the per capita amount of defense spending as the US; they can’t cope with lower health spending.

“Nobody actually knows how much China spends on defense.”

OK, I’ll give you that. I am inclined to believe the numbers from the CIA World Factbook before I believe China’s official numbers.

“Total US defense spending is a little less than health care.”

Are you talking about the federal governments share of health care, or the entire sector?

DoD spending is about 4% of GDP. Add another 1% for Iraq and Afghanistan and you’re at 5%.

The health care sector of the US economy is about 16% (and rising,) which is more than three times current defense spending.

According to Peter Orszag’s 2007 testimony to Congress, Medicare and Medicaid are currently were at 4.5% of GDP, and projected to rise to 20% by 2050.

According to a more recent document from the U.S. Senate, Medicare and Medicaid were at 5% of GDP at the end of 2009, and projected to rise to 12.7% by 2050.

Reeling all of this back in:
* Federal revenues are more or less flat since 1965 (actually slightly up now)
* Defense spending is stable on a downward trend since 1965
* Total discretionary spending (which includes transportation projects) is on a downward trend since 1965
* Medicare and Medicaid are on a strong upward trend
* The U.S. Federal Debt is on an upward trend

Measured by GDP%, with revenues relatively stable, and the debt rising, I look for large expenditures that are also rising. What I see is Medicare and Medicaid. That’s the problem in the Federal Government’s structural deficits, and it is getting worse.

The all time highest U.S. Federal debt, as measured by GDP%, was about 125% after WWII. There were no structural deficits, so it was manageable. The 1965 Social Security Debt gave us our structural deficits. If that is fixed, the U.S. will be able to eliminate deficits, and reduce the debt. Once that happens, a lot of money will become available for plenty of infrastructure projects.

The health care number I’m using is for total government spending, which is about 7% of GDP. It’s rising, but that’s health care inefficiencies more than the idea of entitlements; one of the main arguments for health care reform is that the US budget is fiscally sustainable if and only if the government brings health costs under control. Other developed countries have universal health care with lower or similar percentages of GDP spent on health care.

Social security is 4.5% of GDP, if I’m not mistaken.

The national debt was on a downward trend until 1980. Then Reagan cut taxes and hiked spending, and all hell broke loose.

“I admit that from the perspective of economists looking for maximum job growth, it would be damaging to argue for tax increases, even as you’re increasing spending. That said, I never suggested that I was working from the same perspective as claims the president. Rather, I was suggesting that there are arguments to be made for both tax increases and spending increases, and meanwhile Mr. Obama is pushing for neither.”

Yonah, please clarify your perspective, as well as the time frame in which you are advocating for tax increases.

On the one hand you repeatedly cite the need for job creation, as well as how spending cuts will be detrimental to this. You also seem to be advocating tax increases now, even though this will hinder job creation. I’m interested how you view the importance of job creation, as well as where it fits in your world view, from a hierarchical perspective.

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