Wednesday, January 27, 2010

How Obama's Budget Freeze Could Backfire

Mark Thoma from Economist's View discusses his disappointment in Obama's new plan for a three-year spending freeze that is reported by the New York Times to be a main component in the State of the Union. Other economists think that this is a short-term band aid to America's deficit problems that could backfire with a negative impact on the economy and jobs. See the following post from Economist's View.

Here's the administration's latest bright idea:
Obama Seeks Freeze on Many Domestic Programs, by Jackie Calmes, NY Times: President Obama will call for a three-year freeze in spending on many domestic programs... The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address...
Brad DeLong reacts (see here too):
Barack Herbert Hoover Obama?, by Brad DeLong: For some time I have been worried about fifty little Herbert Hoovers at the state level. Right now it looks like I have to worry about one big one...

What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion--employment lower by 350,000 or so--and in 2012 GDP will be lower by $70 billion--employment lower by 700,000 or so--than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year, the employment numbers are more like 3.3 and 3.7 million in 2011 and 2012, respectively.) ...

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of the fundamental unseriousness of Barack Obama and his administration: rather than make proposals that will actually tackle the long-term deficit in a serious way--either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits--he comes up with a proposal that does short-term harm to the economy as an alternative to tackling the deficit in any serious and significant way.

As another points out, it is hard to imagine a less competent legislative operation: it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It's quite another to negotiate against yourself by attacking employment in the short term. ...
I can't disagree at all. This is pretty disappointing.

The long-term budget problem is due to primarily one thing, rising health care costs. Everything else is dwarfed by that problem. If we solve the health care cost problem, the rest is easy. If we don't solve it the rest won't matter.

This was an opportunity for Obama to explain the importance of health care reform and how it relates to the long-term debt problem. Why not emphasize this?:
Sam Stein: Orszag Calls Senate Health Care Bill Biggest Cost-Container Ever Considered: The health care bill before the Senate would cut costs and reform health-care delivery more than any piece of legislation in American history, White House budget director Peter Orszag declared on Wednesday. "The bottom line is the bill that is currently on the Senate floor contains more cost containment and delivery system reforms in its current form than any bill that has ever been considered on the Senate floor period," the Office of Management and Budget director told reporters...
Instead we get cheap political tricks that are likely to backfire. How will this look, for example, if there's a double dip recession, or if unemployment follows the dismal path that the administration itself has forecast?

This seems to be a case of the former Clinton people in the administration (or wannabees) trying to relive their glory days instead of realizing that those days are gone, the world is different now and it calls for different solutions.

I wasn't in favor of having so many Clinton administration people in this administration, and nothing so far has caused me to change that assessment. They're nothing but trouble.

Update: Here's an updated interpretation of the policy.

This post has been republished from Mark Thoma's blog, Economist's View.

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