Obama’s Budget Freeze
Wednesday, 01/27/2010 - 4:10 pm by Bo Cutter | One Comment
Shaping the future with today’s choices.
I genuinely don’t get it.
First, while the freeze is stated as applying to domestic, discretionary budget authority, after allowing for the stimulus package of last year — which raised spending in order to increase the economic growth rate and reduce unemployment, it clearly reduces the effect of the stimulus. And that already looked too small. So the freeze runs directly counter to what turned out to be the signature policy of the administration’s first term. Second, while the numbers are small – they amount, very roughly, to 1/6th of 1% of GDP per year accumulating year by year — they will certainly have the effect of reducing employment and growth. Third, the freeze clearly puts an end to any effort to supplement state budgets, or have any sort of jobs program. So we are done with fiscal policy.
I am a proud budget deficit terrorist. But I don’t understand the logic here. We have a horrible long run budget and debt problem, but this is way too small to change that. It applies to the part of the budget which has not shown an historical tendency to grow too rapidly. A freeze is very, very hard to manage — in my various incarnations in the government, I was involved in a couple — and gets messy very fast. And, in my view, it makes the structure of the budget worse. (By the way, doesn’t this mean that the administration cannot do any the discretionary expenditures in the health care bills?)
We have an extremely smart president; and one of the best senior economic teams ever; and we can be certain - given other policy exercises we have seen - that this was discussed endlessly. But from way far away from Washington, this looks as though the Administration has backed itself into a economic policy corner and paid a high price for a small symbol.
Roosevelt Institute Senior Fellow and Braintruster Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.
OMB Director Peter Orszag in a CNBC interview on January 26 said twice that the 3-year spending freeze designed to yield a saving of $250 billion over 10 years has been “in the works for months”, and not part of any alleged recent “populist” shift.
When challenged that the freeze is only a drop in the budget against a Congressional Budget Office estimate of $1.7 trillion deficit for 2010, Orszag said the spending freeze is only one component of the budget that will be released the following Monday.
Unless the final budget numbers pull a golden rabbit out of the hat, it is hard to see the freeze as anything beyond a symbolic gesture, and a very anemic one.
Bo, with your long and deep experience with OMB, it is not ensuring that even you “genuinely don’t get it”.
I also don’t see you as anywhere near to being a terrorist of anything. And that is meant to be a complement.
Orazag has a point: budgets can be better understood if they are viewed on a 10-year time frame, rather than annually. Periodic deficits are acceptable if the money is spent on the right areas to overcome structural flaws in the economy; but perpetual deficits are unsustainable by definition, particularly if the deficit growth rate exceeds the GDP growth rate.
At this juncture, the main structural flaw in the economy is deficient worker income with excess earning for financial firms through the manipulation of debt.
Deficit money must be shifted towards direct support of full employment, rather than keeping zombie financial institutions vertical in hope that they may somehow create new jobs.
Instead, all the taxpayer’s bailout money for too-big-to-fail firms has gone to “carry trade” speculation. Yes, the banks are are paying back the TARP money so that their executives can receive obscene bonuses, but that payback money came mostly from firms contributing to rising unemployment by laying off workers.
This insanity has to stop and the only political institution that can stop it is the Executive Branch. Yet Obama, elected as the people’s president, appears more interested in making excuses than taking bold effective action. the time for eloquence has long past. Let’s hope the State of the Union address has some real meat in it.
Posted by Henry CK Liu | January 27th, 2010 at 3:00 am