 As President Obama unveiled his budget on the heels of his State of the Union address, the numbers in the $3.8 trillion document reveal the tension between the politics and the substance.
The president’s budget arrived on Capitol Hill with the momentum of positive economic news at its back. Though 2009 was the worst year for the economy since 1946, shrinking by 2.4%, the 5.7 % growth in the last quarter was the fastest increase in 6 years. Some of that growth has been attributed to what economists call an “inventory correction.” U.S. manufactures had to cut back production during the early part of 2009, by the fall they did not have enough goods to sell, they were forced to play catch up, producing at a higher rate than they were selling to increase inventory.
That phenomenon will not continue unless consumer spending increases. But in another piece of positive economic news, consumer spending was also up 2% in the last quarter. By all indications, the U.S. economy seems to be headed in a positive direction—at least on paper. The economy still has a long way to go. While the economy appears to be headed toward recovery, it will require sustained growth to get the nation’s unemployed working again. Like the State of the Union address, there is quasi-populist tone in the president’s budget that seeks to substantively align with those who are angry about the deficit. But the substantive problem the president faces, according to his own projections, is deficits staring at the nation until 2019-2020. This fact raises the question: Is the president’s proposed spending freeze on domestic spending politics or substance? The president stated at the State of the Union address: “Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't.” It sounds nice, but how realistic is it? If the categories exempt from the spending freeze were Medicare, Medicaid, Social Security and Defense, it would account for 55 percent of discretionary spending. But the president exempted “spending related to our national security.” With that amorphous distinction, how much is really being frozen and who will be hurt by the impending freeze? The spending freeze is designed to address the $1trillion deficit created by the stimulus package passed last year. According the National Priorities Project the 10-year savings from the spending freeze will net an estimated $250 billion. At that rate it will take 40 years to wipe of the $ 1 trillion deficit. Moreover, if Defense maintains it’s projected pace, an increase of 2.5 % annually, that would result in 522 billion over 10 years, wiping out any savings realized by the proposed spending freeze.
More spending is what’s needed in the short-term and that must be followed up with a long-term strategy to reduce the deficit. I know it has become a dirty word, but the stimulus works. It was recently reported on NPR the stimulus package passed last year has saved or created between 1.5-1.8 million jobs. But that’s a hard sell when you cannot pinpoint the exact jobs saved or created and the economy has hemorrhaged roughly 7 million jobs. The president’s jobs bill, which focuses on tax incentives to small business is merely a smaller more concentrated version of the stimulus package passed last year that is critical to get the economy going. But politically speaking a jobs bill sells better than a stimulus package; and it will increase the deficit in the short-term. Most economists agree the short-term requires additional spending to spur much-needed job growth, followed up by a long-term strategy to reduce the size of the deficit. The healthcare legislation not yet passed in the Senate might be a good place to start on the long-term strategy. I know it received applause at the State of the Union, but it’s hard to see how 3-year budget freeze accomplishes any real deficit reduction, given the size and scope of the problem facing the nation. It plays well with some politically, but substantively it remains a question. And that’s putting it mildly.
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