With the bombshell announcement of a freeze in net Federal discretionary spending on many domestic programs tonight, much confusion (and outrage) has ensued. It seems to me that it would be useful, at this point, to take a look at what this might actually mean.
President Obama is proposing a freeze on discretionary spending levels outside of spending on the Pentagon, foreign aid, the State Department, the Veterans Administration and homeland security. Total non-defense discretionary spending in 2011 is projected by the Office of Management and Budget (PDF) to be $641 billion in 2011. This represents 17.7% of the total projected 2011 Federal budget. However, of that $641 billion, Homeland Security is projected to account for $42 billion, the State Department $56.3 billion, and Veterans Affairs $54.5 billion. That leaves $448.2 billion which will be frozen, or 12.05% of the total projected 2011 Federal Budget.
What makes up the major elements of the nearly $450 billion that will be frozen? $26.7 billion is the budget for the Department of Agriculture (including farm subsidies), $53.6 billion is the budget for the Department of Education, $26.5 billion is the Department of Energy, Health and Human Services is $84.3 billion, Housing and Urban Development is $45 billion, the Department of Justice is $27.8 billion, Transportation is $61.4 billion, the EPA is $10.6 billion, NASA is $18.6 billion and the Social Security Administration is $10.3 billion. Much of the Energy and Justice budget is highly unlikely to be targeted, so the bulk of the savings will have to come from Education, HHS, HUD, Transportation, the EPA, NASA and SSA.
The first question to ask is whether these freezes will result in meaningful deficit reduction. The answer on first approximation seems to be no. Projections for the budget deficit in 2011 run between $750 billion to one trillion dollars. Michael Linden at the Center for American Progress points out that using the most conservative figure for the future budget deficit means that these spending freezes will reduce the deficit by less than five percent. Indeed, the total discretionary spending budget detailed above is only half of the budgetary cost for interest payments on the national debt in 2011! At best, these freezes will amount to a drop in the bucket of our projected deficit, and will do nothing to reverse the unsustainable debt spiral that our Federal government is on the verge of entering.
However, even though it will not make much difference on the deficit, reasonable observers will point out that there is plenty of fat in the discretionary budget that deserves to be cut. However, as Matthew Yglesias points out, much of that fat is the most difficult to eliminate politically:
To try to game this out, let’s assume that Obama is really serious about tackling weak claims rather than weak claimants. That means you’ll see a proposal for drastic, politically unrealistic cuts in farm subsidies while keeping in place growing funding for useful things like community health centers. So what happens when that hits congress?
Scenario one is that self-proclaimed deficit hawks like Kent Conrad turn out to like farm subsidies, decline to implement those cuts, and pass a budget that doesn’t actually freeze spending. Then Obama gets to chide them, and say it’s not his fault congress is so spendy.
Scenario two is that self-proclaimed deficit hawks turn out to like farm subsidies, and Obama launches a big political crusade on behalf of his cuts, threatening to veto anything that doesn’t come close to the spirit of what he’s proposing. That would be . . . interesting.
Scenario three, the really troubling one, is that self-proclaimed deficit hawks turn out to like farm subsidies, and Obama draws a line in the sand over the concept of a freeze, while being flexible about the details. Under that scenario, the weak claims don’t get cut and instead the politically powerful need to bear the brunt of the burden of a tactical political gambit.
Last, though probably least likely (call it Scenario Q) the administration has actually tried to draw up what it thinks is apolitically realistic list of spending cuts that doesn’t touch the most famously untouchable areas of the budget. I don’t even have any idea what that would look like.
Neither do I. Much of the waste in the discretionary budget has endured for so long because it is so politically popular. Indeed, the political popularity of this spending has already resulted in pushback from Congress, with House Dems rejecting the proposal. Which means that we will either see President Obama forcing Congress in an election year to make very unpopular decisions, the failure of this proposal, or cuts primarily to those programs which have the weakest political constituency.
Meanwhile, economist Brad DeLong lays out the impact on GDP and potentially on employment that even such minor cuts can have:
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.)
So we're talking about an employment drop of over half a million before the next Presidential election from this policy, if DeLong is correct. While this proposal seems to not exclude a jobs bill and even a potential second stimulus, those losses will be quite real. In both a conventional analysis and a political calculus, it is hard for me to see how the gain of a 5% decrease in the budget deficit is enough to offset those losses. Fulfilling the promise of a freeze in non-security discretionary spending also causes political problems for the two forms of stimulus which the CBO recently determined would have the greatest impact in 2010 and 2011 – increasing unemployment assistance and providing aid to state governments for purposes other than infrastructure.
But Obama can at least rest assured that this proposal will garner him accolades from deficit hawks? Not so much. The libertarian Reason Magazine has this to say:
What I do doubt, after a year of watching him, is that he truly believes in his heart of governing hearts that this is a virtuous or workable path, or that he's particularly concerned with the considerable gap between what he promises and what he delivers. Presidents, including the last guy, whatshisname, always promise deficit-reduction in every State of the Union Address. We still haven't quite launched that Mission to Mars. I will be happy–and at this point, shocked–to be proven overly skeptical.
Perhaps the most damning commentary is from The Economist:
Through bad times and good times for the president, there was one word I never associated with him and his approach to the challenges facing the country: gimmick. But this is a bright shining gimmick that advertises a lack of seriousness to both near-term economic weakness and long-run budget problems. This is decidedly not what is needed right now. If this is the best the president can do, Democrats, and the country, are in for a very long few years.
Their headline? President Obama Concedes Defeat. We cannot afford to kid ourselves. This has every appearance of being bad policy and even worse politics.