Gimmick or No, President Obama Still Has Big Deficit Problems And A Dysfunctional Debate

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On February 26, 2009, President Obama declared “A New Era of Responsibility” when he released his 2010 budget. Except it wasn’t.

According to the president’s own bean counters’ calculations, the 2010 Obama budget left the U.S. economy with unsustainable deficits in the out-years, from roughly 2012 to 2019, even before the big boom in entitlement spending for Medicare, Medicaid and Social Security begins to really take over. As Budget Director Peter Orszag said last fall at NYU, “Our current projections of 4 to 5 percent of GDP in budget deficits in the out-years are well above the fiscally sustainable level of roughly 3 percent.”

But that didn’t stop the president. In his same non-responsible budgetary declaration of responsibility, Obama increased some non-defense discretionary spending levels considerably. The Environmental Protection Agency, for instance, saw its budget go from $7.6 billion in 2009 to $10.5 billion, an increase of 37 percent. The Transportation Department went from $71.5 billion to $73.3 billion, a 3 percent increase. The Interior Department went from $11.1 billion to $12 billion, an 8 percent increase.

All of these increases took place in addition to the hundreds of billions of dollars in spending in the stimulus bill–the $787 billion American Recovery and Reinvestment Act–that went to fund many of these same sorts of priorities. Obama was sending a message here: In addition to historic government spending to save the economy, he also thought there were important long term programs–more law enforcement on Indian reservations, for example, or more environmental educations programs–that needed to be funded, even if he did not know how to pay for them.

One year later, Obama’s same beancounters have proposed a new approach. On the one hand, the White House wants to spend perhaps $75, $100 or $150 billion more on a new round of stimulus, which will be called a jobs program and will funnel huge amounts of money to priorities like clean energy. On the other hand, he wants to put in place a three-year freeze on most non-defense discretionary spending, which means most agencies will have to get by on what they have (and the increases Obama gave them last year).

This has infuriated many, mostly of the liberal variety. Joe, below, calls it a gimmick. Ezra Klein calls it a “white flag on the argument that the deficit must be understood as health reform problem rather than a taxes and spending program.” (I wonder if that flag was not waved months ago, when Democrats put forward a health care reform bill that proposed a substantial new entitlement, with only modest, unscorable, or not-neccesarily-deliverable savings attached.) Rachel Maddow, on MSNBC, acted on her show as if President Obama had just despoiled the grave site of John Maynard Keynes with bodily fluids of Barry Goldwater.

The first thing that must be said is, this is how it goes. Almost everyone agrees that we have a serious deficit problem. But if you propose tax increases to deal with it, conservatives react with fury. If you propose spending cuts, liberals hit the roof. If you take a run at the big entitlement programs that are driving the problem, you get run over by the special interests, who happen to be either rich industries, like the pharmaceutical trade groups, or people like your parents who vote and don’t want anyone to touch their Medicare and Social Security. So nothing changes.

Before we get consumed by ideological instincts, I think a few points need to be kept front and center:

1. There is no doubt that the spending freeze is symbolic and political. Non-defense discretionary, though a small part of the budget, represents a huge piece of the public outrage over government spending. But really, what is so wrong with that? Bureaucracies need pressure on their bottom lines. And Congress needs pressure as well. Ezra Klein, and Joe, argue that pressure won’t work, because Congress is too corrupt.

Congress can stick to the administration’s freeze but throws out the administration’s proposed cuts. The way this works is simple: The administration will target worthless programs, like agricultural subsidies, in order to preserve good programs. But the reason worthless programs live in budget after budget is they have powerful backers. And those backers will rush to Congress to protect their profits. You think Blanche Lincoln, who chairs the Senate Agricultural Committee and is behind in the polls for her 2010 reelection, is going to let her state’s subsidies get gored?

Now you’ve removed some of the cuts, but you still want to hit the overall target. So the cuts could get reapportioned to hit programs that lack powerful constituencies. Many of those programs help the poor.

That seems to me an awful lot like saying all hope is lost. Isn’t a ceiling on spending–even if symbolic and political–what is needed to get Congress to start behaving responsibly? Why not just go to war with the appropriators for their bad programs? The American people, maybe with the exception of Arkansas farmers, will stand with you.

Furthermore, if a gimmick buys you some much-needed political space to get another short-term stimulus bill through, so that people can get back to work quicker, is it really so bad?

2. The Maddow argument, that a three-year budget freeze amounts to a rejection of basic economics, is just wrong. From the beginning, Obama has worked on two different planes–pushing massive Keynsian stimulus and dealing with the regular government budgets. He has made it clear that he favors much more stimulus in 2010. The freeze does not undo that. As Jared Bernstein points out on the White House blog:

No one is arguing that we should take our foot off the accelerator today, when the economic recovery remains fragile and job growth has yet to return. In fact, you’ll hear from the President tomorrow night about measures we should undertake right away jumpstart job creation.   In his words and deeds, the President has made clear that recovery comes first.   But that doesn’t mean we should wait to start changing the same bad habits in Washington that left a $1.3 Trillion deficit on our doorstep when we entered office in January 2009, especially when we can do so without cutting back on our jobs agenda.

3. The problem of deficits is very real and still not solved. All this name calling and partisan bickering doesn’t move the ball, and the ball must be moved. If it is not moved, your interest rates–on everything from homes to credit cards–are going to start going up. You will eventually lose out. As economist Mark Zandi put it in an email to me today, the current proposals put forward by Obama are not enough to sooth international creditors once this economic turmoil ends. “The Administration will also have to demonstrate in its forthcoming budget that it has a clear and credible path to a sustainable long-term budget deficit. Interest rates won’t rise immediately without such a path, but they will move steadily higher as the economic recovery and borrowing in the rest of the economy gains traction.”

There are only two ways to demonstrate a clear and credible path: Increase receipts (that is taxes) or  decrease outlays (that is spending). Nothing else will do it, save a miraculous boom in the economy that swamps the Treasury with unexpected money.

The real question, it seems to me, is this one: What will it take for the ideological camps, and their campaign donors and interests, to agree that there is a greater good at play here? I don’t know the answer, but I know we are not there yet. When faced with almost any attempt to deal with the issue, everybody seems to run for the ideological hinterlands and cover their heads. Just look at what happened today, via the LA Times.

Despite growing public anger about the burgeoning federal deficit, the Senate today rejected a proposal to establish a commission to devise ways to cut spending and raise taxes — and to give the panel teeth by essentially forcing Congress to consider its recommendations.

The bipartisan amendment would have required Congress to vote on the deficit commission’s recommendations — up or down, without change — in an effort to prevent lawmakers from sidestepping politically difficult choices and cherry-picking easier but less effective measures.

So it goes.