There has been much wailing and gnashing of teeth about Obama’s recent proposal for a net freeze in nondefense discretionary spending, but I rather like the idea. It’s a good start to the problem of the massive deficits that have been saved or created over the past year or two. If I were in Congress, I’d probably vote for it (of course, I’d have to read the bill first, and no specific proposals are available yet).
What Obama is proposing is FY2011 through FY2013, the total nominal (dollar, not adjusted for inflation) amount of federal spending on programs other than Defense, Homeland Security, Veteran’s Benefits, Entitlements, and Interest on the Debt will not exceed the FY2010 budget for those same programs. Only the overall level of spending in the affected area of the budget is frozen, not the spending on any individual program. Obama’s proposal contains a number of large spending increases, but offset by as-yet unspecified cuts in wasteful spending. The proposal also is limited to a very small area of the budget – 83% of federal spending is unaffected by the freeze.
The proposal is projected to save $250 billion over 10 years. That’s certainly significant and worth doing, which is why I say it’s a good start, but it’s only a start. $25 billion a year in savings is barely a dent in a short-term deficit of well over a trillion dollars and a long-term structural deficit in the high hundreds of billions per year.
These are the areas where I would look to further address the deficit:
- Make only the cuts proposed in Obama’s net spending freeze, not the spending increases.
- Extend the freeze well beyond 2013.
- Cancel the remainder of the first stimulus, and drop the proposal to push through a second stimulus before the spending freeze kicks in.
- Reign in the growth of the entitlement programs that make up most of the 83% of the budget unaffected by the freeze
- Drop proposals for a new Health Care entitlement.
- Make some of the Medicare cuts proposed in the health care reform package.
- Start enforcing the Medicare Sustainable Growth Rate provisions which are traditionally postponed each year.
- Index Social Security benefits for new retirees to prices instead of wages.
I’ve noticed a common thread in attacks from the left on the spending freeze is to compare it to Hoover’s response to the onset of the Great Depression, a reference to the urban legend that Herbert Hoover was a dogmatic laissez-faire guy who did nothing in the face of the Depression. Nothing could be farther from the truth. Hoover met the Depression with massive increases in taxes and spending. The top income tax rate rose from 25% to 63%. There was a similarly massive increase in tariffs. And the federal budget rose from $3.8 billion in 1929 to $4.3 billion in 1932 (a 13% increase in nominal terms in just three years, and a whopping 40% increase after adjusting for deflation).
{ 6 comments }
So Herbert Hoover raise the top income tax rate from 25% to 63%. Why isn’t a more modest increase today to deal with the deficit created by the current economic crises appropriate?
This may or may not save money in the long term. It seems to me there is a significant chance of higher levels of inflation with stagnant wage growth in the future. This change might make the situation worse.
I think the reason that inflation has been low the last few decades is that we have offshored almost all manufacturing to places like China. This has resulted in very high trade deficits that can not continue forever. The US dollar should be devalued vs the Chinese currency, but China is artificially holding exchange rate fixed. This can not continue forever, and when the dollar is devalued, consumer prices will go up rapidly in the US.
Why isn’t a more modest increase today to deal with the deficit created by the current economic crises appropriate?
Because it was a terrible idea then, too. High marginal tax rates are a big disincentive for productivity and investment. Since when is Herbert Hoover a model for emulation?
It seems to me there is a significant chance of higher levels of inflation with stagnant wage growth in the future.
Perhaps, but I doubt it. The total US trade deficit (with all countries, not just China) was about $380 billion in 2009, or about 2.6% of GDP. Devalue the dollar until the trade deficit balances, and you’ll get a one-time jump in average price levels of 2-3%. But since 1980, wage growth has generally exceeded inflation by 1-2% per year, 1-3 years of which would outweigh the effects of China cutting off their subsidies of our trade deficit.
Index Social Security retirement age so that we have twenty workers for every retiree.
I think the reason that inflation has been low the last few decades is that we have offshored almost all manufacturing to places like China.
No, we haven’t. There is plenty of manufacturing left in the U.S.
Yours,
Tom, aka Wince
Why isn’t a more modest increase today to deal with the deficit created by the current economic crises appropriate?
Do you really think today’s deficit was created by the current recession? It’s a contributing factor, but the primary culprits in ongoing deficits are Social Security and Medicare, entitlements created under previous Democratic administrations. These are the problem, and the last thing needed now is a new entitlement when these two are effectively bankrupt.
Raising taxes now on anyone is the worst possible choice in a foundering economy. Directly related to this is the creation of any new entitlement that requires new spending. The government needs not only to freeze spending, it must *cut* spending, and soon. I suspect that this so-called freeze is really just a political stunt, and American voters will see right through it.
Why isn’t a more modest increase today to deal with the deficit created by the current economic crises appropriate?
Screw you and your taxes.
I am not your slave.
The problem with this discussion as it relates to “inflation” is that it is currently NOT low. The “consumer price index” rate of inflation is low because the government – shockingly – plays games with it. While simultaneously holding the CPI artificially low, they reverse those same tricks to make it appear that GDP is going up faster.
The fact that you can buy a laptop in 2010 with 10 times the computing power of one 5 years ago at half the price – is not a basis for saying inflation is low, but that is exactly the kind of trick the government plays with that number. They also adjust inflation based on the idea that as the cost of steak increases, you will just buy Spaghetti-Os instead. It isn’t so much the cost of living, anymore, but the cost of survival, and yeah, that cost hasn’t changed much so long as you were living high on the hog 10 years ago.
The Farm Bureau has an index that tracks the cost of a specific group of products, does not make substitutions and does not play games. The actual inflation rate is more like 11-13% right now, today. And I doubt anyone that thinks about it honestly doubts that. You have all seen prices at the grocery store going up just like that while the size and volume of products continue to shrink.
And PS – tax increases cause economies to shrink. Fact, not open to discussion. The kind of tax increases that would even make a dent in the deficit would be crippling and therefore pointless and stupid.
Comments on this entry are closed.