Tuesday, January 26, 2010

Freeze Will Get Chilly Reception

Government spending freezes, caps on appropriations, and revenue limits, they are all the rage now, and they all come from the same wrong-headed place.

First and foremost government is in the business of delivering public services. Public services tend to be those that are vital to a society, too important to be left to the whims of the private market, and very expensive to provide. Public services such as health care, and corrections usually rise in cost at a rate well above the general inflation rate.

State governments face challenging and changing demographics that are not conducive to spending caps: Populations grow, populations age, recessions increase needs such as Medicaid, the federal government makes demands that are often unfunded mandates.

States that have gone down the route of either spending or revenue raising limits, often called TABOR (Taxpayer Bill of Rights) or Hancock Amendments, have found state services, including education devastated.

The federal government is reportedly about to make the same mistake when President Obama will call for a spending freeze in discretionary spending in his State of the State address. Discretionary spending is that part of the budget proposed by the President and debated by Congress. It is more than one third of the budget. The freeze proposal is most probably a political knee jerk reaction to the Democrats losing the Massachusetts US Senate race last week. A spending freeze will be used to demonstrate that the Administration is fiscally responsible. However, this policy is flawed for a number of reasons.

First, Obama excluded all defense and security spending from his freeze. That excluded portion of discretionary spending represents 58% of the pie. Other causes such as health (5%), unemployment insurance (5%), and education (7%) fight over the remaining crumbs. Natural resources and the environment is also in the mix (3%), as well as veteran affairs (4%). Services and programs that most benefit the middle class and the poor will be frozen as demand rises in the recession. Meanwhile, the defense budget will roll on unquestioned about inefficiency or fraud. For example, during the Iraq War $9 billion dollars has simply disappeared. It can not be accounted for, although presumably it is in the pockets of defense contractors.

Second, Obama is freezing discretionary spending in a deep and jobless recession. Economists such as noble prize winner, Paul Krugman and former US Labor Secretary, Robert Reich are highly critical of this move. Krugman called it, "Appalling on every level". It does seem to be the exact opposite direction from a stimulus package that was designed to spend the economy back to life through worthwhile infrastructure projects and public services.

Finally, the spending freeze which is bad policy will also be bad politics. Republicans such as John McCain are already saying the freeze is not enough. Meanwhile, the Democratic base is wanting more populism from the President. Many of the base see the freeze as another way in which the common people take a hit while corporate interests in defense and banking continue on a free ride.

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