1937 Comes Early

It was last week that President Obama allowed himself to be seen in public with Paul Volcker. Lion wrote about it. The wilted flower that was once called Hope sprang anew upon the calluses of my heart. He say's that he's changed, I thought. And this time he means it.

Questions over whether the proposal to impose meaningful regulation on the financial industry had been inspired by post-Massachusetts panic seemed insignificant compared to what the development might portend for the future of Treasury policy. To quote from the best:

If Volcker ousts, or at least chastises, the Summers-Geithner axis, it will make for a very different White House, and not just because, at 6'7", he could probably outbox a gorilla.

What a difference a week makes. Today it looks like that gorilla has just beaten the teeth out of the ephemeral shade that was once our dream for a progressive economic agenda. First the facts if you haven't already seen them:

US President Barack Obama is to announce a three-year partial spending freeze aimed at reducing the country's $1.4tn (£860bn) budget deficit...Officials have told US media that defence, some health care programmes and the massive economic stimulus package will be unaffected. Critics said the planned savings, expected to cut no more than $15bn off next year's budget, were insufficient. But officials said the plan would result in savings of about $250bn during the next 10 years. (BBC)

Ignoring the politics for just a moment, this policy makes absolutely no sense to me. Maybe Obama thinks that America will emerge from the recession this year, but most are forcasting persistent unemployment for many more months to come, perhaps extending over the tenure of the freeze (and certainly exacerbated by it either way). And with the majority of state governments deep in the red, for economic, political, and simple moral considerations alike, this is exactly the wrong time to cut spending on education, transportation, and infrastructure. I say this not only as a Californian; so far this year 39 states have faced mid-year budgetary short-falls.

But then there's the question of where these cuts will actually be made. (It goes without saying that future tax-increases are out of the question). I won't argue that U.S. federal deficits are structural and do need addressing. Cutting into the meat of the budget anywhere seems like really bad timing to me, but I also imagine that there is plenty of fat to be trimmed. So what's being frozen?

As it turns out, the more important question is: what isn't being frozen?

Obama is planning to call for a three-year freeze on non-security discretionary spending, which means everything except Medicare, Medicaid, Social Security, the Defense Department, Homeland Security, and the VA–that is, everything except the vast majority of the budget. This at a time when the unemployment rate is at 10%. (Baseline Scenario)

Which is to say that as a serious attempt at deficit reduction, cutting $250 billion over a decade (about 5% of the accumulated debt forecast for that period) doesn't make the sufficiently big cut. With the added benefit that this is sure to be a kick to the ribs of the overall economy at a time when the overall economy is already in traction (to say nothing of the fact that, as far as I can tell, our government is still in a pretty good position in terms of its ability to borrow), I'll say again: this policy makes absolutely no sense to me. Or to Brad DeLong:

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit--either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits--come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way. (GROT)

Unlike most of the things President Obama has done (or not done or proposed to do or not do) that I disagree with, I can't find the logical political angle here. Compromising on the stimulus or taking his hands out of the healthcare negotiations or keeping Guantanamo open are choices I at least understand from the cynical logic of electoral or legislative politics. But I don't understand where this is coming from. Concern over the national debt polls high. But that over unemployment polls higher. And trading more economic hurt for a little fiscal discipline isn't going to win any voters if your so-called discipline is, in the words of Brad Delong, nothing but "Dingbat Kabuki."

But Tyler Cowen is feeling generous:

There's not much to say in terms of the economic issues, the real lesson is that politics is more constrained than many people think. Berating Obama for his lack of courage or his "failure to get tough" is simply denying or postponing this fundamental realization. (Marginal Revolution)

First of all, I'm not even sure I understand what this means since Obama isn't proposing the freeze in concession to any immediate focused pressure. So I'll agree that he isn't "failing to get tough" by proactively making a Republican talking-point a part of his economic plan. But even assuming that a debate over the debt and deficits were to be the logical end-results of the HCR fiasco--and this is what I assume Cowen means, that Obama is reigning in that old time Socialism out of political necessity--being realistic about the viability of a particular proposal is not the same thing as preemptively caving to the opposition. Even if you know you're going to lose, in politics, the theater of the fight might be worth having.

But maybe I'm getting ahead of myself. The State of the Union comes Wednesday. We can access the damage then.