odd time signatures

The Spending Freeze: Relax, it’s not that bad.

Change you can believe inDespite the small nuclear explosion that left fallout all over the blogosphere, the President’s plan to freeze spending for three years is a sound one. The more I read, the more sense it makes to do it. More importantly, not doing it carries far more risk of damage to the economy than the reverse, not because it saves a ton of money, but because it sends a signal to those to whom we owe.

Bond holders want to know we can pay our debts

Let’s stop right here. I can already hear heads exploding with the accusation that Wall Street is turning us all into Republicans. Not so much. The major investors in the United States are China and Japan with the UK running a distant third. They need reassurance that we’re going to be able to pay our debts and the interest we owe on it.1

The Senate is currently debating yet another increase in our debt ceiling, after just voting to raise it on Christmas Eve. The new ceiling will be $14.3 trillion if the Senate approves the increase, which they will likely do.

Think of it in terms most of us are familiar with: home mortgages. The subprime fiasco notwithstanding, if you want to refinance your home and take cash out as part of the deal, a responsible lender will want to see your cash flow and measure the debt against the value of the house. If you can show that the new, higher payment is manageable and still gives the lender equity recourse if you stop making payments, they make the loan.

Conversely, if circumstances change and lenders have evidence that after making the loan, you are having trouble making payments, they get nervous. Bad things happen. When you’re a country and you do that, really bad things happen. Markets get shaky, and not corporate markets. I hope that we all agree on this: The US is too big to fail.

So step one is making sure bond holders feel very confident that we’re not just running up unlimited debt on the card without a plan for how to keep to a budget that includes prompt, timely payments on what we owe.

How does it work? What gets frozen?

It’s easier to answer this by saying what doesn’t get frozen. Social Security, Medicare, and defense spending aren’t subject to the freeze, nor is spending for the VA, international affairs or Homeland Security. All other budget items are frozen, but as a group. In other words, the bottom line for those items cannot add up to more than what it was in 2010, adjusted for inflation. That means funds could be trimmed from one part of the budget and allocated to other parts, but overall, the total cannot increase. Education funding could receive funds, but only if they were taken from some other program. Overall, the estimated reduction to the deficit is about $250 billion, which is a very small chunk out of the whole.

We’re operating on a thin margin

In President Obama’s first year, he was forced to spend money to turn around the downward spiral and keep us on track. The economic stimulus package was the pathway out of that tight spot, and it’s working for the most part. Still, it was a lot of money. We have the war in Afghanistan at the same time we’re completing our troop withdrawal in Iraq. The world economy is still shaky and devastating natural disasters aren’t helping that much. (Not only Haiti’s tragedy, but other earthquakes, weather catastrophes, famines and droughts)

All of this leaves us with a problem: How do we continue to work on stimulating the economy without driving up the debt ceiling any farther? Also, what impact will stabilizing the national debt and our national cash flow have on the economy?

These are questions I’m not qualified to answer on my own. However, we know from past experience that when President Clinton turned around the national balance sheet leaving a surplus on the books and the prospect of $5 trillion in debt reduction, the economy grew. Conversely, eight years of spending binges on the part of the Bush administration resulted in net-zero growth for a full decade, alongside a full-blown recession bordering on depression.

To give a flavor of what economists think, see Paul Krugman for the contrarian opinion (“It’s appalling…”) and David Brooks’ comments on a spending freeze when John Boehner proposed it (“That is insane”). Overall, the reaction has been, well, a bit cold.

So maybe this is less about freezing spending, more of a signal?

Maybe. One of the biggest criticisms of the freeze as we understand it, anyway, is the small impact it has on the bottom line. It does, however, send the required signal to  bondholders that we are acting in a prudent manner while leaving some room to maneuver on more pressing items.

Truthfully, there’s more savings to be had by passing health care reform. The Senate bill alone (before any modifications made by the House bill or a future reconciliation effort) has much-needed Medicare reforms and other cost-saving measures that also reduce the deficit. Since CBO only projects 10 years out, the savings feels small until you consider the number of baby boomers coming into Medicare eligibility in 15 years. We’re likely to see savings just out of this reform bill that are double what this freeze would save.

What other options are there?

One area that hasn’t even been touched or discussed widely is what the expiration of the Bush tax cuts will do in terms of deficit reduction. It’s hard to argue that allowing them to expire isn’t truly the most fiscally responsible, deficit-reducing move there is. CBPP estimates show that an extension to those tax cuts through 2014 would add $3.4 trillion to the current debt, plus another $1.9 trillion in costs to service that debt. Those numbers even allow for an adjustment to the Alternative Minimum Tax so that it doesn’t hit middle class taxpayers. If ever anyone wanted evidence of how irresponsible Bush was, just look at the cost of those tax cuts.

The real deficit reduction act is no act at all. Just let the Bush tax cuts expire. The CBPP report I linked above is a real eye-opener. I highly recommend reading the footnotes, too.

Is this spending freeze a good thing, a bad thing, or something else?

It feels like “something else” to me. I realize we can’t just stop the war in Afghanistan or accelerate the withdrawal from Iraq, that we have obligations around the world and need the flexibility to continue those, but the savings from the expiring Bush tax cuts alone are staggering. Compared to those, a paltry $250 billion (did I just say that?) is nothing. Truly.

All I can think of is that it’s a gesture of some sort, a gesture that sends a signal to those who need one, and waves a big weird red flag in front of those who want another reason to criticize the President. I think his messaging on this has not been clear, but I also don’t see it as the end of the world horrible disaster either. All in all, it sends a message to Mom and Pop Independent Voter out there that Big Government is not alive and well in the Obama administration. I imagine it’s one way of at least baiting the attention of the blue dogs and moderate Republicans (if there are any) into listening to the State of the Union address.

All fine and well, I suppose, as long as he’s also willing to take on the task of telling Johnny and Susie Middle Class that it’s fine to let those Bush tax cuts expire. Bowing to the Blue Dogs on both of these points would be a fiscal and public relations disaster (and they’re already trying to angle for it). While he’s at it, he should also make sure to let us know how much of a fiscal disaster it will be if Congress doesn’t make a move (and a fast one) on health care reform.

Less heat, more light

When this news broke yesterday the blue Internet burned. I’ve never seen such a deep echo of anger and fist-shaking, except possibly the day of the Citizens United ruling, when blogs, Twitter and Facebook lit up with some really funny quips alongside a barrage of outrage and frustration. Yesterday felt like last week all over again without the funny. Even Rachel Maddow was ballistic.

I’m concerned that liberals are feeling so disillusioned that they’re willing to make everything 2004 all over again. Obama is not the new Bush. They’re two completely different people with different approaches (and morals, ethics, priorities and beliefs…).

We also don’t have two parties in this country anymore. We have one party that covers a pretty wide gamut when it comes to fiscal and social policy, and the rest of them out there that call themselves Republicans, but have no idea of how to play nice on the same playground. After seeing how ineffective ‘all or nothing’ is when Republicans play, it’s disheartening to see liberals and progressives play the same game with the same tone. It seems to me someone has to be the grownup, turn on the Mom voice and behave like the adult. Turn down the heat, turn up the light, and let’s have a look at what’s really going on here.

1 I have long believed that we should be investing in this country rather than foreign investors. If we truly believe in the power of our representative government, we’d also believe in making an investment. But that’s a rant for another day.