What Effect Will a Freeze on Discretionary Spending Have on the U.S. Economy?

BY busadmin  February 1, 2010 at 12:16 PM EST

Question: What effect will a freeze on discretionary spending have on the U.S. economy?

Paul Solman: There are two large points to be made here. One is that most of the U.S. budget is NON-discretionary, especially if you include defense. Social security, Medicare and Medicaid, government employee pensions, interest on the national debt — all these are our contractual obligations to each other or, in the case of foreign lenders, to those from whom we’ve borrowed. This mandatory spending, leaving military aside, accounts for about $2.2 trillion of $3.7 trillion in total outlays. Throw in defense and we’re up near $3 trillion. So the president is not talking about the bulk of the budget here. He can’t be.

Point number two, however, is his vow to do something about long-term deficits and, thus, our national debt, which is nothing more than all our deficits, accumulated over time.

The promise is to be an Uncowardly Lion and hold the line some way, somehow, starting with spending an administration CAN conceivably control: its various departments (Energy, Agriculture, et al.). Skeptics will wonder if the promise can be kept. Champions will note that at least it isn’t more tax cuts for wealthier Americans, which moved us in the greater-deficits direction.

A footnote. When POTUS said his SOTU pledge would kick in FY2010, a few guffaws were audible. The reaction prompted Obama to remind his audience: “That’s how budgets work.” That is, they’re for the year ahead. More relevantly to those economists of the Keynesian persuasion, a government doesn’t cut spending when the economy is slack, as unemployment and capacity utilization rates unambiguously show it to be at the moment. Obama’s plan is to keep spending in the present to keep the economy in revival while making a commitment to America’s lenders that we will get our budgets in order soon, so that they need not fear inflation and hike the interest rate they charge us to keep funding our deficits. A highwire act worthy of Phillipe Petit, some might say. To which others might retort: Mr. Petit is still standing.