Commentary | Economic Growth

Spending freeze could spell disaster

Lawrence Mishel, president of the Economic Policy Institute, issued the following statement on the Obama administration’s expected proposal to ‘freeze’ overall non-defense discretionary spending for three years starting with fiscal year 2011. Freezing nominal growth in spending means cutting the budget in inflation-adjusted terms.

“In all likelihood the unemployment rate will be higher in October than it is now, yet somehow the White House thinks it’s appropriate to begin reducing domestic discretionary spending at that time. Reducing overall spending when tens of millions of Americans remain out of work would be a disaster. It will condemn millions of families to years of avoidable economic hardships.

“President Obama knows that the real key to long-term fiscal responsibility is to rein in health care costs. He also knows that it’s the recession, not out-of-control spending, that has been the main source of the increase in the budget deficit, since the recession has dramatically reduced corporate and personal income tax receipts. That’s why his proposed ‘freeze’ is bad economic policy. It ignores the basic facts that deficit reduction must begin with job creation and economic recovery, offers little more than window-dressing on long-term deficit reduction, and inappropriately vilifies domestic spending.  

“Shifting federal spending from less effective to more effective programs is certainly welcome, but it doesn’t justify an overall spending reduction — especially not at a time when we need the federal government to inject demand into a severely weakened economy in order to create jobs. What President Obama should offer in his State of the Union address tonight is a bold plan to put millions of Americans back to work. To do anything less is to turn a cold shoulder to the needless suffering of millions of Americans and make any focus on ‘jobs’ simply rhetorical.

“If President Obama wants to send a signal that he is concerned about deficits, there are far more effective and equitable ways to do so — aside, of course, from finishing the job on health care reform. One idea is to impose a modest sales tax on Wall Street transactions. If this Wall Street sales tax were implemented three years from now — assuming a recovery has firmly taken hold by then – it would do far more to rein in the deficit than the administration’s proposed budget cuts.

“The main cause of this year’s large deficit is the recession, which President Obama inherited. The economy would have shed two million more jobs than it did this year if it weren’t for the Recovery Act that President Obama signed into law. Now is the time for the President to build on the important progress he has made, not backtrack from it.

“The bottom line is that it’s hard to see how the domestic budget freeze enables us to create millions of new jobs or lay the foundation for future economic growth based on energy alternatives, education, and other public investments, two goals that the administration has repeatedly espoused. On the contrary, spending cuts run counter to both of these goals.”