Commentary | Budget, Taxes, and Public Investment

Public investments are needed, but a budget freeze would hurt the economy

Last week, President Obama called for a five-year freeze in non-security discretionary spending, a proposal he will detail in his budget request next month.  This proposal should be viewed as a two-year extension of his proposed freeze last year, which—due to the Continuing Resolution—was for all intents and purposes adopted.  While this proposal doesn’t change nominal funding levels, it does represent a cut relative to an inflation-adjusted per capita constant funding level.

Moreover, this proposed freeze represents a missed opportunity.  The economy is still in dire condition, and must create 11 million new jobs just to return to our pre-recession employment levels, adjusted for population growth.  Now is the time to be boosting support for the fragile recovery, yet with the Recovery Act receding and the budget frozen, the federal government is rapidly decreasing its commitment to job creation and recovery.

The president rightly called for higher public investment.  Investments in transportation, education, research, and the energy infrastructure are vital to ensuring a healthy, prosperous future for the nation, and jump-starting these investments now would create hundreds of thousands of new jobs.  Yet these investments fall under the same portion of the budget—non-security discretionary—that the president wants to freeze.  Even if President Obama is able to secure more public investment, a freeze can only happen at the expense of other vital programs.  Congress and the administration should focus on jobs, not cutting holes in the social safety net during the largest economic downturn since the Great Depression.

While the president’s proposed freeze may represent a missed opportunity, the vote earlier in the day in the House of Representatives calling for a cut of $84 billion—which translates to $160 billion through this fiscal year and the next—represents a full frontal assault on the economic recovery and would cause massive job loss. Using a conventional economic multiplier, we estimate that a cut such as this would reduce employment levels by about one million jobs, completely wiping out the economy’s job gains over the past year.

Furthermore, with non-security discretionary funding levels at $445 billion, this cut would force funds for transportation, education, law enforcement, health care, and other categories to be slashed by over 20%.  Think about it: one out of every five federal dollars spent on repairing roads and levees, educating our children, keeping our communities safe and borders secure, and preventing the outbreak of dangerous communicative diseases.  The president said that “the future is not a gift; it is an achievement”—unfortunately, the House of Representatives’ vote signaled that rather than fighting for a better tomorrow, it prefers pre-emptive surrender.

The president is right to be focused on long-run economic growth instead of solely on deficit reduction. But his proposal to freeze non-security discretionary spending is misguided, and as the House of Representatives’ vote has just shown us, only serves to encourage even worse policy proposals from his opposition.