Spending Freeze Kabuki


So what’s the point of Obama’s spending freeze proposal? Noam Scheiber wrote about this back in December and offered up this precis of budget director Peter Orszag’s thinking:

There is a logic to Orszag’s gambit, which runs roughly as follows: It’s almost certain that Congress will pass, and the president will sign, a jobs bill early next year, probably in the neighborhood of $100 billion to $200 billion. Given that, and given the difficulty of doing anything about the long-term deficit next year, the administration needs some signal to U.S. bondholders that it takes the deficit seriously. Just not so seriously that it undercuts the extra stimulus.

The Orszag approach just might accomplish that. Given the amount of domestic discretionary spending in the federal budget — about $700 billion this fiscal year — we’re talking about cuts of, at most, several tens of billions of dollars if Orszag holds the line on spending (and probably less once Congress weighs in). Which means the cuts wouldn’t come close to offsetting the likely stimulus. But they just might buy some credibility in the bond market, which could defer the day when the real deficit cutting has to start. “It’s a little bit of form over substance,” says Michael Granoff, a money manager who served on the advisory council of the Brookings-based Hamilton Project when Orszag ran it. “But, if you show resolve, that you care about this stuff, it gets into the psychology of bond traders.” The laws of psychology may prove easier to finesse than the laws of economics.

I guess anything is possible. But this sure doesn’t sound very likely. It’s true that market traders haven’t proven themselves very bright over the past couple of years, but does anyone really think they’re this dim? Proposing a discretionary spending freeze is one of the oldest chestnuts in the book; the amount of money at stake is paltry; and the whole reason it’s called “discretionary” in the first place is that Congress is highly unlikely to let it stand over the long term. Bond markets would have to be remarkably credulous to react positively to this announcement.

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