Budget Sense and Nonsense

James Kwak
HuffPost

With the submission of the Obama administration's budget today, fiscal silly season is opening. President Obama already launched an opening salvo last week with his proposed freeze on non-security-related military spending, which amounts to a rounding error on the ten-year budget projections, which are themselves a rounding error on the long-term budget projections -- at a time when unemployment is running at 10.0 percent. Fortunately, there is a partial saving grace, which is that the freeze does not set in until fiscal year 2011 (which begins in October 2010), and in the meantime Obama has proposed $100 billion in tax cuts and government spending to create jobs. (Whether his proposals are the right way to spend $100 billion is a debate for another time.)

The midterm elections are looming already (note: do we have to be satisfied with a political system in which the legislature is preoccupied with upcoming elections half the time?), and the two big themes seem to be jobs and the deficit. With unemployment at levels not seen since the 1980s, it's obvious why jobs are on the political agenda. With the federal budget deficit at record (nominal) levels, it also seems obvious that the deficit should be on the agenda, but this is really an unfortunate artifact of our political system. A government deficit is the result of insufficient government saving, and a period of high unemployment is absolutely the worst time to increase government saving. The sensible solution would be to use the urgency we currently feel to put in place long-term fiscal solutions, but the political system can't handle that (see health care reform as Exhibit A). As a result, when deficits go up, we get lots of short-term politicking about the deficit-in Paul Krugman's words, the "march of the deficit peacocks."

(More here.)