Obama’s Budget Shows the Tensions Between Jobs and Deficit

Posted February 1, 2010 at 4:31pm

What did the president really mean last week when he turned to his left from the podium, looked straight at the Republicans, and stated, “That’s how budgeting works—?

[IMGCAP(1)]Although it came about two-thirds of the way through the speech and appeared to be a throwaway line, not only was it one of the most important things the president said all night, but as the budget the White House sent to Congress on Monday shows, it’s going to be one of the most contentious points in the economic and budget debates all year.

The president’s statement was part of his discussion about whether, as some people insist, it’s too early to start talking about reducing the budget deficit or whether, as others just as stridently demand, deficit reduction already has been delayed for too long. It’s a tension that doesn’t always exist between two apparently mutually exclusive choices. What to do with the budget for the coming year is always much easier when the economy unambiguously is or isn’t getting better. When it seems to be both, the choices are much more difficult to make and, just as important, far harder to explain.

For the short term — that is, through the rest of fiscal 2010 — the president talked about a jobs bill and a boost to small-business lending that he said will help with the current economic situation. For the longer term — that is, starting in fiscal 2011 — he talked about freezing a portion of domestic discretionary programs, enacting a new pay-as-you-go law that will make it harder for Congress and the president to make the deficit any worse, allowing tax cuts for those earning more than $250,000 a year to expire, and creating a budget commission.

As the administration’s critics demonstrated immediately after the State of the Union and all day Monday following the release of the fiscal 2011 budget, that leaves the White House open to criticism from all sides. On the one hand — because monetary policy still isn’t encouraging consumer or business activity and job growth, and as much as some might like it to be otherwise, the budget continues to be the only real economic policy game in town — the president is being strongly encouraged to deal with reducing unemployment no matter what deficit that might produce this year. On the other hand, some are saying that government debt is already too high, that the almost $1.6 trillion fiscal 2010 deficit is outrageous, and that, as last Friday’s 5.7 percent increase in gross domestic product showed, it’s time to start reducing government borrowing.

And of course, some are saying both.

To deal with these contradictory pressures, the White House in effect is saying that the time to start reducing the deficit is coming but hasn’t yet arrived. As the president said last week and his budget confirmed Monday, deficit reduction will begin in fiscal 2011. We have to “budget— now, he said, so that we’ll be ready to implement the necessary changes then.

That’s already proving to be a difficult sell for the White House, and it undoubtedly will get even tougher as the rhetoric becomes more heated. Although it starts in less than eight months and so really isn’t that far away, fiscal 2011 seems like a long time from now. Indeed, in Washington, where the phrase “long term— often only means through lunch tomorrow, some will consider the decision not to do more to reduce the deficit until Oct. 1 an indication the administration shouldn’t be taken seriously on the subject.

That’s almost certainly why the White House included a freeze on a portion of domestic spending in its budget. If implemented as proposed, the savings would be relatively small, at least by federal budget standards: $250 billion. But this proposal allows the administration to put itself in the we-will-reduce-the-deficit-when-possible camp for the time being.

The White House likely will have to make the case in the coming months that it can do the fiscal policy equivalent of walking and chewing gum at the same time by insisting that what it submitted Monday is about both the rest of this year and the one that starts next October. As the president said to Congress last week, this is what budgeting is all about: dealing with current problems and anticipating events.

The best clue that this is what is ahead is the economic forecast included in the Obama fiscal 2011 budget. The administration is projecting that GDP will increase by 2.7 percent in 2010 and 3.8 percent in 2011. In other words, by the start of fiscal 2011, the administration is projecting that the economy will have grown for five consecutive quarters and, at least as far as GDP growth is concerned, the recession will be over. That’s the point at which it will say that it is time to keep the recovery going by reassuring lenders and the bond market that the pressure on interest rates will not be increased by fiscal policy actions.

The White House will also likely try to make the case that, when it happens, the change to deficit reduction from deficit increases at the start of fiscal 2011 will be a reflection of the success of its economic recovery efforts. Others will say that the economy will grow faster if deficit reductions start sooner and are more robust than the administration is proposing.

In other words, this year’s budget debate will be all about budgeting.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.—