Obama's misguided spending freeze

Since the beginning of the presidential campaign, Barack Obama and his advisers have repeatedly claimed that they don't listen to DC's conventional wisdom. But Obama's decision to propose a freeze of discretionary non-security spending suggests that the White House misunderstands the problem in the same way as most of the rest of Washington.

The problem, as I've argued, is that Obama's political fortunes are closely tied to the economy -- a variable over which he has relatively little control. With his first midterm election approaching and the economy in terrible shape, an anti-presidential backlash was a virtual certainty. Obama's approach to health care or the economy may have exacerbated this backlash -- the public tends to move in the opposite direction from public policy (though usually after some lag) -- but it's highly unlikely that Obama's policies or communication strategies were the primary cause of his declining approval ratings.

The decision to respond to this problem with a partial spending freeze is both bad politics and bad economics. From an economic perspective, Obama faces a serious risk of a long period of slow growth or even a double-dip recession. He has no politically feasible jobs agenda; his proposed tax credit is tiny relative to the scale of the problem. Imposing additional limits at government spending will only make the problem worse.

From a political perspective, Obama's gesture will have very little effect. The idea seems to be that it will appeal to independents and Republicans who are concerned about the deficit. However, most Republicans and Republican-leaning independents will not support Obama no matter what he does. They may say they are concerned about the deficit or government spending, but if those concerns are addressed they are likely to find other reasons to oppose the administration. (In addition, their perceptions are likely to be biased.) Deficits might hurt Obama on the margin, but in most cases I tend to think that they're a convenient reason to cite for opposing a president you wouldn't like anyway.

Just to underscore the magnitude of the political and economic problem Obama faces, the White House budget, which was released today, projects "8.9 percent unemployment at the end of 2011, and 7.9 unemployment percent by the end of 2012." While unemployment isn't as good a predictor of election outcomes as income growth, these figures underscores the difficult path to re-election that Obama currently faces. He can still win in 2012 -- seasonally adjusted unemployment in December 1983 was 8.3% and Reagan went on to beat Mondale in a landslide -- but he needs significant growth to do it (regression line excludes the outliers of 1952 and 1968):

Given the historical record, the downside risk of suboptimal economic policy vastly outweighs the symbolic appeal of spending freezes and other short-term deficit measures. Unfortunately for Obama, this is one issue where his administration appears to buy into the conventional wisdom.

Update 2/2 1:30 PM: Matthew Yglesias makes the point more eloquently in a post linking to this one:

Roughly speaking, people got it into their heads over the years that “deficits” are “bad” (which is usually true, but also pretty simplistic) and then the economic situation became very bad, so people have decided that large deficits must be the problem. This is a misunderstanding. An application of a crude, sorta-correct rule of thumb to an unusual situation. It also involves people confusing cause and effect. Steep economic downturns cause large deficits, which is bad. But the deficit is the symptom rather than the cause. Meanwhile, as Brendan Nyhan observes the Obama administration seems eager to pile bad political science on top of the mass public’s bad economics. People are upset, and they say they want a smaller deficit. So Obama’s proposing to give it to them, and seems to have no intention of doing anything about its own forecast of a years-long bleak economic situation.

In political terms, though, the actual performance of the economy in 2012 is going to be much more important to Obama’s re-election than the budget deficit. In particular, by directing its policymaking more at the things that the public thinks are the cause of economic problems rather than the things that economists think are the cause of economic problems, the administration is making is running a huge risk of GOP takeover of the House in 2010. What’s more, they’ve left themselves with almost no margin of error for their own re-election. And for double-irony, the very members of congress who are most endangered by poor short-term economic performance are the ones who are doing the most to urge the administration to adopt a fiscal retrenchment agenda. The faith in vox populi that this reflects (”the public will reward me for doing what they said they wanted me to do, even if it turns out not to work at all”) is sort of touching, but really lacks any basis in the evidence. It’s fascinating to me how few professional political operatives or reporters seem interested in systematic studies of US politics.

See also:
-Seth Masket on pundits misunderstanding Obama's problems
-John Sides on the overemphasis on process as the problem in the health care debate
-Jon Chait on Peter Wehner ridiculing "structural factors" as the primary reason for Obama's decline

[Cross-posted to Pollster.com]

Comments

[David]

What has been the economic impact of Obama's policies? Economists loyal to the President now calculate that his stimulus bill saved or created 600,000 jobs. Opposing economists point out the during Obama's term of office the country lost 4 million jobs, and they blame Obama's policies for much of that job loss, implying that Obama's policies have cost the coutry millions of jobs. Brendan Nyhan, not a economist, asserts without evidence that Obama has relatively little control over the economy, thus contradicting economists on the left and on the right.

Every profession tends to particularly value its own contributions and minimize the value of other inputs. Brendan's unsupported assertion is convenient because it makes his political analysis more important than economic analysis.

[David]

If Obama has relatively little control over the economy, as Brendan asserts, that would imply that Obama's "stimulus bill" was a waste of nearly $900 billion of taxpayer money. Also, Brendan takes it for granted that Obama's spending freeze was not proposed to improve the economy, but is a political move designed to increase Obama's popularity.

If an Obama supporter thinks Obama wasted almost a trillion dollars and is working for his own selfish ends rather than for the good of the American people, imagine what Obama opponents think.

[David]

Yglesias is wrong in asserting that the cause of the current and ongoing deficits is economic downturns. It's true that the current economic downturn is part of the cause, but this chart shows that domestic spending has increased dramatically. Furthermore, Obama's ten year projected budget shows a continuation of stupendous deficits even though it's based on incredibly rosy forecasted real economic growth of 4% per year.