Committee for a Responsible Federal Budget

Note to Clemons: Freeze Won’t Hurt Competitiveness; Too Much Debt Will

Jan 29, 2010 | Other Spending

Our good friend Steve Clemons of the New America Foundation wrote in The Washington Note, this week, that President Obama's proposed spending Freeze Forfeits America's Future. Clemons argues that the proposed non-security discretionary spending freeze would hinder necessary public investments and put us at a competitive disadvantage relative to China. We strongly disagree.

It is true that China is our economic competitor, but they are also our largest single creditor. In 2009, according to the CBO, they held $800 billion (or over a tenth) of our debt. This is compared to just over $200 billion (a twentieth) in 2004.

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In total, around half of our debt is held by foreign countries. The other half is held by domestic holders who, in normal times, would likely otherwise be using the money to make productive private investments.

Given all this, we find the claim that further increasing our borrowing needs will help our competitiveness to be spurious, at best. (Just look at how our failed fiscal policy drives down our competitiveness rankings).

In fact, continued borrowing is the surest way to stifle public (and private) investment. As China and others become less confident we will be able to make good on our borrowing, they will demand higher interest rates. And as the government dedicates more of its budget to servicing our debt, it will leave less for everything else.

Precisely because China is our largest creditor, it is all the more important that we get our debt under control. (And, by the way, this is in the interest of China – not because they are a competitor but because they are an investor).

More importantly, we reject the claim that a non-security discretionary spending freeze means inadequate investments. We agree with Clemons on the importance of promoting economic growth; and in fact, we don't think it is possible to avoid a debt crisis without vibrant growth.

But freezing non-security discretionary spending won't prevent politicians from making necessary investments in education and infrastructure, it will force them to make choices as to how we should be spending our money. There are an awful lot of wasteful, unnecessary, redundant, and even economically damaging government programs (the President has proposed cutting a few of them); and there are many other programs which, though they may be beneficial, simply don't pass a cost-benefit analysis. Congress should be cutting this spending, in order to make room for the spending we need.

And yes, regular defense and homeland security spending should also be limited -- there is no shortage of waste in these programs. But this is an argument for broadening the freeze, not for scrapping it.

Clemons is right about one thing, we may be ceding our growth to China. But if we are, it isn't because we are spending too little; it's because we are borrowing too much.