JONATHAN COHN FEBRUARY 9, 2011
President Obama releases his budget proposal on Monday and I doubt it's going to make me very happy. Obama has already indicated he wants to freeze non-defense discretionary spending, in nominal terms, for five years. I think that's about five years too long.
Yes, there's waste in the budget. I'm all for finding and cutting it. But there is also a great deal of unmet need in our country, particularly at a time when the economy is still sputtering. If there is a time to hold the line on overall discretionary spending, now is not that time.
Still, the president's budget is surely more generous than what the Republicans, and even many Democrats, have in mind. And it will surely include some intriguing policy ideas, like the proposal on unemployment insurance that various outlets have written about in the last two days.
It's a complicated proposal and, even now, I'm not entirely sure I understand it. But the gist goes like this: During periods of extended unemployment, like the one we're living through now, states end up borrowing from the federal government to refill the coffers of their state unemployment funds. But because they are borrowing the money, they have to pay it back to the feds. And that means they'd likely have to raise taxes, right now, when the economy can least afford it.
To remedy this, the Obama Administration proposes to waive those debt repayments in the short-term. But to make sure states can pay back the money later, the federal government will increase the income base on which both federal and state unemployment insurance benefits are based, giving states an easy way to raise the money they need later on, once the economy improves a bit more. (It would be up to the states to decide whether to simply apply the same unemployment insurance taxes to the broader base or to lower the rates.)
On paper--and, again, assuming I have the details right--it seems like precisely the sort fiscal policy that most economists, left and right, always say they want to see: It boosts the economy in the short term (in effect, by letting the states borrow more money to get through the hard times) and stabilizes government finances in the long term (in effect, by raising taxes once the hard times are over). But it's also politically risky, since Republicans can label it a "tax increase"--which, sure enough, they are doing already.
Of course, Republican governors might not agree. Among other things, in states that have already raised their unemployment taxes to pay back the feds, the Obama initiative would actually mean a tax cut, at least in the short term. Will Republican governors see it this way? And, if so, will they pressure Republicans in Congress to go along? It will be an interesting test of how the party's leaders prioritize politics and governing.