You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

Talking Budget Cuts Before Seeing Our Lenders (i.e., China)

The last two days have brought two very interesting stories that highlight a key link between domestic policy and geopolitics. First, on Friday afternoon, the AP reported that the administration is considering a spending freeze for domestic agencies in next year's budget:

The Obama administration has alerted domestic agencies to plan for a freeze or even a 5 percent cut in their budgets, part of an election-year push to rein in record deficits that threaten the economy and Democrats' political prospects next fall.  ...

White House budget director Peter Orszag said Friday that it is imperative to start curbing the flow of red ink in coming years so as not to erode the fledgling economic recovery and raise interest rates. But he called it a balancing act and said acting too fast could undercut the recovery. Orszag wouldn't comment on the specifics of the upcoming budget, which will be unveiled in February, right after Obama's State on the Union address in which the initiative is sure to be a major focus.

Democratic officials in the White House and on Capitol Hill say options for locking in budget savings include caps on the amount of money Congress gets to distribute each year for agency operating budgets. The officials spoke on condition of anonymity to frankly discuss internal deliberations.

Then, today, The New York Times has a story pegged to Obama's arrival in Shanghai about the shadow the deficit casts over our relationship with the Chinese:

When President Obama visits China for the first time on Sunday, he will, in many ways, be assuming the role of profligate spender coming to pay his respects to his banker.

That stark fact — China is the largest foreign lender to the United States — has changed the core of the relationship between the United States and the only country with a reasonable chance of challenging its status as the world’s sole superpower.

The result: unlike his immediate predecessors, who publicly pushed and prodded China to follow the Western model and become more open politically and economically, Mr. Obama will be spending less time exhorting Beijing and more time reassuring it.

Now, obviously the deficit is a big substantive problem: There would be very good reasons to try to reduce it even if it didn't affect our relationship with a strategically important country. (At some point the bond markets get antsy and interests rates start to rise, as Orszag points out, which can be as damaging to the economy as withdrawing stimulus prematurely.) Likewise, to the extent the deficit is a political problem, it's as much a domestic political problem as a geopolitical problem: The GOP has seized on it as a central criticism of the administration. Even if, like me, you don't think voters care about it that much, it's clearly not something you want to get hammered on day in and day out.

Having said all that, the timing of the spending-freeze trial balloon does nicely coincide with Obama's visit to China. I doubt that was lost on anybody at OMB, Treasury, or the White House.

P.S. For what it's worth, I wrote a long-ish piece in September about the way China's status as our biggest creditor affects the U.S.-China relationship. It elaborates on some of the same points as the Times piece. Here's the take-away:

And so, whereas previous U.S.-China dialogues, which former Bush Treasury secretary Hank Paulson officially launched in 2006, consisted largely of discussions of international issues like trade, currency, and cross-border investment, this year's included conversations about domestic topics like health care and budget discipline. Indeed, the joint announcement that capped two days of talks in Washington actually included a U.S. commitment to "reform its health care system with the aim of controlling rising health care costs for businesses and government . . . [and] reducing the federal budget deficit relative to GDP to a sustainable level by 2013."

For decades, while the United States has prodded China on any number of internal issues, the reverse has rarely been true, except for the vaguest exhortations. The notion that we might take advice from a developing country--even one as large and rapidly industrializing as China--would have been a blow to our self-image, at least if it weren't so laughable. Within a few short years, though, Washington has come face to face with a daunting new reality: Not only are the Chinese raising questions about our domestic policies, but we suddenly have to listen. "The U.S. had all the answers once upon a time," says a senior administration official. "But China's not the apprentice anymore."