Responsibilities have real costs

September 16, 2005|By David H. Feldman

THE FEDERAL government is spending nearly $1 billion a day on the recovery from Hurricane Katrina. The total tab owed by Washington won't be known for a while, but $100 billion is probably a lowball figure. The real question is where will the revenues needed to make the Gulf Coast whole again come from. The surprising answer is that much of it will come from places such as China.

The U.S. economy outspent its income by more than $600 billion in 2004. For 2005, the overspending is on course to hit $800 billion. The only way we can do this is if foreigners lend us the means.

The largest single overspender in the United States is the federal government. Before Katrina blew a hole in all budget projections, the 2005 deficit was forecast to exceed $330 billion and over $500 billion if we set aside the Social Security trust fund surplus.

Given how little Americans save, foreign investors now buy nearly half of the bonds that the U.S. Treasury issues to finance the federal deficit. In a very real way, our government's ability to pay for Hurricane Katrina relief is contingent on foreigners' continued willingness to buy those bonds in exchange for selling us their goods.

This dependency on foreign loans reflects the bipartisan failure of American political leadership to set priorities for the federal government and to find ways to pay for them out of our own tax base.

Things didn't have to turn out this way.

In January 2001, the Congressional Budget Office (CBO) sent the incoming Bush administration its long-term projections for economic growth and its forecast for the federal budget. The government was projected to run a budget surplus of $2 trillion between 2002 and 2006. Given that cushion, borrowing several hundred billion dollars to finance recovery from a national catastrophe sounds almost inconsequential.

Instead, President Bush decided that using the surplus to reduce the national debt was of little economic or political value. That surplus has morphed into a $1.6 trillion deficit, much of it financed by foreign governments buying U.S. Treasury securities.

His tax cuts first were sold as a cure for recession, even though they were too late to have much effect, and far less costly ideas, like a temporary cut in the payroll tax, would have had a much more immediate impact. The tax cuts also were sold as a way to spur long-term economic growth.

The CBO report that greeted the incoming presidency also contained a long-term forecast for yearly labor productivity growth with no tax cuts in place. Rising labor productivity is what translates into higher average living standards for American workers.

In 2001, the CBO's best guess at productivity growth for the years 2006 to 2011 was a robust 2.3 percent annual rise in output per worker. By now, the Bush tax cuts have had time to work their magic, yet the current CBO forecast as of August is for annual productivity gains of only 2.1 percent between 2005 and 2010.

Unfortunately, the first fiscal responses to the Katrina recovery effort that are now under consideration are gimmicks. They include Sen. Byron Dorgan's, D-N.D., proposal to subject profits earned by oil companies on crude oil above $40 per barrel to a 50 percent excise tax, with the proceeds rebated to consumers.

Yet crude oil prices are set on a world market. The most likely effect of this tax would be even higher prices in the United States for refined products as global oil companies shift crude away from the U.S. market toward markets in Europe and Asia that the profits tax cannot reach.

As satisfying as it may be to find a villain, this recovery effort is a national responsibility and we need to use the full weight of the nation's tax base. We can also afford it. Currently, federal tax revenue as a fraction of the gross national product is at the lowest levels since before the Korean War.

What is lacking is the political will to tell the American people that the federal government's responsibilities have a real cost. Many options exist, ranging from a temporary progressive income tax surcharge to repealing the parts of the Bush tax cuts most heavily tilted toward the wealthy.

Any mature fiscal response to this disaster should include raising the needed revenues right here at home. Let's stop mortgaging the future to China and other places.

David H. Feldman is a professor of economics at the College of William and Mary in Virginia.

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