'Bush's Math: No Big Easy'

NEW YORK, Sept. 18 /PRNewswire/ -- On Thursday, President Bush delivered a speech to the nation where he pledged to "do what it takes," to rebuild the Gulf region. By late last week there were signs of renewal in New Orleans and the sounds of hammers and saws all along the coast. But Bush's new commitments, as broad and sweeping as the Mississippi River itself, could divide his own party, blast gaping holes in the federal budget and create management tasks that swamp his second-term agenda -- including the creation of a benign Iraq, reports Newsweek Chief Political Correspondent Howard Fineman in the September 27 cover, "Bush's Math: No Big Easy" (on newsstands Monday, September 19). (Photo: http://www.newscom.com/cgi-bin/prnh/20050918/NYSU002 ) The administration now must renew its financial case for the Iraq war against the backdrop of the desperate needs of the Other Gulf, Secretary of State Condoleezza Rice conceded in an interview with Newsweek. In the fall, when Congress considers military spending -- and perhaps a new special appropriation to fund the war -- the pressure will grow. "I don't doubt that we'll have to make the argument in budget time..." she said. "But I have every confidence that it's an argument that Americans will understand, resonate with." Fineman examines the political ramifications of Bush's speech and how it will affect his second-term agenda in the cover package. "I think it's the best speech he has ever given," declared Michael Oliver, the state Economic Development secretary. John Maginnis, a plugged-in Louisiana pundit, had an explanation for the official good cheer. "Everyone wants all of the money," he said. The first sign of an internecine war on the budget emerged at a recent gathering of the House Republican Conference. Rep. Mike Pence, the House's leading deficit hawk, challenged Joshua Bolten, a former Goldman Sachs banker who runs the Office of Management and Budget. There to seek a tranche of $50 billion in relief money, Bolten brushed aside the congressman's insistent fiscal questions. Pence suggested a yearlong delay in launching the Medicare drug benefit; several allies floated the idea of a 10 percent, across-the- board cut in every category of spending. No dice. Bolten agreed that spending "offsets" were a "worthy topic," but stayed mum. It was "not the time to have this debate," he told the assembled Republicans, saying the cash was needed immediately to save lives in the region. Some GOP strategists worry that the costs of Katrina -- on top of everything else -- will generate pressure, at the grassroots, to cut back support for the war in Iraq. "I'm worried about the moment when a mayor in Louisiana is told that he's not going to get his bridge or his firehouse built for two years," said a top GOP staffer in the House, declining to be named because he deals with the White House daily. "And we're going to tell him to get in line, that the money isn't there right now, and he is going to say "How come we can afford to keep rebuilding the same damned bridge in Baghdad every day and y'all can't afford to build mine?" Also in this week's cover package, Detroit Bureau Chief Keith Naughton and Investigative Correspondent Mark Hosenball report on the waves of contractors, prospectors and speculators looking to cash in on one of the largest reconstruction efforts in history. They also report on widespread snafus. In one instance, with thousands of starving animals wandering New Orleans, the federal disaster agency placed an emergency $28,370 order with PetsMart for 970 wire pet crates on September 9. The pet-supply chain jumped at the chance to help, even waiving delivery charges, a spokeswoman tells newsweek. Over four days, FEMA first changed its order, canceled it, reinstated it, put it on hold and finally demanded it. But when the PetsMart truck arrived at a New Orleans naval base Friday, it was initially turned away. When the driver finally gained entry, he drove around the base all day, racking up 152 miles, to find someone to take delivery. The tail-chasing experience left PetsMart "frustrated and disappointed." FEMA admits "kinks" in the process, but says it was its first big pet rescue. And Wall Street Editor Allan Sloan looks at how the country can pay for the reconstruction and the problems future borrowing can mean in the long- term. "Just keep on spending and borrowing, because at least for now, there's no limit to the debt that Uncle Sam can rack up with foreign and U.S. lenders," Sloan writes. "But one day, we'll have one Katrina -- or one other unexpected problem -- too many. We'll finally spook the financial markets on which we're now so dependent. Federal borrowing costs will rise, the economy will tank, we'll all be hurt. Instead of a 'perfect storm' of the physical variety, we'll have one of the financial variety. And like Katrina, it's going to be devastating." General Editor Jon Darman reports on Haley Barbour, who as governor of Mississippi, in the first long nights after Katrina, was struck by the scenes of New Orleans descending into madness and contrast with the calm he saw inside his own state. "I don't want to make comparisons," he told Newsweek, "all I'll say is we want people to know that in Mississippi, things work." A former D.C. lobbyist, now as Barbour's state looks to the Feds to cover staggering reconstruction costs, nobody is complaining about having an old Washington hand in the governor's chair. "When Haley calls Washington, there's a lot of familiarity and a lot of good will," says one close Barbour associate who asked not to be identified so as to avoid drawing attention from the governor.

No money? No problem!
How will we pay for Katrina (and the war in Iraq)? Easy. We'll borrow it.

By Allan Sloan

Newsweek

Sept. 26, 2005 issue - Can the federal government afford to pay $200 billion or so to repair the damage from Katrina? Of course not—but we're going to spend it anyway. So how are we going to get the money? We're going to borrow it, primarily from foreign lenders, such as the central banks of China and Japan. Borrowing is how we've been able to pay for the war in Iraq and cut taxes at the same time.

And borrowing is how we'll pay for the additional tax cuts that Congress is likely to consider next month.

Washington math, you see, isn't the same as household math. With household budgets, there are caps on how much you can borrow—banks will extend you only so much credit-card and mortgage debt with which to hang yourself. That provides some discipline. Not so in Washington, where Republicans' borrow and spend has replaced Democrats' tax and spend.

The fact that Congress is preparing to cut a variety of taxes by up to $90 billion over five years at the same time Katrina is going to send spending to the moon is living proof of that. What are the government's priorities? Who can say, given that Congress is planning to help pay for those cuts by trimming social programs like Medicaid and food stamps by $35 billion over five years, even as President Bush is pledging to spend what it takes to help poor people affected by Katrina.

No, I'm not making this up. These tax and spending cuts, called for in the congressional budget adopted this spring, were supposed to be considered by Congress last week under the budget reconciliation process. Even though that's now been deferred to next month, Senate budget committee chairman Judd Gregg, a Republican from New Hampshire, told me in an interview that the tax cuts and social spending reductions are still on track. Raising taxes—or letting tax cuts expire on schedule in future years—isn't on the table, he said. On Friday, President Bush ruled out tax cuts to pay for Katrina and talked about spending cuts—none specified—to help cover the tab.

Borrowing endlessly for Katrina and Iraq and tax cuts and Homeland Security is possible only because foreigners are willing to keep buying U.S. Treasury securities despite the relatively low interest rates they pay. At least for now. The cost of hocking ourselves to the eyeballs shows up in the line of the federal budget that says how much interest we're paying. Interest will run about $350 billion in the current fiscal year, according to projections by the nonpartisan Congressional Budget Office. It rises to $385 billion next year, $426 billion the year after and so on. This is without Katrina. Just the interest on Katrina—call it 4 percent on $200 billion—is $8 billion a year. While $8 billion is trivial in a world of $2 trillion federal budgets, it's still $40 billion over five years. That's more than the aforementioned $35 billion of social-spending cuts would save.

Households—and even states and cities—have to prove to lenders that they can afford to borrow. But for Uncle Sam, who borrows in dollars and can print as many dollars of Treasury securities as he wants, it's always let the good times roll. Or the bad times. Just keep on spending and borrowing, because at least for now, there's no limit to the debt that Uncle Sam can rack up with foreign and U.S. lenders. (Forget the federal debt ceiling, which has political impact but no financial impact.)

Katrina, like 9/11, really is a one-time emergency that no one can reasonably budget for. It's a short-term problem, albeit a horrendously expensive one. Congress has already authorized $62 billion in Katrina spending and about $8 billion in Katrina-oriented tax cuts for the Gulf Coast. However, almost none of this will show up in the federal budget until 2006—in Washington, the year 2006 starts this Oct. 1. What will the new math look like? Before Katrina, the Congressional Budget Office projected a $503 billion deficit for 2006. That becomes about $540 billion when you make some realistic spending and tax adjustments. Toss in $160 billion for Katrina, and you're looking at a $700 billion deficit.

About a quarter of it is interest the government pays to federal trust funds by giving them Treasury IOUs rather than cash. These include the Social Security trust fund ($97 billion) and federal-employee pension funds and such ($70 billion). Uncle Sam will need to borrow cash—call it $500 billion—to cover the rest of the shortfall. Most of it will come from foreigners.

We'll muddle through and borrow for Katrina. But one day, we'll have one Katrina—or one other unexpected problem—too many. We'll finally spook the financial markets on which we're now so dependent. Federal borrowing costs will rise, the economy will tank, we'll all be hurt. Instead of a "perfect storm" of the physical variety, we'll have one of the financial variety. And like Katrina, it's going to be devastating.

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