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Katrina bailout means big deficits, higher taxes

President George W. Bush and his administration have been widely criticized for their inept response to Hurricane Katrina. Bush's sweeping promises to rebuild New Orleans and the surrounding Gulf Coast region have been equally devoid of serious leadership.

After administration officials told the president the reconstruction effort may cost at least $200 billion, Bush said, "You bet it will cost money, but I'm confident we can handle it."

Of course, the United States is prosperous enough to handle it. The big question is how will we pay for it? "It's going to cost whatever it costs," Bush also said, adding, "We're going to be wise about the money we spend."

The first step in being wise in this case would have been for the president not to suggest an open-ended commitment of federal money. His words underscored how little he actually seems to care about fiscal discipline or the long-term consequences of running large budget deficits when national saving is much too low to adequately finance them.

Bush's behavior is just the latest reason to regard the budget process and the budget itself as out of control.

Federal Reserve Chairman Alan Greenspan certainly thinks that, according to French Finance Minister Thierry Breton. At a Sept. 25 press conference in Washington after a meeting between U.S. and French officials, Thierry said Greenspan told them he "very bitterly regretted" that budget deficits are no longer a political priority. Greenspan said the United States has "lost control, and that's his expression, of its budget," according to Breton.

'War on all fronts'

Citing that loss of budget control, recently the Committee for Economic Development, a business-backed research and policy organization, recommended a fiscal "war on all fronts," that should include revising entitlement programs such as Medicare, reducing discretionary spending and raising new revenues.

The obligations the government faces are so great and the political likelihood of very substantial restraint in the growth of spending so remote that a major new tax -- a value-added tax -- is needed to avert a fiscal crisis, the CED said.

"The deficit is now slightly more than 3 percent of GDP, in very good times," said W. Bowman Cutter, a managing partner at Warburg Pincus, chairman of the CED's subcommittee on tax reform, in presenting the proposal at the National Press Club in Washington. "It will be over 4 percent by the end of the decade and it will rise to above 6 percent toward the end of the next decade."

Threat to growth

Cutter, a Democrat who served in both the Carter and Clinton administrations, said that large, growing deficits eventually will pose a danger to U.S. economic growth.

A similar message was delivered on Sept. 23 at a Capitol Hill economic forum organized by Democrats, where Republican economist Bruce Bartlett, a senior fellow at the National Center for Policy Analysis, said he had spent most of his career looking for ways to cut taxes.

"But that was predicated on an assumption those supporting tax cuts also wanted to downsize government," he said. "Unfortunately, few in my party seem to share this philosophy any longer."

Many Republicans "seem genuinely oblivious to the fact that the burden of government is largely determined by the level of spending, not taxes," he said. "Nor do they understand that in the long run, all spending must be paid for one way or another. Increasing spending today, therefore, absolutely guarantees that taxes will have to be raised in the future."

Reconstruction costs

If the president realized that, then maybe he would have been more cautious in his promises about the post-Katrina reconstruction. Of course, whatever rebuilding after Katrina might cost, that figure is now a lot bigger as the result of Hurricane Rita, which struck the Gulf Coast about a month later.

Rita's damage was not nearly as great; still, are the people, businesses and communities of eastern Texas and western Louisiana going to be willing to accept less help than those hurt by Katrina?

With little forethought, Bush has by proclamation created a new entitlement, one for which he apparently is unwilling to pay.

With Bush's implicit invitation to open-ended spending, Louisiana's congressional delegation has proposed a $250 billion Hurricane Katrina Disaster Relief and Economic Recovery Act, which includes $40 billion for Army Corps of Engineers projects in the state. The legislation would waive the usual requirement for partial matching funding from state or local governments and create a commission that would decide which projects would be built.

No new taxes

For comparison, over the past five years, the Corps of Engineers' budget for the entire country has averaged $4.6 billion annually.

Meanwhile, Bush has ruled out raising taxes to cover any of the reconstruction costs. Instead, as usual when some new spending comes along, the president said other government programs can be cut.

What programs? Who is supposed to do the cutting?

Certainly not congressional Republicans, who have shown no spending restraint, all their small-government rhetoric notwithstanding.

And certainly not the president, whose rhetoric runs in a similar vein and who has not vetoed a single bill in his almost five years in office. The last president never to exercise the veto was John Quincy Adams.

House Republican leader Tom DeLay of Texas discouraged the notion of cutting spending to offset reconstruction costs. "There is no fat left to cut in the federal budget," DeLay said.

Well, if there's nothing to cut on the spending side of the budget, the alternatives are expanding deficits or raising taxes.

Or, as Cutter put it, trimming the fat isn't nearly enough. Taxes eventually are going to go up, and the longer big deficits are allowed to persist, the larger the eventual increase will have to be.


Berry is a columnist for Bloomberg News

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