Paying for Katrina (not to mention Rita)
A disclaimer and the "bottom line" question
I am not an economist. Many moons ago I was a college freshman with plans of being an economics minor. I kicked ass in the first two semesters, then I took the course that was designed to thin out the herd, and I found that my mind lacked the requisite elasticity to be an economist. What follows should be read with that in mind. I am not going to undertake an analysis of all the economic factors involved. Instead, I am going to look more at the possible political and policy consequences--and I'm not talking about Democrats v. Republicans.
The question is "How are we going to pay for this massive federal hurricane recovery program?" By a process of elimination and some comments by the Bush administration, we can ascertain how we are going to pay for this massive federal program. There are three basic options.
Option 1: Raise taxes and/or eliminate the tax cuts that have been passed in the last few years.
Option 2: Spending cuts
Andrew Taylor wrote another AP article which contained this passage:
Well, The Bug Man was not entirely correct. There have been some suggestions, but Congress apparently won't act on them. Taylor's articles explain the situation.
Option 3: Brother, can you spare a few billion?
First, let's establish that the deficit will increase. In the September 16, 2005, press briefing, Al Hubbard said, "Well, there's no question that this -- the recovery will be paid for by the federal taxpayer and it will add to the deficit. That's right."
To me, however, the bigger issue is the national debt and the possible ramifications of borrowing billions of dollars at this time. My principal sources for this part of the discussion are Kevin Hall and James Kuhnhenn of Knight Ridder, Allen Sloan of Newsweek, a George Stephanopoulos interview with Bill Clinton, a March 15, 2005, article by Pauline Young, a December 1, 2004, article by Bruce Bartlett, and a March 16, 2005 article by Bartlett. Both of the Bartlett articles were published by the National Review Online.
The national debt used to be $3.4 trillion, then Bush took office and the GOP got control of Congress, and now the debt is $4.6 trillion. That is a 35% increase in just over four years. That's not the troubling part, however. The nature of the debt, how it is serviced, and to whom it is owed constitute the troubling part.
As Bartlett noted in his March 16 article,
Bartlett wrote about the increase of debt owed to foreign nations in his December 1, 2004, article:
Allan Sloan discussed this situation further in his September 26, 2005, Newsweek article:
Before proceeding, I repeat that I am primarily addressing the political consequences. You can find plenty of analysis dealing strictly with the economics and the effects on the U.S. economy as a whole. While some economists are concerned, many economists say that there is no imminent danger. Since I am not an economist, I am not going to try to sort all that out. I will say that I have yet to see any of these economists look at the political factors. I find that much of economic theory looks at the world in a bit of a vacuum in spite of the fact that economic theory takes into account many variables and complex relations among those variables. Those variables tend to be tangible and quantifiable. However, they are affected by other variables which are not tangible and quantifiable, and often these other variables are not predictable or controllable. Such variables include human nature in general and greed and the desire for power and control in particular.
Now back to "What happens if those foreigners decide to stop buying Treasury securities?" There have been indications that this is already happening. In March of this year, Pauline Young wrote that "According to Treasury Department data, foreign official net purchases of U.S. Treasury fell to US$7 billion in December from US$21 billion in November (of 2004)." Subsequent data from the Treasury Department (which can be accessed here) show the following numbers (in billions of dollars):
But what if foreign governments keep buying Treasury securities at a rate sufficient to fund the deficit (which will include the cost of hurricane recovery)? Well, there will be incentive for this Republican Congress and President to continue their "borrow and spend" ways. But there is another possibility that is my big concern.
So here are the circumstances that form the basis of my big concern: 1) our deficit spending is possible only because of borrowing from foreigners; 2) increasingly, such borrowing is being done through foreign governments; 3) the deficit and subsequent borrowing are increasing our national debt; 4) to use a phrase of Hall and Kuhnhenn, due to the record deficit and record spending, the day-to-day operation of our federal government "depends on the kindness of foreigners." Wow, Blanche DuBois as a metaphor of our federal government...interesting.
Anyway, what this all adds up to is the possibility of a foreign government having power over our government. Lots of people are upset that we are dependent on Saudi Arabia for oil, but the "borrow and spend" conduct threatens to make us dependent on foreign governments just to keep our government working. In other words, there is the potential for our government to be subject to the desires and demands of foreign governments. That power could be exerted either by buying more Treasury securities or halting such purchases. This issue was raised a year ago in a Washington Post article:
And now, we have a hurricane recovery plan that is going to cost $100-200 billion and will have to be paid for by borrowing more money.
As I said, I have not seen an economic analysis that takes into account "the circumstances that form the basis of my big concern." I have seen analyses that say we are doomed economically, and I have seen analyses that say all of this is actually good for the economy. I have seen analyses of currency issues, and the those conclusions are also varied. I want to stress that even if all this borrowing and deficit spending and increased national debt is somehow good for the overall economy, I feel that my concerns are still valid. Look at it this way. By many accounts (pun not intended), the U.S. economy as a whole is good and growing. However, that does not mean that people in the lower and middle classes are better off. We are losing jobs, common folk are not making as much money in real terms as they were a few years ago, and a tax cut of several hundred dollars doesn't mean much. So, the economy might somehow improve with continued "borrowing and spending," but that fact would not preclude my concern from becoming a reality.
At least that's my story for now. This is another instance in which I would be happy to be proven wrong. Just don't ask me to assume any can openers.
I am not an economist. Many moons ago I was a college freshman with plans of being an economics minor. I kicked ass in the first two semesters, then I took the course that was designed to thin out the herd, and I found that my mind lacked the requisite elasticity to be an economist. What follows should be read with that in mind. I am not going to undertake an analysis of all the economic factors involved. Instead, I am going to look more at the possible political and policy consequences--and I'm not talking about Democrats v. Republicans.
The question is "How are we going to pay for this massive federal hurricane recovery program?" By a process of elimination and some comments by the Bush administration, we can ascertain how we are going to pay for this massive federal program. There are three basic options.
Option 1: Raise taxes and/or eliminate the tax cuts that have been passed in the last few years.
And so, you bet, it's going to cost money. But I'm confident we can handle it and I'm confident we can handle our other priorities. It's going to mean that we're going to have to make sure we cut unnecessary spending. It's going to mean we don't do--we've got to maintain economic growth, and therefore we should not raise taxes.(emphasis added). The same day Scotty McClellan, Claude Allen (Assistant to the President for Domestic Policy), and Al Hubbard (Assistant to the President for Economic Policy) held a press briefing. Hubbard was asked whether taxes would have to be raised, and he answered as follows:
The most important thing that we need to do is make sure that this economy remains very, very strong. A strong economy is what will provide the resources for the rebuilding for the disaster as a result of the Katrina storm. We're fortunate that the economy is very, very strong now; it will continue to be strong. But the last thing in the world we need to do is raise taxes and retard economic growth.(emphasis added). It is a pretty safe bet that the prevailing view in Congress is the same. As reported by Andrew Taylor of the AP, Rep. Jeb Hensarling (R-Texas) said "We do not have to raise taxes" to finance the recovery. In any event, the Republican-controlled Congress passed the existing tax cuts, and anyone who thinks that Congress will eliminate those cuts or raise taxes is in serious need of a reality check.
Option 2: Spending cuts
Andrew Taylor wrote another AP article which contained this passage:
There are the requisite calls for sacrifice: Just cut wasteful spending elsewhere in the government's $2.5 trillion budget. But even some of Congress' staunchest conservatives say offsetting spending cuts simply won't happen.Obviously, this article was written before The Bug Man got indicted. :-)
"My answer to those that want to offset the spending is sure, bring me the offsets, I'll be glad to do it," said House Majority Leader Tom DeLay, R-Texas. "But nobody has been able to come up with any yet."
Well, The Bug Man was not entirely correct. There have been some suggestions, but Congress apparently won't act on them. Taylor's articles explain the situation.
In February, President Bush proposed killing or paring back 154 government programs to save $15.3 billion. Most of the proposals got crumpled up and tossed in the trash. The House Appropriations Committee managed to kill off programs totaling $4.3 billion, but all of the money was redirected to other programs.And there you have it. Option 2 is not really viable. Man, I hope Option 3 is a winner.
That experience underscores how difficult it would be to finance Katrina reconstruction with savings from the budget that Congress passes each year in the form of appropriations bills.*******Some lawmakers say Congress should rescind "pork barrel" projects like the $223 million "bridge to nowhere" connecting Alaska's Gravina Island -- population 50 -- to the mainland, or even consider delaying the rollout of the $400 billion-plus Medicare prescription drug benefit passed two years ago.
"With a disaster this size, no program is sacrosanct, no cost-cutting is off the table," said Rep. Tom Tancredo, R-Colo. "Republicans weren't put in office to be satisfied with the size of our government."
While some deficit hawks like Tancredo are energized, it's doubtful they'll meet with success. There's little political stomach for the types of cuts they're advocating. Neither their leaders nor the White House is backing them up.
"I'm not sure the will is here to sacrifice," admitted Sen. Tom Coburn, R-Okla.*******Many of the ideas circulating are likely political nonstarters like delaying the start of the Medicare prescription drug benefit or favorite White House cuts that have previously been rejected by Congress — some of them several years in a row.
Cutting Amtrak subsidies, crop supports, grants to state and local governments and hometown projects may sound like great ideas to some, but they are extraordinarily difficult to get through Congress, even one dominated by supposedly tightfisted Republicans.
President Bush said Thursday the administration was still tabulating the cost of hurricane recovery to help decide where to suggest budget cuts to offset the spending.
"We're beginning to make those kinds of suggestions," the president said.
But he didn't offer any specific places to cut.
A group of House conservative stalwarts announcing "Operation Offset" on Wednesday before a phalanx of television news cameras admitted they had no agreement among themselves on a $500 billion-plus roster of spending cut ideas, many of which — such as cutting public television subsidies — have been resoundingly rejected.*******House leaders, however, have offered only tepid support. Speaker J. Dennis Hastert, R-Ill., said Wednesday he is "willing to look at offsets if there are viable offsets."
"Viable" means commanding enough support to at least pass the House, said Hastert Spokesman Ron Bonjean. Winning the approval of the Senate and Bush is a taller order.
"So far, to be honest, there is not a working majority in the Congress to do any aggressive activity in the area of spending restraint, especially on this," said Senate Budget Committee Chairman Judd Gregg, R-N.H.*******The White House's $20 billion roster of spending cuts and "reforms" is studded with cuts that haven't made the grade with lawmakers, such as an almost $1 billion cut in Amtrak subsidies. The House overwhelmingly rejected the idea this summer and the Senate Appropriations panel voted to increase those subsidies.
Other ideas, like a $3 increase in airline ticket taxes, $500 million in cuts to airport construction grants, halting construction on two new federal prisons and cutting a variety of grant programs to state and local governments have been rejected or ignored by lawmakers.
Congress also has made it plain it is uninterested in significant cuts to farm subsidies or curbing grants to state and local law enforcement agencies.
Most ideas offered by McCain and other GOP "deficit hawks" don't appear to have enough support to pass, starting with the $33 billion in proposed savings by delaying Medicare prescription drug benefits for a year. Both the White House and GOP congressional leaders dismiss that.
In passing 11 spending bills for the budget year beginning Oct. 1, Republicans did manage to kill off 98 programs totaling $4.3 billion. But those savings were just redirected to higher-priority programs.
Option 3: Brother, can you spare a few billion?
First, let's establish that the deficit will increase. In the September 16, 2005, press briefing, Al Hubbard said, "Well, there's no question that this -- the recovery will be paid for by the federal taxpayer and it will add to the deficit. That's right."
To me, however, the bigger issue is the national debt and the possible ramifications of borrowing billions of dollars at this time. My principal sources for this part of the discussion are Kevin Hall and James Kuhnhenn of Knight Ridder, Allen Sloan of Newsweek, a George Stephanopoulos interview with Bill Clinton, a March 15, 2005, article by Pauline Young, a December 1, 2004, article by Bruce Bartlett, and a March 16, 2005 article by Bartlett. Both of the Bartlett articles were published by the National Review Online.
The national debt used to be $3.4 trillion, then Bush took office and the GOP got control of Congress, and now the debt is $4.6 trillion. That is a 35% increase in just over four years. That's not the troubling part, however. The nature of the debt, how it is serviced, and to whom it is owed constitute the troubling part.
As Bartlett noted in his March 16 article,
Growing nervousness in the bond market might be signaling an end to the free lunch Americans have enjoyed for the past three years, when foreigners have essentially financed our budget deficit.(emphasis added). Stated differently, continuing budget deficits means more borrowing, which means an increase in the national debt. It turns out that a significant amount of the national debt is owed to foreigners, and, most notably, foreign governments are increasingly becoming our creditors. Not only that, but as Clinton explained to Stephanopolous, "Now, what Americans need to understand is that that means every single day of the year, our Government goes into the market and borrows money from other countries to finance Iraq, Afghanistan, Katrina, and our tax cuts."
Bartlett wrote about the increase of debt owed to foreign nations in his December 1, 2004, article:
If foreigners were just interested in investing in the U.S. because they like our economic prospects and investment climate, this would not be a problem. Indeed, this unquestionably explains most of the private capital transfers. In places like Japan and Europe, economic prospects have been much worse than here for some time and investors there have had little choice except to invest abroad.(emphasis added). In his March 16, 2005, article, Bartlett stated that foreign central banks owned 60% of Treasury securities held by foreigners ($1.2 trillion of $1.9 trillion). In other words, foreign governments, not private investors, have become major creditors of our government.
But lately, a considerable portion of foreign investment has been by foreign central banks in U.S. Treasury securities. From 1999 to 2003, these rose to $249 billion from $44 billion. The figure for this year will undoubtedly be higher than last year since foreign central bank purchases of Treasurys were already at $202 billion just through June.
As a consequence, foreign ownership of the U.S. national debt has risen to $1.8 trillion or half of the privately held debt. A decade ago, foreigners owned just over 20 percent of the debt.
Allan Sloan discussed this situation further in his September 26, 2005, Newsweek article:
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.(emphasis added). Some might be wondering why I emphasized something other than the money amounts. Our federal government is able to operate only because of deficit spending, and deficit spending is possible only because of the borrowing, which takes the form of the purchase of Treasury securities by foreigners. What happens if those foreigners decide to stop buying Treasury securities? Some possibilities are not good, but then again, some possibilities are not good if foreign governments keep buying Treasury securities.
Before proceeding, I repeat that I am primarily addressing the political consequences. You can find plenty of analysis dealing strictly with the economics and the effects on the U.S. economy as a whole. While some economists are concerned, many economists say that there is no imminent danger. Since I am not an economist, I am not going to try to sort all that out. I will say that I have yet to see any of these economists look at the political factors. I find that much of economic theory looks at the world in a bit of a vacuum in spite of the fact that economic theory takes into account many variables and complex relations among those variables. Those variables tend to be tangible and quantifiable. However, they are affected by other variables which are not tangible and quantifiable, and often these other variables are not predictable or controllable. Such variables include human nature in general and greed and the desire for power and control in particular.
Now back to "What happens if those foreigners decide to stop buying Treasury securities?" There have been indications that this is already happening. In March of this year, Pauline Young wrote that "According to Treasury Department data, foreign official net purchases of U.S. Treasury fell to US$7 billion in December from US$21 billion in November (of 2004)." Subsequent data from the Treasury Department (which can be accessed here) show the following numbers (in billions of dollars):
Feb. 05: 11.3These data show that at best, the purchase of Treasury securities by foreign governments has been fluctuating. At worst, it shows a decline even before Katrina and Rita and the announcement of the huge recovery program. If purchasing of Tresury securities declines, that initially means a decrease in money available to finance the deficit and national debt. That's not good. Sales of Treasury securities could be increased by raising the interest rate on the securities (the rate of return), but that is not particularly good, for the higher the rate of return, the greater the increase of the national debt. In other words, if the interest rate of Treasury securities goes up, the cost of borrowing money also goes up.
March 05: -15.0
April 05: 13.9
May 05: 6.8
June 05: 11.2 or 16.7 (one report says 11.2, and the next month's report says 16.7)
July 05: 3.6
But what if foreign governments keep buying Treasury securities at a rate sufficient to fund the deficit (which will include the cost of hurricane recovery)? Well, there will be incentive for this Republican Congress and President to continue their "borrow and spend" ways. But there is another possibility that is my big concern.
So here are the circumstances that form the basis of my big concern: 1) our deficit spending is possible only because of borrowing from foreigners; 2) increasingly, such borrowing is being done through foreign governments; 3) the deficit and subsequent borrowing are increasing our national debt; 4) to use a phrase of Hall and Kuhnhenn, due to the record deficit and record spending, the day-to-day operation of our federal government "depends on the kindness of foreigners." Wow, Blanche DuBois as a metaphor of our federal government...interesting.
Anyway, what this all adds up to is the possibility of a foreign government having power over our government. Lots of people are upset that we are dependent on Saudi Arabia for oil, but the "borrow and spend" conduct threatens to make us dependent on foreign governments just to keep our government working. In other words, there is the potential for our government to be subject to the desires and demands of foreign governments. That power could be exerted either by buying more Treasury securities or halting such purchases. This issue was raised a year ago in a Washington Post article:
If the lending splurge continues, however -- and some feel it is bound to, if only because China and Japan now have an interest in propping up the dollar to keep their exports cheap -- some fear U.S. policymaking will be constrained by the reliance on foreign capital. "What does this mean to our bargaining power as a nation?" asked Michael D. Granoff, president of Pomona Capital, an investment firm. "If China is financing our debt, how tough can we be the next time there's a Tiananmen Square?"More to the point, China wants to be a world economic power. China is already kicking everyone's ass in manufacturing, we have a huge trade deficit with China, and China needs mass quantities of oil--meaning that we are in competition for that resource. China wants power on the global stage, and that is going to be the driving force for its policy. And that is one factor that has not been part of any economic analysis I have seen. One of China's state-owned oil companies recently tried unsuccessfully to buy Unocal (an oil company). That situation caused much consternation here, as expressed in a June 27, 2005, article posted on Fox News:
Gal Luft, executive director of Institute for the Analysis of Global Security, said it would be "suicidal" at a time of $60-a-barrel oil for the United States to let a Chinese state-run firm control oil sources by buying Unocal.So, the Chinese government was unable to invest in an American oil company, but it certainly has invested in the U.S. government, and our Republican-controlled government has willingly allowed that. Going back to something Bartlett said, China and other foreign governments are NOT "just interested in investing in the U.S. because they like our economic prospects and investment climate." They are interested in making investments which will pay a return in the form of policy power, not direct monetary gain.
"It's not the government of Japan or France," he said. "We want to think about the fact that an American company falls in the hands of the Communist government of China."
And now, we have a hurricane recovery plan that is going to cost $100-200 billion and will have to be paid for by borrowing more money.
As I said, I have not seen an economic analysis that takes into account "the circumstances that form the basis of my big concern." I have seen analyses that say we are doomed economically, and I have seen analyses that say all of this is actually good for the economy. I have seen analyses of currency issues, and the those conclusions are also varied. I want to stress that even if all this borrowing and deficit spending and increased national debt is somehow good for the overall economy, I feel that my concerns are still valid. Look at it this way. By many accounts (pun not intended), the U.S. economy as a whole is good and growing. However, that does not mean that people in the lower and middle classes are better off. We are losing jobs, common folk are not making as much money in real terms as they were a few years ago, and a tax cut of several hundred dollars doesn't mean much. So, the economy might somehow improve with continued "borrowing and spending," but that fact would not preclude my concern from becoming a reality.
At least that's my story for now. This is another instance in which I would be happy to be proven wrong. Just don't ask me to assume any can openers.
posted by WCharles @ 10/14/2005 02:01:00 AM
1 Comments:
Disconcerting to me is our government's offer to fund renovations to the UN headquarters providing a $1.2 billion loan. The original offer was at 5.54%, but the deadline went by without acceptance since UN member states are holding out for an interest free loan. So, now we are ready to offer the same loan at 5.35% spread over 30 years. Donald Trump says he could achieve the same goal for $700 million.
This is the same UN body who arrogantly denounces the United States. They accuse us of being horrible people, world dominators. Elitists. Imperialists. Greedy. Among other things. So what is the going interest rate on a home mortgage these days? Around 7%. Sounds like we are offering them quite a deal, but yet they *expect* ..... demand a freebie.
Oh, and just how will we finance this one?
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