Borrowing Trouble (from China) in Katrina's Wake

If you think the costs of war in Iraq and recovery from Hurricane Katrina will force President Bush to raise taxes, think again. No matter how high the price may go for rebuilding the Gulf Coast while staying the course in the Persian Gulf, this White House will not choose the revenue option.

If you think the Congress is going to cut enough spending to offset Katrina's costs, think again. Nothing in memory suggests our lawmakers will risk the ire of their constituencies with the massive rescissions that would be required.

That leaves one way to meet the new obligations of disaster relief while sustaining the rest of Uncle Sam's commitments, foreign and domestic. It is the path of least resistance, the well-worn path to the international credit markets. No sooner had the Congress approved more than $60 billion in hurricane relief than the Treasury Department readied a new issue of 30-year bonds.

So we will borrow what we need to rebuild Louisiana and her neighbors. The future beneficiaries of that policy will be our creditors, including China and her neighbors. Right now, they like investing in America by owning our debt. And in the long run, creditor nations tend to rise as debtor nations decline.

Why do our policymakers accept this trajectory? Why can't the United States government raise the cash domestically or reduce other spending? The reasons are several, and they are not hard to understand.

Four years ago this month President Bush stood in the smoking ruins of the World Trade Center and said "whatever it takes." Last week he stood in an eerie, empty Jackson Square in New Orleans and said "whatever it costs."

In both cases, he spoke to a nation convulsed with shock, grief and anger. In both cases, his words of resolve could be taken as a source of inspiration. But such open-ended promises also commit the nation to sacrifices that are hard to foresee and harder still to manage — sacrifices that are unequally shared. We are finding that out in Iraq, and we will get another demonstration in the Deep South.

We are at war in Iraq without raising taxes, even though this will add as much as $100 billion to our budget deficit this year. The Bush administration has made an economic calculation here and a political one. His economic thinking says higher taxes would undercut economic growth and worsen the deficit, so putting a war on the cuff is the lesser evil. The political side assumes it's suicidal to raise taxes to pay for a war that a majority in opinion polls say was a mistake.

By similar logic, we will also rebuild the storm-ravaged Gulf Coast without raising taxes, even though this could add $200 billion to our federal debt in the near future (using the cost estimate of Senate Majority Leader Bill Frist). The economic calculation here is that a short term spike in borrowing will hurt the economy less than a tax increase would. Borrowing, the thinking goes, allows the economy to continue growing and supplying richer revenue streams to the federal treasury (as indeed it has in the fiscal year ending this month).

The political calculation on Katrina's costs is a product of the Bush family's experience in the Oval Office. The first President Bush was elected in 1988 after taking the anti-tax pledge. "Read my lips, no new taxes," was the centerpiece of his nomination acceptance speech (delivered in the Superdome in New Orleans). In the summer of 1990, in the midst of budget negotiations with a Democratic Congress, the president agreed to some new revenue measures in order to get a deal.

It should be remembered that the first President Bush had lots of reasons to hit the tax button. In the summer of 1990, Saddam Hussein invaded Kuwait and the buildup to the Persian Gulf War of 1991 began. The federal deficit was already a bigger percentage of the budget than it is today. And as the savings and loan industry crisis hit its peak, the federal government was facing projected bailout costs in the hundreds of billions. (The total cost wound up being about $150 billion, four-fifths of which was borne by the federal government.)

Despite all that, Bush's compromise played as a broken promise. On TV the "read my lips" clip replayed endlessly. Rebellion broke out among Republicans on Capitol Hill and in the country. Pat Buchanan entered the GOP primaries against the incumbent President Bush in 1992, weakening him for the general election against Democrat Bill Clinton and independent Ross Perot. The first Bush was a one-term president.

That wound remains fresh in the family and in the current White House. No matter how embattled it may become, Fortress Bush will not be taken that way again.

As for spending cuts to offset the Katrina costs, they are embraced at once by all, as always, in public. But privately, there is no agreement on what to cut. If you oppose the war in Iraq you'll say save the money there, but the administration and Republican Hill leaders will hear none of it.

What about domestic spending? An anticipated $10 billion reduction in Medicaid payments to states was on the congressional agenda this month. It was postponed because of Katrina, and in effect it is now doomed.

The addition of prescription drug coverage to Medicare is scheduled to kick in next year. This new benefit could be delayed — saving tens of billions — but so far no one has made a move to do so. Perhaps the protests of AARP and other seniors' groups that backed the new benefit would be too much to bear in the midterm election year of 2006.

How hard is it to cut spending in the 109th Congress? No less a conservative than Tom DeLay, the House Majority Leader, now says that after 11 years of Republican majority in his chamber, there's just not much fat left to cut.

So that leaves borrowing, the option that requires nothing but letting it happen.

No wonder there are people in Asia who believe the yuan will be the world currency standard in their lifetimes.

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