Costs of Rebuilding Could Push Deficit into Danger Zone
MICHELE NORRIS, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.
The House of Representatives approved another hurricane relief package today. This one includes $6.1 billion worth of tax breaks for people and businesses recovering from Katrina. The Senate is expected to approve the measure soon. At the same time, many members of Congress are concerned that the new spending will swell an already large budget deficit. Today a group of House Republicans, including Mike Pence of Indiana, urged their colleagues to offset the hurricane spending with cuts in other programs.
Representative MIKE PENCE (Republican, Indiana): Now is the time for us to begin to make the tough choices necessary to ensure that a catastrophe of nature does not become a catastrophe of debt for our children and our grandchildren.
NORRIS: To date, the federal government has committed more than $62 billion for Katrina relief. By some estimates, the final cost of relief and rebuilding could exceed $200 billion. NPR's John Ydstie reports on whether that spending could tip the deficit into the danger zone.
JOHN YDSTIE reporting:
Unless the White House and Congress raise taxes or cut spending, the costs of Katrina could push the federal budget deficit back above $400 billion in the next fiscal year which begins on October 1st. President Bush has suggested spending cuts, but Senate Republicans who met with White House officials yesterday said they got no specific plans for offsetting the Katrina spending. Brian Riedl, a budget analyst for the conservative Heritage Foundation, says he isn't optimistic there'll be a plan.
Mr. BRIAN RIEDL (Budget Analyst, The Heritage Foundation): President Bush and the Congress have gone on a Great Society-style spending spree over the last four years, increasing the cost of government by a full 33 percent. At this point, there are no indications that the president nor Congress have the courage to make some of the difficult trade-offs that are part of responsible budgeting. So I would expect the entire cost to be added to the budget deficit and dumped into the laps of our children.
YDSTIE: Mark Zandi of Economy.com, an online consulting firm, agrees that Katrina adds to a deteriorating deficit picture.
Mr. MARK ZANDI (Economy.com): Katrina, by itself, is no problem. What is a problem is that you need to put it in the context of all the other things that the federal government is doing. We're all growing increasingly worried about the costs of Iraq. We are all increasingly aware of the cost of the tax cuts. We all are increasingly aware of the prescription drug plan for Medicare, which is about ready to really kick in. We're all doing our own math in our heads, and the numbers just don't add up, and we all sense that.
YDSTIE: Zandi thinks eventually the foreign central banks and investors who lend America the money to support its spending will demand higher returns, forcing interest rates up and harming the economy. Alice Rivlin, a former budget director in the Clinton administration, says Washington has ignored the deteriorating budget for too long.
Ms. ALICE RIVLIN (Former Budget Director, Clinton Administration): This is a very good example of the old maxim that you should fix the leaky roof while the sun is shining, because it may rain again.
YDSTIE: Rivlin says during the past couple of years of strong economic growth, the government should have balanced the budget to prepare for the upcoming burden that retiring baby boomers will put on the federal budget. She also says the cost of Katrina, while manageable by itself, becomes a problem when added to that already gloomy budget picture.
Ms. RIVLIN: Additional borrowing certainly puts us a bit more at risk--and more than a bit, 'cause this is large--of rapidly rising interest rates or a plunging dollar or some kind of financial crisis related to those things.
YDSTIE: Economist John Macon dismisses the idea of crisis. He's a senior fellow at the American Enterprise Institute and is swimming against this tide of concern about Katrina spending. Macon, also a principal in a hedge fund called Caxton, believes the cost of Katrina won't reach $200 billion. In the next year, he predicts only about 80 billion in spending, and maybe an equal amount spread over the next few years. Even if it's borrowed, he says, it's not a problem.
Mr. JOHN MACON (Senior Fellow, American Enterprise Institute): For the financial markets to, you know, absorb another $80 billion of government paper is really not a problem. We're looking at financial markets with a total capitalization of 20 to $30 trillion.
YDSTIE: But even Macon complains that the current Congress and administration have spent too freely. He urges and expects some spending and tax-cutting restraint in the next couple of years as the costs of Katrina are absorbed. John Ydstie, NPR News, Washington.