China passes Japan as largest creditor for US National Debt

November 20th 2008.

China has bought more of the US National Debt and has now surpassed Japan as the largest creditor. China's investment in U.S. Treasury bonds surged to $585 billion in September 2008, surging past Japan's $573.2 billion worth.

The debt purchase by China raises the US dollar while devaluing the Yuan, hurts American manufacturers and creates the potential for US banks to raise interest rates in the future.

See: China buys more US debt, passes Japan for more details.

US National Debt Clock Runs Out of Digits

October 9th 2008

UNITED STATES - The clock has run out on the national debt.

The national debt clock, the unofficial tracker of the federal budget deficit maintained by the Durst Organization in New York, has reached its limits. Last month, as the national debt exceeded $10 trillion for the first time, the clock ran out of digits to record the number.

The dollar sign in the clock had to be deleted and replaced with a one to record the massive number. The clock’s owners say a new model — with space for two extra digits — will be in place early next year.

Now the debt clock will be able to reach the quadrillions. Hopefully, that’s not a level that will be breached any time soon.

National Debt Passes $10 Trillion, Few Notice

October 7th 2008

UNITED STATES - There are enough signs of the apocalypse already: the global financial crisis, reports that one in four mammals are at risk of extinction, the Cubs (briefly) making the playoffs. So maybe it's no surprise that a huge milestone (or tombstone perhaps) slipped by without much notice. The national debt broke $10 trillion on Sept. 30, but honestly there was so much going on that we can forgive everyone for being distracted. Including us.

Ten trillion is an almost unimaginable number -- so colossal that the even the people who worry about debt had trouble anticipating it. The National Debt Clock in Times Square, for example, didn't even have room for that many digits. On Sept. 30, they had to squeeze the "1" and the dollar sign into the same box.

How much is a trillion dollars anyway? Like we all learned in school, it's a thousand billions, and as the old line goes, "a billion here and a billion there and pretty soon you're talking about real money." But the difference between a billion and a trillion is staggering.

With a billion dollars, you could keep about 45,000 people in a four-year college for a year -- or, depending on their behavior, in jail. The College Board says private tuition and fees average $22,218 per year; the Bureau of Justice Statistics says the average cost per inmate is $22,650 per year. With a trillion dollars, you could cover tuition for 45 million people -- and in 2006 there were only 17 million students enrolled in college nationwide.

You could think of lots of good ways to spend $10 trillion, but the point is that we don't have it -- we owe it. And hold on, folks, there's more. Just to name a few:

This problem is getting worse. We're adding to the debt at mind-boggling rates. In fact we're spending more on interest on the national debt than we're spending on the Iraq war. For 2008, the budget deficit was projected to be more than $400 billion - but that was before the Wall Street bailout. Not only did the Congressional Budget Office project a $400 billion deficit this year, they also anticipated a $400 billion deficit, next year, and the year after that, with further deficits for the next decade. The numbers could be much worse than that. The financial crisis and the recession that will almost certainly follow will reduce tax revenues because people who are unemployed and businesses that are losing money don't pay taxes. So those figures are optimistic.

We're borrowing to pay for the Wall Street bailout. True, as many have pointed out, the government may actually make money on the bailout in the long run. The bad debts the government buys should be worth something at some point, so the final bill may well be less than $700 billion. But that may be years off -- the money we have to shell out up front will be paid over the next two years. At no point during the ragged, torturous congressional debate did we really talk about how the government's going to pay for this. No one's talking about tax increases or spending cuts to cover it. And when politicians don't specify how they're going to pay for something, that means they're going to borrow. And, by the way, those little "sweeteners" -- the Congressional earmarks for children's wooden arrows, racetracks and the rums of Puerto Rico -- are paid for with red ink too.

The irony of the government borrowing to head off the consequences of bad debts speaks for itself. The good news is that the U.S. government is one of the few institutions out there that can borrow. Banks won't loan to each other, much less businesses and consumers, but the U.S. Treasury bond is one of the few safe havens left. And many would argue that this is not the time to quibble - when you're trying to put out a fire, you don't worry about where the water is coming from. But after the fire is put out, the debts are going to remain.

We've got more big bills on the way, and no plan to pay them. The Government Accountability Office estimates that rising health care costs and the retirement of the baby boomers mean a cool $53 trillion in "unfunded liabilities" ahead of us over the next several decades . By 2040, if nothing changes, the government won't have any money for anything other than Medicare, Medicaid, Social Security and paying interest on the money we've already borrowed.

You know, of course, how the bank insists that you have a specific schedule to pay back your car loan or mortgage? (Never mind that this isn't working out for lots of people right now). Well, the government doesn't have one. The plan for paying off the national debt can be summed up as "maybe someday we'll have a surplus again, and we can pay it down." As for that $53 trillion in liabilities, that depends entirely on whether we as a nation can come up with a politically viable plan to fix Social Security and Medicare. You know how well that's gone in the past.

Neither Barack Obama nor John McCain is talking about this problem. In fact what they're saying right now will make the problem worse. If you saw the first presidential debate, you saw Jim Lehrer try to pin these guys down on how the Wall Street bailout would affect their plans. You also saw them both duck the questions. The nonpartisan Tax Policy Center says McCain's plans would increase the national debt by $5 trillion over the next 10 years, while Obama's would increase the debt by $3.5 trillion. Right now one of the biggest unspoken campaign promises for both men is to offer you lots of tax cuts and/or new programs the country doesn't have the money for.

Like everyone else, we're praying that the U.S. bailout and the world's central banks can put out this financial fire, fast. Realistically, the country is going to be adding a lot to the national debt over the next few years. There's no way around it, and frankly balancing the budget during a recession is difficult and may not even be advisable. But once we've got the private sector's bad debts under control, we've got to get the federal government's debt under control, too. The long-term problem for the federal government is predictable, inevitable -- and completely solvable, if politicians show some leadership and the public starting demanding some real answers.

Bush Administration Adds $4 Trillion To National Debt

September 29th 2008

UNITED STATES - With no fanfare and little notice, the national debt has grown by more than $4 trillion during George W. Bush’s presidency.

It’s the biggest increase under any president in U.S history.

On the day President Bush took office, the national debt stood at $5.727 trillion. The latest number from the Treasury Department shows the national debt now stands at more than $9.849 trillion. That’s a 71.9 percent increase on Mr. Bush’s watch.

The bailout plan now pending in Congress could add hundreds of billions of dollars to the national debt – though President Bush said this morning he expects that over time, “much if not all” of the bailout money “will be paid back.”

But the government is taking no chances. Buried deep in the hundred pages of bailout legislation is a provision that would raise the statutory ceiling on the national debt to $11.315 trillion. It’ll be the 7th time the debt limit has been raised during this administration. In fact it was just two months ago, on July 30, that President Bush signed the Housing and Economic Recovery Act, which contained a provision raising the debt ceiling to $10.615 trillion.

Deputy Press Secretary Tony Fratto declined an invitation to comment on the enormous jump in the national debt during Mr. Bush’s presidency. He referred me to OMB – the Office of Management and Budget, which tried to make the case that as a percentage of the economy, the national debt is not that big.

In its budget documents in February, OMB estimated that next year’s national debt would hit $10.4 trillion – which it said would amount to 69.3 percent of the gross domestic product – the standard measure of the size of the economy.

That’s high – but far from an all-time high. After World War II, the national debt soared to over $270 billion – a quaint figure by today’s standards. Numerically, it’s less than the amount of federal budget deficit we now run up in a single year. But back in 1946, the Debt amounted to 121.7 percent of the size of the total economy.

By the time Richard Nixon began his second term in 1973, the national debt had grown to $466 billion – though as percentage of GDP, it had fallen to 35.7 percent.

Today, OMB press secretary Corinne Hirsch, renewed the oft-made government argument that reporters should focus on just that part of the national debt that is held by the public – now about $5.6 trillion and not include that portion billed as “intra-governmental holdings” – money the government owes itself – especially the Social Security and Medicare trust funds.

Of course, the government doesn’t have that money either. It’s been spent.

President Bush made that point himself on April 5, 2005, when he paid a visit to the offices of the Bureau of the Public Debt in Parkersburg, W.Va.

He was shown a white file cabinet with keypad locks on each of its four drawers in which the Social Security Trust Fund is stored. On that day, there was no cash – as he noted in a speech later in the day.

“There is no 'trust fund,' just IOUs that I saw firsthand, that future generations will pay – will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs,” he told an audience at West Virginia University.

The government didn’t have the money it owed itself back then – and still doesn’t.

A couple of weeks after he took office, President Bush addressed the Republican Congressional Retreat in Williamsburg and declared that his budget “pays down the national debt.”

In recent years, President Bush almost never mentions the national debt.

Bank bailout: What it means for taxpayers

September 25th 2008

UNITED STATES - Treasury officials and congressmen are scrambling to find a viable solution to what been dubbed the worst financial meltdown since the Great Depression, and are tossing around figures unimaginable to most “regular folks.”

The latest amount being discussed in Washington is $700 billion, which would come at the taxpayers’ expense.

If the three-page act is passed as is, what would this mean to the taxpayer? Dr. John Yeutter, associate professor of accounting and Certified Financial Planner, explained the situation in layman’s terms.

“Let’s put this in perspective,” said Yeutter. “The U.S. Federal Government collected $2,568 billion in fiscal year 2007, while spending $2,730 billion, generating a total budget deficit of $162 billion. This proposal asks for more than 25 percent of last year’s collections. This is more than the government spent on defense ($549 billion), Social Security ($581 billion), or Medicare and Medicaid ($561 billion) last year. So we’re talking about ‘real money’ here.”

Yeutter indicated this money will come by increasing the federal debt, and will have to be paid back somehow.

“So our children and our grandchildren will have to pay for the mistakes of a few executives on Wall Street, through future taxes,” he said. “So we shouldn’t expect anything but tax increases until this debt is paid.”

Indeed, a review of the text of the bill, available at the New York Times Web site, provides a stark – some might say frightening – plan that would leave U.S. Treasury Secretary Henry Paulson in charge of running the whole show.

Particularly sobering is Section 8 of the three-page document, which states: “Decisions by the Secretary [of the Treasury] pursuant to the authority of this act are non-reviewable and committed to agency discretion, and may not be reviewed in any court of law or any administrative agency.”

If passed, not only would the legislation increase the national debt to $11.3 trillion, it would leave one man in charge with absolutely no oversight.

According to a report by the Associated Press, Federal Reserve Chairman Ben Bernanke warned Congress Wednesday they risk a recession if the plan is not approved immediately, as is.

Yeutter is concerned about the act and its potential long-term effects on other programs.

“We all hope that the government has the ability to stop what might be a crisis of similar proportions to that which brought on the 1929 depression,” he said. “The difficulty that exists here is that our lawmakers are being told, ‘Give us this blank check, or the economy will collapse,’ and the current proposal has little in it to provide protection for the citizen taxpayers who are funding it, or accountability from the secretary of the Treasury who will administer it. This also means the next administration, whoever that may be, will be left with less available funds to spend solving other economic or social problems, like health-care costs, health-insurance costs or education.”

The latest U.S. Census information indicates there are 116 million households in the U.S. – given that information, the cost per household for this proposal equals approximately $6,000.

What some may find even more disconcerting is there is no “Plan B,” should this plan fail.

According to Eamon Javers, writer for Politico magazine, if this week’s bailout plan fails, the government will probably have no choice but to continue to buy up assets, which could include credit-card debt, car-loan debt, as well as commercial real-estate debt, until the problem abates or taxpayers gain control over the banking system.

Bush's Legacy: Debt

September 25th 2008

UNITED STATES - The Bush legacy is going to include a nasty four-letter word: debt.

On second thought, make that staggering, long-term debt, perhaps in excess of $11 trillion, that will tie the hands of the next president and Congress, to say nothing of imposing a crushing burden on taxpayers.

Just a few months ago, the Iraq war looked like the biggest thing in the eight-year era of the second President Bush, during which his party controlled Congress for six years.

Just a couple of Sunday mornings ago, Bob Woodward of the Washington Post said on national television that the war in Iraq “is probably the most important thing going on right now,” adding that in January the war in Iraq will be topic one in the next administration, and topic two will be the war in Afghanistan.

Now the country suddenly is facing a financial crisis fraught with the possibility of unprecedented economic disaster.

If that isn’t enough to make you reach for the antacid tablets, the president still has about three months left in office, plenty of time for yet another calamitous turn of events.

The national debt was about $5.7 trillion when Bush took office in January 2001. Today, after almost eight years and a couple of wars, the debt has risen to about $9.7 trillion.

And, by the way, that figure might rise another $1 trillion or so before Bush steps down on Jan. 20.

The national debt ceiling today is $10.6 trillion. Treasury Secretary Henry Paulson wants Congress to raise that to $11.3 trillion to clear the decks for massive borrowing to deal with the nation’s financial crisis.

A national debt of $11.3 trillion would come to more than $37,000 each for every man, woman and child in the United States.

And all this comes during an era of allegedly conservative, fiscally responsible Republican domination in Washington.

U.S. debt could hit WWII levels

September 24th 2008

UNITED STATES - $700 billion plan may drive the budget deficit next year to all-time record of more than $1 trillion.

Treasury Secretary Henry Paulson's $700 billion (U.S.) proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.

The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 per cent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.

"This is sobering, absolutely sobering, even to someone who doesn't drink," said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.

At risk for the world's largest economy: a jump in interest rates prompted by the glut of additional Treasuries needed to finance the plan, and a diminished desire among international investors to add to their holdings. The dollar yesterday slid the most against the euro since the European currency's 1999 introduction.

Paulson is asking lawmakers to lift the legal ceiling on the federal debt to a record $11.3 trillion, from the current $10.6 trillion.

Treasuries fell in the past two trading days after Paulson said on Sept. 18 that a sweeping rescue was needed. Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 per cent of gross domestic product.

The Treasury is already borrowing to fund Federal Reserve efforts to inject liquidity into credit markets. Last week it announced sales of $200 billion in short-term debt.

The Treasury's potential use of all $700 billion to purchase impaired assets would raise the country's debt to more than 70 per cent of GDP. The last time American taxpayers owed as much was in 1954, when the nation was still paying down costs incurred during World War II.

"It's an alarming level of debt given that we're not fighting something like World War II," said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog group.

The government reaching the requested debt limit would entail every man, woman and child in the U.S. owing more than $37,000 each. The median U.S. income last year was $50,233.

If Treasury spends the entire amount next year, as some economists expect, it would drive next year's budget deficit, now projected to be around $500 billion, to $1 trillion or more. Still, the money for the Paulson plan will go to buy assets at prices that many market analysts say are depressed. Though it's still far from clear what price the Treasury would pay for them, it's possible those assets could increase in value as the crisis recedes and, as was the case with the government's 1979 bailout of Chrysler Corp., taxpayers could ultimately profit.

Our kids will pick up the cheque for our financial mess

September 23, 2008 - Our kids ought to be hopping mad.

UNITED STATES - This whole financial crisis is essentially the consequence of binging on debt. And to get ourselves out of it, we are about to binge some more without showing the slightest inclination to pay for it.

The Bush administration's bailout plan for a financial crisis rooted in failing mortgages is pretty simple.

It asks Congress to increase the national debt ceiling to $11.315 trillion to cover $700 billion in new borrowings so the Treasury Department can buy bad loans.

"We're charging the national credit card. It's more of the same, just in larger numbers," said budget deficit hawk David Walker, president of the Peter G. Peterson Foundation.

President Bush called China's President Hu Jintao Monday morning to discuss all this – as well he might.

China holds more than $502 billion in U.S. treasuries.

Count the paper issued by Fannie Mae and Freddie Mac, along with debts bought in London's financial market that aren't identified in the official statistics, and China's holdings look more like $1 trillion to $1.3 trillion, estimates Brad Setser of the Council on Foreign Relations.

"That's enormous – close to 10 percent of our GDP," Mr. Setser said. "So China is understandably interested."

China's Xinhua news agency paraphrased Mr. Hu's views on the conversation this way:

"We have noticed that the United States has taken some important measures to stabilize the domestic financial market, and we hope these measures can achieve quick results so that economic and financial conditions in the United States will gradually improve and turn better."

Mr. Bush did not need to rattle the cup, but that's part of the underlying story here. We need Asian creditors to prop up the system.

Japan's stake

Japan's central bank, for example, holds more than $592 billion in U.S. treasuries.

Look at some of Monday's other news:

Morgan Stanley is selling up to 20 percent of itself to Japan's Mitsubishi UFJ Financial Group "as soon as practicable."

Nomura Holdings, Japan's largest brokerage, is buying the Asian operations of bankrupt Lehman Brothers for a reported $225 million.

Britain's Barclay's is buying Lehman's investment banking business for about $1.35 billion.

There will no doubt be more international deals in the days ahead.

It might be sad to see the flags of giant domestic finance houses fall to sales abroad, but the most important global consequence of the financial bailout will be what we borrow.

Debt ceiling

If Congress moves the debt ceiling to $11.3 trillion, that will bring the national debt to 79 percent of the $14.3 trillion economy.

It hasn't been that high since World War II, when federal borrowings equaled 120 percent of the gross domestic product.

None of that wartime debt was owed to foreign creditors, however.

Today, more than 25 percent of the national debt is owed to Mr. Hu and other international lenders.

Consider the leverage of these creditors.

For now, China, Japan, Saudi Arabia, Brazil, Russia and others are bankrolling the U.S. government.

It's in their interest to do this because it prevents the global financial system from seizing up and because it keeps us in cash to buy consumer goods from Asia and oil from the oil producers.

It looks odd for the United States to hector these same countries about human rights and other behaviors, however, when we owe them so much money.

Now we're about to double down on our borrowing.

Before the Treasury and the Federal Reserve moved to bail out Fannie Mae, Freddie Mac, AIG and now the whole of Wall Street, the federal deficit was expected to approach $500 billion next year.

With nearly $1 trillion in federal debt instruments pushed into these bailouts, however, the deficit will certainly be far larger.

How will we pay for that? We won't. Since this borrowing binge started, we've heard that economic growth will overcome the debt and knock back deficit spending.

It looks a lot more like we're leaving the cheque for our kids.

Barack Obama Wins

Congratulations to Barack Obama, the new president of the United States.

Now he can reverse America's budget deficits and decrease America's National Debt.

Bush lays out $700 billion bank bailout plan

The Bush administration yesterday formally proposed to Congress what could become the largest financial bailout in U.S. history, requesting virtually unfettered authority for the Treasury to buy up to $700 billion in mortgage-related assets from financial institutions based in the United States.

The plan would raise the US National Debt to $10.4 trillion from the current $9.7 trillion.

The proposal was stunning in its simplicity: less than three pages, it would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semi-annual reports to Congress, allowing the Treasury to buy and resell mortgage debt as it sees fit.

Democratic congressional leaders have pledged to help approve legislation by the end of this week.

The plan, an ambitious effort to transfer the bad debts of Wall Street into the obligations of American taxpayers, was put forward by the administration late last week after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

Bush pledged to work with Congress to quickly pass legislation as part of the biggest financial bailout since the Great Depression.

"It's big because it needed to be big," Bush said, acknowledging hundreds of billions of dollars in taxpayer money is being put at risk. He added that the risk of doing nothing far outweighed the risks of government intervention.

"People are beginning to doubt our system, people were losing confidence, and I understand it's important to have confidence in our financial system," he said.

Bush's remarks capped a roller-coaster week on Wall Street. The Federal Reserve engineered an $85 billion takeover of insurance giant AIG after seizing control of housing giants Freddie Mac and Fannie Mae earlier in the month. One investment giant, Lehman Brothers, collapsed and a second, Merrill Lynch, was purchased by rival Bank of America for less than half its value.

The government must bail out the financial system "because if we don't, it will have a tremendous impact on American consumers, homeowners, taxpayers and the rest," House Speaker Nancy Pelosi, a Democrat, said at a citizens' workshop in San Francisco.

But, she added, "We cannot deal with this unless this bailout helps families stay in their homes."

Democrats are pressing to require that the plan help more strapped borrowers stay in their homes and that it put new limits on executive compensation.

Signalling what could erupt into a brutal fight with Democrats over add-on spending, the House's top Republican, Ohio Representative John Boehner, warned "efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors and small businesses deserve."

Treasury officials met congressional staff for about two hours on Capitol Hill yesterday. Also among the key issues up for negotiation is which financial institutions would be eligible for the help. The proposed legislation doesn't make it clear, leaving open the question of whether hedge funds or pension funds could qualify.

Don’t be surprised if the US defaults on debt

September 13th 2008 - On October 30, 1938, the American Radio Drama series Mercury Theatre aired The War of the Worlds, directed by Orson Welles. Adapted from H G Wells’ novel, the first half of the broadcast was scripted as a series of dramatic news bulletins of a Martian invasion. Listeners who had missed or ignored the opening credits assumed that the invasion was real. People fled their homes in panic and phone calls swamped police.

The financial equivalent of this broadcast today would be an announcement: “We interrupt regular programming to announce that the United States of America has defaulted on its debt!”

Lenders to the US government have suffered significant losses .The losses have not been from non-payment but because repayments have been in a constantly debased currency - the dollar.

Assume a Japanese investor bought 30-year US Treasury bonds in 1985 when the $/yen exchange rate was $1 = yen 250. Based on a current exchange rate of $1 = yen 105, the investor has lost 58% of the investment, though he can take comfort from the fact that at the low of $1 = yen 84, he would have lost 66%.

European investors who bought US government bonds in recent years would also have suffered significant losses. Based on the highest $/ euro exchange rate (1 euro = $0.85) and recent trading levels (euro1 = $1.56), the investor would have lost (up to) 46%.

Despite official “strong dollar” policies, a case can be made that the US is in the process of defaulting on its obligations via a systematic devaluation of its currency.

As of March 2008, US national debt stood at $9.4 trillion. This equates to over $30,000 per person in the US or a little over $60,000 per head of the US working population. The US national debt has grown by $3 trillion (50%) since 2000, when it was $6 trillion. In 2007 alone, it grew by $500 billion, from $8.7 to $9.2 trillion. In 2005, it was 67% of US GDP, up from 51% in 1988. The Office of Management and Budget projects that total debt will rise to $12.3 trillion in 2013.

Of the $4.7 trillion in private hands, $2.4 trillion (51%) is held by foreign investors. Japan holds around $600 billion (24%) and China holds $500 billion (around 20%). Oil-exporting countries probably hold another 10-14%.

As James Fallow noted in The Atlantic: “every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.”

In September 2008, the $5.4-trillion-plus in debt and guarantees of the government sponsored enterprises — Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) — became de facto parts of US national debt.

US national debt is also shortening in maturity. In December 2000, the average length of US public debt held by private investors was 70 months. As at March 2008, the average length had shortened to 53 months (a decline of 24%); 71% of this debt is due in less than 5 years and 39% in less than 1 year. The US must now “roll over” significant amounts of debt in the coming years.

High levels of debt are compounded by the “twin deficits” - the 2008 budget deficit forecast is $380 billion (2.4% of GDP) and the current account deficit is expected to exceed $700 billion (4.6% of GDP).

A mainstay of the US economy has been its financial system - “financial” engineering has long overtaken “real” engineering.

Lawrence Summers, a former deputy secretary of the US Treasury, proudly extolled the merits of the US financial system in a 2001 speech at the London Stock Exchange in the following terms: “… the United States is the only country in which you can raise your first $100 million before you buy your first suit.” He gave short shrift to critics who felt that US financial sophistication was synonymous with financial instability: “(That belief) is observed in inverse proportion to knowledge of these matters.”

The US financial system has been badly affected by losses on subprime mortgages and the current credit crisis.

Mohamed El-Erian, co-chief executive of Pimco, summed it up on June 25, 2008: “What has suffered most is the credibility of the most sophisticated financial systems in the world.”

In a 1998 speech during the Asian financial crisis, Summers had preached the merits of American-style “transparency and disclosure”. It is the US that now needs “transparency and disclosure.”

There are other dimensions to the malaise.

John Gapper, a columnist for the Financial Times observed on May 8, 2008: “If anyone doubts the problems of US infrastructure, I suggest he or she take a flight to John F Kennedy airport (braving the landing delay), ride a taxi on the pot-holed and congested Brooklyn-Queens Expressway and try to make a mobile phone call en route. That should settle it, particularly for those who have experienced smooth flights, train rides and road travel, and speedy communications networks in, say, Beijing, Paris or Abu Dhabi recently. The gulf in public and private infrastructure is, to put it mildly, alarming for US competitiveness.”

The factors identified are well known. To quote Summers again: “In this age of electronic money, investors are no longer seduced by a financial dance of a thousand veils. Only hard accurate information on reserves, current account and fiscal and monetary conditions will keep capital from fleeing precipitously at the first sign of trouble.”

Why haven’t the “electronic herd” abandoned the US? Facts, it seems, don’t matter, until they do.

Bush proposes $3.1-trillion budget

February 5th 2008 - President Bush unveiled a $3.1-trillion budget today that would boost military spending and trim health benefits for retirees. The proposal was immediately tagged by Democrats as “irresponsible.”

The first spending plan in history to top $3 trillion would freeze or eliminate many domestic spending programs yet still rack up a $407-billion deficit for fiscal 2009, which begins Oct. 1. The Pentagon is the only department for which Bush proposes a significant increase; its budget would grow 7.5% to $515 billion.

“It’s a good budget,” Bush said after meeting with his Cabinet. “It’s a budget that achieves some important objectives. One, it understands our top priority is to defend our country, so we fund our military as well as fund the homeland security.”

Because Bush is leaving office in a year, his budget proposal is largely an academic exercise. The Democratic-controlled Congress has responsibility for proposing and passing budget bills, and it’s unlikely to adopt his priorities.

The plan’s significance is mostly political. Bush’s proposal seeks to codify the policies he considers his legacies as president, namely the tax cuts he won in 2001 and 2003; significant increases in military spending; and a few education programs, including his No Child Left Behind legislation.

For Democrats, the Bush budget provides a summary of the policies of his administration they find most egregious: the war in Iraq, tax cuts that worsened the federal deficit, and the squeezing of social programs such as Social Security and Medicare.

“This budget is fiscally irresponsible and highly deceptive, hiding the costs of the war in Iraq while increasing our skyrocketing debt,” said Senate Majority Leader Harry Reid (D-Nev.). “President Bush’s fiscal policies are the worst in our nation’s history – he has turned record surpluses into record deficits – and this budget is more of the same.”

Bush said the proposal would balance the federal budget by 2012. But Democrats said it would do so by relying on accounting tricks, including ignoring most funding for the Iraq war and pretending that the government would essentially permit a huge tax increase on the middle class by not rescinding the alternative minimum tax after Bush leaves office.

“The president proposes more of the same failed policies he has embraced throughout his time in office – more deficit-financed war spending, more deficit-financed tax cuts tilted to benefit the wealthiest and more borrowing from foreign nations like China and Japan,” said Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee.

The deficit projections are also worsened by the $146-billion economic stimulus package negotiated between the administration and Congress in an effort to soften or forestall a feared recession. The budget assumes a 3% increase in gross domestic product this year, a rate that is unlikely if the economy continues to slow down as it has in recent months.

“When President Bush took office, the national debt stood at $5.7 trillion,” said Rep. John M. Spratt Jr. (D-S.C.). chairman of the House Budget Committee. “Today it is $9.2 trillion and rising, projected to increase to $9.7 trillion by the time President Bush leaves office – up by $4 trillion in eight years. This is the legacy our children and grandchildren will inherit from the fiscal policy of this administration.”

But the administration hailed the budget as balanced and innovative.

In a cost-saving gesture, the government for the first time did not provide free copies of the four-volume proposal to Congress, instead releasing it online and charging $200 per printed copy ordered through the Government Printing Office.

“It’s not only an innovative budget, in that it’s coming to Congress over the Internet, it’s a budget that’s balanced – gets to balance in 2012 and saves taxpayers money,” Bush said.

A hefty chunk of the proposed savings would come from the government’s two giant healthcare programs, Medicare and Medicaid, but leading Democratic lawmakers have already called the cuts unacceptable.

Medicare, which serves about 44 million seniors and disabled people, would be squeezed by $178 billion over five years, reducing its growth from an average of 7.2% a year to 5% a year. At least $115 billion of the savings would come from reduced payments to hospitals, according to initial calculations by a senior Democratic congressional aide. Hospitals and other providers in traditional Medicare would face the sharpest cuts, and private health insurance plans that now constitute one of the fastest-growing parts of the program would get only a light trim, critics said.

Over 10 years, Bush’s proposed Medicare savings would grow to $556 billion.

The president also called for reductions totaling $17 billion over five years in Medicaid, a federal-state partnership that serves some 55 million people, including the poor and many elderly nursing home residents.

Although the scale of Bush’s Medicare reductions appear to be far beyond what Congress would accept, some of his specific proposals may make into law. Congress must act by the summer to roll back a scheduled cut in Medicare fees to doctors, and it will have to consider cutting other parts of the program to offset the added costs of protecting physicians.

Addressing other health priorities, Bush proposed a modest increase in the Food and Drug Administration’s food safety budget, but some critics said it would do little more than offset inflation. And public health advocates protested a proposed 7% cut for the Centers for Disease Control and Prevention.

The State of the Union and Its Debt

January 27th 2008 - The financial state of the union is a mess. That's not a surprise. It's in the headlines -- from the mortgage crisis to the wild gyrations of the stock market. Surely President Bush's State of the Union address will touch on those financial issues.

But will the president tell the truth, the whole truth, about the numbers and the extent of our nation's financial woes over the long run? Will he acknowledge the true cost of the emergency economic-stimulus package now being worked out by Congress?

The Institute for Truth in Accounting is determined that the real numbers will not only be spoken and written, but considered by all the candidates running for office this year. This nonprofit, nonpartisan institute has created a Web site to bring the financial facts to the public attention.

Prominently displayed on the home page are two running series of numbers that increase almost faster than the eye can capture. The first is the "official" National Debt, which was $9,193,222,137,000.00 at the instant I checked. (That's the figure taken from the Treasury Department's Web site.) The number is growing by $1 million every minute!

Beneath it is another number, also constantly clicking higher. This, according to the Institute, is the true national debt figure: $55,146,513,890,000.00.

This calculation of the national debt includes all the "off balance sheet" liabilities of the government, such as its promises to pay benefits to Social Security and Medicare recipients far into the future, as well as military and civilian government workers' pensions.

In other words, the true liability of the United States of America is not only the Treasury bills, notes and bonds we sell to finance our annual deficit and past deficits. To get to the true liability, you must include all the promises we've made to make payments in the future.

That's how you get a staggering $55 trillion national debt!

No one talks about those "off balance sheet" obligations. It's as if you only looked at your checkbook balance to figure out your family finances -- and ignored the amount due on your mortgage and your credit cards. That would totally misrepresent the state of your finances.

Do you think you could get a loan if you presented only your checking-account statements? Surely your banker would demand the complete picture. And that's just what's happening around the world, as central banks have been recognizing that the U.S. is on a collision course with debt. The result is evident in the value of the U.S. dollar, which has collapsed over the past year. Foreign central banks have been dumping their dollars in favor of other currencies, as well as commodities like gold.

Of course, those foreign central banks still have huge holdings of U.S. Treasury securities. The U.S. remains the most stable country on the planet, and the safest place to hold assets during a crisis. And, the foreign central banks earn interest on the Treasury securities they hold. So far, they've kept holding our debt as the Fed pushes rates down to stimulate the economy.

All of the political candidates are rushing to give the American public their solutions to an economic slowdown. Most involve sending a check from the government, a rebate on the tax dollars that have been deducted from our paychecks all year long. In the long run, those checks will only increase the deficits, and thus increase our borrowing demand, eventually pushing rates higher.

The only other alternative is for the Fed to "print" (create) the extra money. That is the definition of inflation: excess money creation. As we all learned in the late 1970s, if inflation seems likely, lenders demand higher rates to compensate for the falling buying power of the currency.

If you're thinking the government is caught in a tight spot, you're right. In previous recessions the government could "stimulate" the economy and get growth back on track. Now, because we're so indebted to the rest of the world, our options are limited. If they won't buy our new debt, who will?

The American people need to ask their president, and their presidential candidates, how they'll deal with this tough issue.

Truth in Accounting Institute founder Sheila Weinberg says: "It isn't pretty. But we have to face the truth -- or we could face disaster." That's definitely The Savage Truth.

Wincing Dems are likely to raise the limit on debt

March 13th 2007 - Congressional Democrats are poised to take the politically uncomfortable but unavoidable step of raising again the federal debt ceiling, using the budget process to increase the nation’s credit limit even though they had hammered Republicans for making the same move in previous years.

Amid growing anticipation of the 2008 budget proposals from the chairmen who will navigate the path to conference, Sen. Kent Conrad (D-N.D.) and Rep. John Spratt (D-S.C.), the ticking clock of the federal debt limit has gone largely unnoticed. But the current ceiling of about $9 trillion is likely to be hit this fall, according to the Bush administration. Although any further raise has the potential to spark partisan and inter-chamber conflict, Congress must pass the hike to prevent the government from defaulting on its debt.

In a March 2 letter to the Senate Budget panel’s leaders, the Senate Finance Committee’s two senior members urged that Congress raise the debt ceiling through the budget reconciliation process.

“We recommend that the budget resolution include reconciliation instructions … to increase this statutory limit,” wrote Finance Committee Chairman Max Baucus (D-Mont.) and ranking member Chuck Grassley (R-Iowa).

In the closely divided Senate, where Republicans have already slowed down several popular measures, the reconciliation process would block a filibuster of the debt-ceiling bill and shield it from contentious amendments. At the same time, going the reconciliation route would prevent House Democrats from using the “Gephardt Rule,” a tactic that allows the lower chamber to raise the ceiling without taking a roll-call vote that could turn into attack-ad fodder next year.

Whether it’s the House or the Senate that takes the brunt of the burden on whipping a vote to raise the debt limit, attacks from Republicans eager to exploit any cracks in the Democrats’ fiscal discipline are a near certainty.

“The debt limit vote always becomes a carnival for the opposition party,” said Brian Riedl, budget analyst at the conservative-leaning Heritage Foundation. “The opposition always uses the vote to bludgeon the majority, and this year will be no different.”

Anticipating that criticism, Democrats are employing a response similar to the message they used during the continuing resolution debate earlier this year. They preemptively blasted detractors of that spending measure by condemning GOP leaders for “leaving a mess” by failing to finish the appropriations cycle during the 109th Congress.

“It would be very difficult for anyone to say that reaching the public debt limit this close to a Democratic takeover of Congress had anything to do with Democratic policies,” one House Democratic aide said. “There will be some who will make that argument … but their politics drove us to this point. We’re working to make it better.”

Senate Budget Committee Chairman Conrad pointed a finger at the president, saying via e-mail: “It is his borrow-and-spend policies that have resulted in the massive buildup of debt.

“Fortunately, Democrats are working to take this country in a better direction, one that restores fiscal responsibility,” Conrad added. “But it will take time to change Republican policies that have exploded deficits and debt.”

House Speaker Nancy Pelosi (D-Calif.) and other Democratic leaders blasted Republicans at the dawn of the 108th Congress when they reinstated the Gephardt rule after trumpeting its removal during the previous session. In another sign of things to come, House Minority Leader John Boehner (R-Ohio) signaled during his 2006 leadership campaign that he would push for a roll-call vote on all future debt-limit hikes.

One Republican aide forecast that the House would invoke Gephardt and use its budget resolution to increase the debt ceiling, the fifth hike needed since President Bush took office.

“Having reconciliation instructions gives us the option to pursue that if we choose,” the GOP aide said. “[But] historically, we’ve not done it. We take up the path of least resistance. … If I were making predictions, we’ll wait until the very last day that Treasury says [the current limit will last], and the Senate will pass the House-passed bill.”

Robert Bixby, chairman of the Concord Coalition, a nonpartisan budget-analysis group, said he would urge a recorded vote in both houses.

“It gives Congress an opportunity to assess the consequences of past actions,” Bixby said. “Having it go up automatically, while it’s politically convenient, avoids accountability for fiscal policy decisions. If Democrats really wanted to stick to their prior rhetoric, they should have an explicit vote.”

Meanwhile, House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) appeared to reference the Gephardt route in his own letter to the Budget panel.

“The committee notes that it has been the practice of the House to pass a resolution raising the debt ceiling to the level necessary to accommodate the assumptions of the resolution for its first fiscal year,” Rangel wrote.

Both Spratt and Senate Majority Leader Harry Reid (D-Nev.) declined through their offices to comment on which option Democrats currently favor to raise the limit.

The vote may be especially tough for Democratic presidential hopefuls such as Sens. Hillary Rodham Clinton (N.Y.) and Barack Obama (Ill.). The latter gave a floor speech last spring vilifying the higher credit limit.

“Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren,” Obama said. “America has a debt problem and a failure of leadership.”

Democrats’ ability to invoke Gephardt, however, hinges on their success at passing a budget conference report, which Republicans failed to do last year.

Congress Sets New Federal Debt Limit: $9 Trillion

March 16th 2006 - Faced with a potential government shutdown, the Senate votes to raise the nation's debt limit for the fourth time in five years. The bill passed by a 52-48 vote, increasing the ceiling to $9 trillion. The bill now goes to the president.

The debt now stands at more than $8.2 trillion.

Like many cash-strapped Americans who have maxed-out credit cards, the federal government has hit its limit for borrowing funds to keep operating. If the limit isn't raised, the government likely will run out of borrowing authority within days, risking a shutdown.

When President Bush took office five years ago, the national debt was at $5.6 trillion; since then, big budget surpluses have collapsed into huge deficits, and the debt has shot up nearly 50 percent.

Few lawmakers, though, wish to be on record as authorizing more debt -- the House goes so far as to hike the limit automatically. And Senate Democrats are telling their Republican counterparts not to expect any help from them, particularly in an election year.

If any amendments are attached to the Senate's debt measure, the House would be forced to vote on raising the limit -- the last thing many lawmakers seeking re-election want to be on the record as doing.

Treasury Secretary John Snow wrote congressional leaders last week, imploring them to immediately raise the $8.2 trillion debt limit. The House has put the new limit at $9 trillion.

U.S. moves to miss hitting debt ceiling

February 16th 2006 - The U.S. Treasury acted Thursday to avoid hitting the national debt limit and said it's "imperative" Congress raise the debt ceiling by the middle of March.

Treasury is suspending reinvestment in the so-called "G-Fund," an investment vehicle for a federal employees' retirement system. The action will free up $65.266 billion, a Treasury spokeswoman said.

"Without this action we would reach the debt limit today," spokeswoman Brookly McLaughlin said Thursday.

Congress and the Bush administration have been negotiating an increase in the current $8.18 trillion debt limit. On Wednesday Treasury said it would suspend sales of state and local government non-marketable securities.

Now Treasury Secretary John Snow is urging Congress to raise the debt limit by mid-March.

"I know that you share the president's and my commitment to maintaining the full faith and credit of the United States," Snow wrote to Senate Majority Leader Bill Frist, R-Tenn., on Thursday.

Beneficiaries of the government retirement fund won't be affected by the temporary halting of reinvestment, Snow explained to Frist. The fund will recoup all payments, including interest, Snow said.

"Once I am able to make the G-Fund whole, the effect on the G-Fund and its beneficiaries will be the same as if this temporary action had never taken place," Snow wrote to Frist.

Meanwhile, with the federal budget deficit projected to reach $423 billion in 2006, both Republicans and Democrats have so far balked at raising the debt limit.

Bush's Budget Sparks Bipartisan Protest

February 7th 2006 - The administration defended President Bush's $2.77 trillion budget plan on Tuesday against congressional attacks that the cuts it sought to deal with exploding budget deficits would unfairly harm government efforts in education, health care and farm programs.

Treasury Secretary John Snow, among leadoff witnesses in a series of congressional hearings, said the administration had made the tough choices to fund programs that were working and eliminate those that were not.

"This budget represents the president's dedication to fiscal discipline, an efficient federal government and the continuation of a thriving U.S. economy," Snow told the Senate Finance Committee.

But critics noted that the deficit for the current budget year would rise to an all-time high of $423 billion and they questioned Bush's projections for declining deficits in future years.

Democrats said Bush's proposed budget for Fiscal 2007, beginning Oct. 1, was seriously understating spending that will be needed to fight wars in Iraq and Afghanistan and did not include the billions of dollars needed in future years to make sure the alternative minimum tax designed for the wealthy does not pinch more and more middle class taxpayers.

Sen. Max Baucus, D-Mont., said the explosion of federal deficits was adding to the national debt, requiring the administration to come to Congress in the next few weeks to raise the $8.18 trillion debt ceiling. He said all of that debt is being financed more and more by foreigners.

"America is borrowing 80 percent of the world's annual savings. We are handing our children and our children's children a set of obligations they will owe to foreign central banks," Baucus told Snow.

Sen. Kent Conrad, D-N.D., produced charts showing that the amount of federal government debt held by foreigners before Bush became president totaled $1 trillion and now in the first five years of his administration has more than doubled.

Snow said the ability of the United States to pay interest on the debt was a function of the economy's size and the vitality of the nation's bond markets.

"There is no doubt given the deep and liquid capital markets of the United States, that we will continue to attract capital from investors around the world," the Treasury secretary told the committee.

Testifying separately before the Senate Armed Services Committee, Defense Secretary Donald H. Rumsfeld said the military must continue to change in order to defend against terrorists who could get a nuclear weapon or launch a biological attack.

"No nation, no matter how powerful, has the resources or capability to defend everywhere, at every time, against every conceivable type of attack," Rumsfeld said. "The only way to protect the American people, therefore, is to provide our military with as wide a range of capabilities, rather than preparing to confront any one particular threat.

Bush's budget, which was sent to Congress on Monday, has faced predictable criticism from Democrats but it is also facing attacks from Republicans.

Sen. Arlen Specter, R-Pa., called Bush's proposed cuts in education and health "scandalous" while Sen. Olympia Snowe, R-Maine, said she was "disappointed and even surprised" at the extent of the administration's proposed cuts in Medicaid and Medicare.

Bush's spending blueprint for the 2007 budget year that begins Oct. 1 would provide large increases for the military and homeland security but would trim spending in the one-sixth of the budget that covers the rest of discretionary spending. Nine Cabinet agencies would see outright reductions with the biggest percentage cuts occurring in the departments of Transportation, Justice and Agriculture.

And in mandatory programs _ so-called because the government must provide benefits to all who qualify _ the president is seeking over the next five years savings of $36 billion in Medicare, $5 billion in farm subsidy programs, $4.9 billion in Medicaid support for poor children's health care and $16.7 billion in additional payments from companies to shore up the government's besieged pension benefit agency.

Senate Finance Committee Chairman Charles Grassley noted that Congress has just completed a yearlong battle to achieve far smaller savings in Medicaid and Medicare and "any more reductions of a significant scope could be difficult this year."

Bush's budget would meet his twin goals of making permanent his first-term tax cuts, which are set to expire by 2010, and cutting the deficit in half by 2009, the year he leaves office.

Democrats, hoping to wrest control of Congress from the Republicans in this year's election, charged that Bush was forced into an austere spending plan because of the estimated $1.35 trillion over the next decade that it will cost to extend his first-term tax cuts, which Democrats claim primarily benefit the very wealthy.

In addition to strict limits on most discretionary, non-security spending in the budget, Bush sought drastic cuts or total elimination on 141 programs that would produce savings of nearly $15 billion in 2007.

The targeted programs included 42 in the area of education ranging from drug-free schools to federal support for the arts, technology and parent-resource centers.

Even previously favored agencies such as the National Institutes of Health were not immune from the budget knife with overall funding essentially frozen and many individual programs seeing budget cuts. That brought objections from groups ranging from the American Heart Association to the American Diabetes Association.

Bush's budget submission is just the opening round in what opponents are promising will be a spirited fight in Congress over spending priorities.

"The president's budget slashes resources for exactly the priorities we should be supporting _ groundbreaking medical research, health care for our seniors, and education for our kids," said Sen. Tom Harkin, D-Iowa.

Bush Seeking to Limit Spending Growth in 2007 Budget

January 10th 2006 - President George W. Bush is preparing a budget request for next year that officials say would carve savings from programs such as Medicare, NASA and agriculture, testing lawmakers' pledges to hold down spending in an election year.

Administration and congressional officials say Bush will propose more cuts in so-called entitlement programs as well as discretionary spending in fiscal year 2007, which begins Oct. 1, to hold down budget growth as the deficit swells with the cost of hurricane relief, the war in Iraq and subsidizing prescription drugs for senior citizens.

``Clearly, the rate of growth is going to be below the rate of inflation'' except for defense and homeland security, Senate Budget Committee Chairman Judd Gregg, a New Hampshire Republican, said in an interview.

The president may face resistance from Congress on cuts to entitlements, which cover broad categories of federal spending including crop subsidies, food stamps and health care for the elderly. Every seat in the House and one-third of those in the Senate is up for election in November and many of the programs have vocal constituencies, such as farmers and senior citizens.

``Policy is going to butt heads with politics this year,'' said Bill Hoagland, a budget analyst for Senate Majority Leader Bill Frist, Republican of Tennessee. Cuts in Medicare or other entitlement programs ``aren't politically saleable.''


The budget ``is going to call for sacrifices, no doubt about it,'' Treasury Secretary John Snow said today in Washington. ``The growth rate of things will be slowed. There will be some outright reductions.''

Snow declined to be more specific, and Scott Milburn, a spokesman for the Office of Management and Budget, wouldn't comment on possible spending cuts.

Bush submits his fiscal 2007 budget to Congress on Feb. 6. It likely will total about $2.7 trillion, based on Congressional Budget Office projections. The president previewed some of his plans in recent addresses.

Entitlement programs -- those which pay benefits to whoever qualifies under the law -- are growing faster than the country's ability to pay for them, Bush said in Chicago Jan. 6. The next day, in his weekly radio address, the president said, ``We do not need to cut entitlements, but we do need to slow their growth.''

Proportional Savings

Gregg said he supports to push for holding down entitlement spending, which amounted to about $1.3 trillion in fiscal 2005. Medicare, Medicaid and Social Security account for about 60 percent of the federal budget, he said, so they should account for 60 percent of budget savings.

``Future restraint should be in proportion to spending,'' he said.

Bush's budget proposal may seek trims in Medicare by cutting doctor reimbursement rates, a Senate Republican aide said, speaking on condition of anonymity. Winning approval in Congress may be difficult. Senate Republicans needed Vice President Dick Cheney in December to cast a tie-breaking vote to approve $39.7 billion in cuts to benefit programs.


The reductions were opposed by Democrats and some Republicans such as Senator Olympia Snowe of Maine.

``She wouldn't want the beneficiaries to bear the brunt of cuts,'' in any new proposal affecting Medicare or Medicaid, said Preston Hartman, Snowe's spokesman. Snowe would also object to any cuts to food stamps, he said.

Gregg said White House budget director Joshua Bolten also will propose reducing or eliminating more low-priority or poorly performing programs. Last year Congress agreed to reduce or end 89 of 154 programs proposed for cutting by Bolten for a savings of $6.5 billion, according to the White House.

``Yes, there's no question'' that such programs will be targeted again, said Gregg, who has made deficit reduction one of his priorities. Gregg, who said he has conferred with Bolten in recent weeks, declined to give details.

Farmers and environmentalists should expect a further tightening of the Agriculture Department's budget. There's an effort to slash spending in everything from crop subsidies to crop insurance to conservation programs, said an administration official involved in the budget process who spoke on condition of anonymity.

NASA Supporters

The budget office also aims to reduce spending on the Space Shuttle program, slicing as much as $6 billion from the projected cost of almost $70 billion in the next four years.

Illustrating the resistance to budget cuts, members of Congress from Texas and Florida, where two of NASA's largest facilities are located, are seeking to head off trims. Republicans including former Majority Leader Tom DeLay and Senator Kay Bailey Hutchinson have written to Bush or spoken with Bolten in the past few weeks. DeLay also has lobbied Vice President Dick Cheney, according to DeLay spokesman Ben Porritt.

A reduction of as much $6 billion ``would mean the immediate retirement of the Shuttle Atlantis and a cut of the needed 19 Shuttle missions to between eight and 11 through fiscal 2010,'' a letter signed by 36 lawmakers said.

The cuts will be proposed as a new raft of spending swells the deficit. Congress has already approved about $62 billion in aid and reconstruction funds, mostly for Hurricanes Katrina and Rita. The new prescription drug benefit under Medicare is estimated to cost $724 billion over 10 years, with as much as $40 billion this year, depending on signup levels.

Iraq Costs

The White House also will request an extra $50 billion to $80 billion for the war in Iraq, and there will be pressure to provide subsidies for heating costs for low-income households, according to the Senate aide.

In addition, congressional efforts to overhaul the alternative minimum tax to prevent more than 15 million taxpayers from paying higher taxes because of inflation would mean the loss of more than $30 billion in revenue.

As a result, the average estimate of five Wall Street economists is for a fiscal 2006 deficit to swell to about $365 billion, falling to $357 billion in fiscal 2007.

The president, in Chicago last week, maintained his pledge to cut the deficit in half to $260.5 billion by 2009. Some budget experts say that's a stretch.

``They're not going to get there by nibbling around the edges,'' said Brian Riedl, budget analyst at the Heritage Foundation, a conservative think tank in Washington that typically supports Republican presidents. ``It's going to take serious reform to reach that goal.''


The deficit shrank to $319 billion in 2005, 2.6 percent of the gross domestic product, from a record $413 billion the year before. It was the first decline since Bush took office.

Hoagland, the budget analyst for Frist, predicts this year's deficit will climb to about $370 billion, or around 2.8 percent of the gross domestic product, and decline in fiscal 2007 to about $350 billion, or 2.6 percent of GDP.

Gregg said the deficit goal will be in reach as spending on Iraq and disaster relief lessens in future years.

``Once you curtail spending on Katrina and Iraq, you've really put some glide-path mechanism in'' for reduced spending, Gregg said.

U.S. hovers close to its debt ceiling

January 8th 2006 - If consumers are overextended with credit, they're not alone. The U.S. government is poised to exceed its charge card limit and may have to quit paying its bills unless Congress raises the national debt limit soon.

That's what Treasury Secretary John Snow said in a recent letter to Congress, warning that unless the current $8.2 trillion debt ceiling is raised by mid-March, "we will be unable to continue to finance government operations."

In the last 50 years, the United States has raised its debt ceiling more than 70 times, and budget watchers say lawmakers have become expert at delaying or disguising this politically perilous task.

"The antics they go through are incredible, and they've gotten worse,'' said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget in Washington, D.C.

For instance, in his Dec. 29 letter, Snow said that while the debt limit "will be reached in mid-February 2006," he could delay default for a month using "available prudent and legal actions."

These actions, MacGuineas said, would include putting IOUs instead of cash into federal retirement accounts -- a tactic that Clinton administration Treasury Secretary Robert Rubin first employed in 1996, when Republican lawmakers balked at raising a debt ceiling then at $4.9 trillion.

Back then, some lawmakers in the Republican-controlled House of Representatives called for Rubin's impeachment, saying his action usurped the powers of Congress. But in 2002, when the Bush administration was about to hit the $5.95 trillion debt limit it inherited from President Bill Clinton, then-Treasury Secretary Paul O'Neill employed Rubin's tactic to buy time until Congress raised the debt ceiling to $6.4 trillion in June.

Alas, that limit lasted just 11 months. In May 2003, Congress authorized borrowing of $7.4 trillion. In November 2004, lawmakers upped the credit ante to $8.184 trillion. Now, Snow says the limit must be raised yet again to protect "the 'full faith and credit' of the United States."

Late last year, the Republican-controlled House of Representatives wrote a $781 billion increase in the debt ceiling into its budget. The Senate, also controlled by Republicans, has yet to act.

The federal debt is so mind-boggling it's no wonder lawmakers would rather not think about it. In per capita terms, the current debt is about $27,000 for each of 298 million Americans.

But economists tend to look at the national debt as a percentage of the gross domestic product -- the sum total of all goods and services. This links the debt level to the nation's ability to pay and factors out inflation over time.

By this measure, the national debt has ebbed and flowed with world and political currents. According to historical tables in the 2006 federal budget, debt peaked at 121.7 percent of GDP in 1946 because of World War II spending. It fell to about 33 percent of GDP in 1980, then roughly doubled to the 60 percent range during the administrations of President Ronald Reagan and the first President George Bush.

After hitting 67.3 percent of GDP in 1996, a few rare budget surpluses during the Clinton era drove the national debt back down to about 57 percent in 2001.

Debt as a percentage of GDP turned up again as the Bush administration began running deficits and now stands at an estimated 65.7 percent of GDP. The 2006 budget forecast predicts that the national debt will be 70 percent of GDP in 2010.

Nonpartisan budget watchers say the current debt load isn't the problem. They worry about what happens after 2010, when retiring Baby Boomers begin placing demands on Social Security and Medicare.

"It's not where we are. It's the trajectory we're on,'' said Douglas Holtz-Eakin, who just stepped down as head of the Congressional Budget Office, the nonpartisan research arm of Congress.

As his last official act, Holtz-Eakin sent Congress six scenarios that look at federal spending and debt through 2050. All six assume that Social Security benefits will be paid as required by current law. The differences lie in how much inflation occurs in Medicare and Medicaid; higher or lower levels of taxation; and whether, or how deeply, Congress curbs spending on defense and other programs.

The scenario that follows current trends leads to an eye-popping national debt of 449 percent of GDP in 2050. Seen another way, in this business-as-usual scenario, it would cost 21.4 percent of GDP to pay just the interest on the federal debt in 2050. In 2005, the comparable figure was 1.5 percent.

Other scenarios make what Holtz-Eakin calls the "miraculous" assumption that medical cost inflation will fall below current levels, or count on politically tough choices to raise taxes or cut many spending programs.

"There is no single lever one can pull to bring the spending level into balance,'' he said.

Brookings Institution economist Alice Rivlin was founding director of the Congressional Budget Office in 1975 and was vice chair of the Federal Reserve Board in the late 1990s. She agreed with Holtz-Eakin that the current debt load isn't really the problem.

"The scary part is that there doesn't seem to be any prospects for getting the deficit under control,'' Rivlin said, adding that in this light, "raising the debt ceiling is a sort of red flag that says, 'You've got a real problem here.' "

But political leaders have become adept at keeping that red flag from attracting too much attention. When Snow wrote Congress before the new year, there were few on Capitol Hill to read his letter or the retort by Rep. James Spratt, D-S.C., the ranking Democrat on the House Budget Committee, who blamed the Republican-run White House and Congress for "a 50 percent increase in the statutory debt, all accumulated on the Bush administration's watch."

Budget watcher MacGuineas said the ceiling must be raised. To do otherwise would cause a financial crisis. But it will be done as quietly as possible, to avoid discussion of the tough choices that must ultimately be made.

"What bothers me most is the generational aspect," she said. "We are leaving an economy with huge debt, huge promises. And it's only going to get worse."

Deficit cracking GOP's solidarity

November 27th 2005 - More than a decade after the Republican Revolution, when Newt Gingrich became House speaker on the promise to downsize government, Republicans are facing another revolution.

This one is from within.

When Congress returns next month from its Thanksgiving recess, Republican leaders who have never failed to marshal their forces on big party-line votes face the prospect of defeat on tax cuts and spending restraint -- the core issues that have united the party since President Ronald Reagan and gave them their House majority in 1994.

They have lost some tax and spending votes already, and postponed others because of the specter of losing. After a five-year spending spree on everything from the Iraq war to Medicare, deficits are now jeopardizing the tax cuts that were the centerpiece of President Bush's first term.

A move to preserve tax cuts on capital gains and dividends -- the gemstone of the Bush tax cuts for conservatives -- is in trouble in both the House and the Senate. For the first time since George W. Bush took office, House Democrats are united against tax cuts, and Republican moderates are bucking their party leadership.

GOP leaders are pushing a measure to control entitlement spending by shaving Medicaid and food stamps for the poor. But the combination of investor tax cuts and reductions in poverty programs has already led to a series of embarrassing defeats in committee and on the House floor. Republicans are headed for a pre-Christmas showdown that could turn into a political disaster.

Hurricane topples plans

Hurricane Katrina last summer was a tipping point. The storm forced Republicans to ditch the estate tax repeal because it was deemed unseemly to end a wealth tax after poor people had lost their homes. Sensing a public relations disaster, Republican leaders also postponed extending the investor tax cuts until the end of the year.

Congress quickly passed $62 billion in emergency disaster relief. But Bush's promise to "do whatever it takes" to rebuild the Gulf Coast set off a rebellion among conservatives, who demanded spending cuts to pay the bill.

"I think they blinked after Hurricane Katrina," said Brad Woodhouse, a liberal activist who helped defeat Bush's Social Security overhaul and has turned his fire on the Republican budget, heading a liberal alliance called the Emergency Campaign for American Priorities.

"It was such an acknowledgment of how inappropriate these spending cuts to finance tax cuts are," Woodhouse said. "It was like blood dripping in the water for us."

The budget outlook -- and the problems facing the GOP -- promise to get much worse. Medicare's costly new prescription drug benefit, an $18 trillion unfunded liability sponsored by the White House and Republican leadership, starts in January. Just two years from now, in 2008, the enormous Baby Boom generation will begin retiring, ceasing income tax payments and starting to collect benefits, leading to a budget squeeze unprecedented in U.S. history.

"We're seeing the future," said Bruce Bartlett, a former Treasury official in the George H.W. Bush administration and tax-cut advocate. "The decisions that have been made over the last five years have resulted in the chickens coming home to roost."

Total spending increases under the current President Bush closely rival those of President Lyndon Johnson, a Democrat famous for conducting the Vietnam War while simultaneously increasing domestic spending.

Discretionary spending rose 48.5 percent in Bush's first term, according to an analysis by the libertarian Cato Institute, twice as much as in two terms under President Bill Clinton, when spending rose 21.6 percent. Adjusted for inflation, Bush has increased total spending at an annualized rate of 5.6 percent, compared with 1.5 percent under Clinton.

"It's only a matter of time before we stop talking about cutting taxes for a very long period of time and talk basically about increasing taxes," Bartlett predicted. "The end of the era of tax cutting is going to put tremendous strain on the Republican coalition, just as the end of the era of big spending put tremendous strain on the Democratic coalition" in the 1980s. "You're hearing more and more people on the Republican side talking about major losses in the congressional elections next year and about 2008 being a really, really bad year for Republicans."

In the two months since Republicans pulled their tax cut bills, the atmosphere has only gotten worse. Republicans lost two important off-year gubernatorial elections in Virginia and New Jersey. Bush's popularity has hit new lows, with the public now decidedly opposing the Iraq war. Leading GOP candidates, including Sen. Rick Santorum, a conservative member of the Senate leadership who faces a tough re-election fight in Pennsylvania, have refused to appear with Bush at campaign events.

"Republican members of Congress recognize that the president can't help them very much any more," said Cato Institute Chairman Bill Niskanen, a former Reagan administration economist. In addition, the indictment of former House Majority Leader Tom DeLay seriously weakened party discipline in the House and exposed deep divisions between fiscal conservatives and moderates.

"There is a substantial ideological split, particularly among House Republicans, on fiscal responsibility," Niskanen said. "A lot of them have gone along with a high rate of growth of spending but have done so without any enthusiasm."

As the post-Katrina conservative revolt gelled, the Republican leadership turned to Medicaid, food stamps and student loans for spending restraint. The Senate is proposing $35 billion in reductions and the House $50 billion; both chambers are also seeking between $56 billion and $59 billion in tax cuts.

Large gap to cross

There are enormous differences between the House and Senate on both measures. Reconciling them will be very difficult in the two weeks Congress has left before adjourning for Christmas.

Combined, the measures increase the deficit. The spending restraint appeased conservatives but provoked an outcry from Democrats and GOP moderates. Efforts to console moderates by dropping a measure for oil exploration in the Arctic National Wildlife Refuge and adding subsidies for home heating costs and dairy farmers have done little but stoke more controversy.

The Medicaid and food stamp cuts have attracted the most fire, and barely passed the House 217-215 before Thanksgiving, with no Democratic support. Republicans recessed before attempting to pass the tax cuts.

Much of the roughly $11 billion in cuts over five years proposed by the Senate for Medicaid, a health care program for the poor that many elderly use to pay nursing home costs, were recommended by state governors. They contend the program is becoming burdensome for the states, which must come up with money to match federal funding. Democrats have portrayed the reduction in the growth of Medicaid spending as dire, but even liberal analysts concede they are not severe. One provision would increase co-payments from $3 to $5, and another would allow elderly nursing home residents to shield $750,000 in home equity, raised from $500,000 after Republican moderates objected.

The cuts are "not awful," said Jason Furman, a former adviser to Democratic presidential candidate John Kerry now at the liberal Center for Budget and Policy Priorities.

"It's less about the magnitude and more about why should you be asking poor people to pay anything more for health care at the same time that you're giving brand-new tax cuts to the most fortunate," Furman said. "That is what is just completely wrong with this picture.

"A go-it-alone Republican strategy works when you're trying to cut taxes or increase spending, but when you're trying to make tougher choices, the only way to do it is to work together with the other party for shared sacrifice," Furman said. "Budget reality is starting to catch up with the Republican Party."

Heavy U.S. borrowing with much more on the horizon is stoking concern about a potential financial crisis. Any one of several big economic imbalances -- including looming pressures on the federal budget, the zero U.S. savings rate, the historically high trade deficit, a real estate boom that has supported consumer spending -- could provoke a sudden financial shift, economists say.

"It's not unrealistic to think that if we continue to delay -- and the Baby Boomers do start to retire as early as 2008 -- that sooner or later the lenders to this country may decide it's not the best place to park all their savings," said Maya MacGuineas, director of fiscal policy for centrist New American Foundation.

Bartlett warns of a "financial Katrina."

"It's just a matter of time before we have some kind of economic event that I think is just going to change the political situation 180 degrees and make deficit reduction the order of the day," he said. "I don't know what it will be. I just know that when you've got gasoline spilling onto the floor of your house, it doesn't really matter where the spark comes from."

$7,782,816,546,352 debt just an IOU

April 10th 2005 - This week, President George W. Bush went to the Bureau of Public Debt, in Parkersburg, West Virginia, to make the point that there is no Social Security trust fund -- nothing there that can be really counted on. All it is, he said, was a bunch of IOUs. Parkersburg is a river town near the Ohio border, where the Ohio and Little Kanawha Rivers meet, and it is something of an irony that the one presiding over the largest explosion in federal budget deficits would use the Bureau of Public Debt as a backdrop for his plea for solvency in Social Security.

But the bureau may indeed serve as a confluence of many of the serious problems confronting the country over the long term: booming deficits fueled by wildly out-of-balance federal budgets and reckless, sometimes dishonest federal fiscal policy. This week in Washington, the GOP leadership in Congress is continuing its efforts to come up with a budget resolution for the next fiscal year, a blueprint of priorities that will also look out at the next five years. There is some question about whether they can come up with a deal that they can sell to the disparate and increasingly rowdy elements of their party.

The Senate and House plans reveal sharp ideological disagreements, and both plans differ in important ways from the president's budget blueprint. In two of the last three years, Congress was unable to produce a budget resolution, the basic framework of how the federal government will spend and raise money. This year, the GOP has a lot of incentive to pull it off. A budget resolution will give them the opportunity to pass a lot of controversial initiatives [drilling in the Arctic National Wildlife Refuge and making tax cuts permanent] by a simple majority, since budget bills can't be filibustered.

Without the budget resolution, those proposals face Democratic filibuster and will likely die. Regardless of how it is sliced and diced, we are looking at an annual deficit of $368 billion this year and a 10-year projected deficit on $1.35 trillion, according to the Congressional Budget Office. And none of these numbers include the cost of the continuing military operations in Iraq and Afghanistan.

The president's suggestion in Parkersburg, that the $1.7 trillion in Treasury bonds held by the Social Security Administration is "not a pot on money to be drawn on," is a scary proposition. It not only threatens the future of Social Security, but it also goes to the heart of the debate over the long-term health and viability of the national economy. Debt and deficits, colliding with the spiraling costs of entitlements -- Social Security, Medicare, Medicaid, farm subsidies, student loan programs -- may mean we are headed for desolate economic shoals.

Newsweek's Robert Samuelson envisions it as an "and economic and political death spiral."

And when one considers how deficit concerns dominated the politics of the 1990s, it is remarkable how sanguine we are faced with the current situation. Remember that giant sucking sound? It has fallen quiet. The first President Bush agreed to a $500 billion deficit reduction plan that required him to raise taxes, breaking a no-tax pledge that may have cost him his presidency. But he may have made it easier for Bill Clinton to go down the same road two years later, in 1993, when he negotiated another $500 billion deal to reduce the deficit over five years. That solidified Clinton's reputation as a good economic steward and may have saved his presidency later.

And in 1994, it was largely over concern about the size of the federal government that allowed the Republicans to take control of Congress. Deficits politics turned to surplus politics, making it easier for George W. Bush to get his record-level tax cuts.

These days, there is nothing on the table worthy of the name "deficit reduction," but there is growing concern. Conservative GOP budget hawks in the House -- embarrassed by the tarnish that the deficits puts on their reputation as the party of smaller, cheaper, more responsible government -- have been challenging their leadership to more aggressively address the deficit problem. The comptroller general of the General Accounting Office, David Walker, has been saying the solvency problem in Social Security is essentially a small stream headed for a much bigger river.

"First, [Social Security's] financial challenge is a subset of our nation's financial and fiscal challenge," Walker told a House tax panel recently. "Social Security has an estimated unfunded commitment in current dollar terms for the next 75 years of $3.7 trillion. ...That compares with a roughly $43 trillion problem for our country."

So the problem is not just that Social Security may not be able to mail out monthly checks someday in the distant future but that, more perilously, the federal government may find itself so mired in debt that the whole economy just slowly grinds to a halt.

Walker says that without significant reforms we could end up with a federal budget almost entirely committed to interest payments. "[W]e could be doing nothing more than paying interest on federal debt in 2040 if we don't end up engaging in some fundamental reforms of entitlement programs, mandatory spending, discretionary spending and tax policy," he says.

If we assume the Treasury issues are the same as a trust fund, because they are backed by the U.S. government, then the real problem with Social Security is almost a half-century away.

If there is a question about the reliability of those bonds down the road, then you are talking about a larger set of problems: There may come a time when the federal government might not be good for its IOUs.

"Four years ago, the Bush administration inherited a projected 10-year budget surplus of $5.6 trillion," says House Minority Whip Steny Hoyer. "Since then, we have run record deficits of more than $400 billion a year, and Congress has been forced to increase the national debt limit three times. Even worse, the administration and Congress have no real plan to rein in deficits and debt. This threatens our investments in issues important to our communities -- on everything from health care to our national security."

Walker made an interesting point when he recently appeared before the House Ways and Means Committee: The Social Security Trust Fund has IOUs because the Federal government spends, every year, hundreds of million of surplus payroll taxes collected for Social Security. These days, that means the federal deficit looks smaller that it actually is. In 2008, those surpluses begin to dwindle.

"And since Congress has, for a number of years, spent every dime of the surplus on other operating expenses," said Walker, "that means it will increasingly put additional pressure on the balance of the federal budget starting in 2008."

That's about the time an almost-62-year-old George W. Bush heads back to Texas to begin his retirement and, sooner or later, to start cashing those Social Security checks.

The day Bush was sworn into office in 2001, the national debt was $5.7 trillion, and there was a surplus. On the day he showed up in Parkersburg, it had climbed to $7,782,816,546,352.29. That is seven trillion, seven hundred and eighty-two billion, eight hundred and sixteen million, five hundred and forty-six thousand, three hundred and fifty-two dollars, and twenty-nine cents.

But it's just an IOU.

Bureau Of Public Debt: Surrounded by IOUs

April 7th 2005 - The president of the United States told the world that the government doesn't believe in its own debt instruments.

"There is no trust fund," President Bush said as he toured the U.S. Bureau of Public Debt in Parkersburg, W.Va. The paperwork in a file cabinet that Bush peeked into represents $1.7 trillion in payroll tax surpluses. This is what he dismissed as "just IOUs that future generations will pay for in higher taxes or reduced benefits or cuts in other future programs."

This statement is extraordinary -- and damning.

Our entire economic system is based on "just IOUs." What's a mortgage? Just an IOU. What's a bond? Just an IOU. Is the president really advocating that the United States renege on all its debt instruments? Or only those debts involving Social Security?

What's particularly troublesome about the president's "filing cabinet" theatrics is that his very proposal does nothing to solve the problem he's showcasing. Converting a portion of Social Security into private accounts will not solve the program's demographic deficit or improve its long-term solvency. The only way to fix those problems is to increase the age of retirement, reduce benefits to the baby boom generation or some combination of both.

The trust fund obligations are legal U.S. debt. Any solution to Social Security -- and Medicaid, Medicare and the growing problem of pension insurance -- must recognize every debt already incurred. Anything less is called default.

Just an IOU? The same could be said about stock certificates, the U.S. dollar or even private investment accounts.

Bush's agenda faces opposition from election-wary Republicans

April 4th 2005 - The tightly disciplined, Republican-controlled Congress that gave President George W. Bush key pro- business victories in the first few months of his second term may now put political survival ahead of party unity.

Bush has outlined an aggressive agenda -- including restructuring Social Security, cutting a record budget deficit and easing immigration policies -- that he hopes will secure his legacy for posterity. His party's lawmakers have a simpler goal: winning re-election and maintaining or enlarging their House and Senate majorities in 2006.

``Bush sees himself as a consequential president in history who accomplished big things,'' says Bill McInturff, a Republican pollster. ``Most members of Congress can be very happy just strolling along saying, 'Here is all the money I delivered to my district.'''

Congressional Republicans are pushing for legislation to allow drug imports from Canada, a measure opposed by Bush and drug makers such as Pfizer Inc. and Merck & Co. Bush also faces resistance on his plan to ease immigration laws, which food- service companies such as Outback Steakhouse Inc. and Wendy's International Inc. support. And Wall Street analysts and economists hoping for measures to restrain the budget deficit are concerned that lawmakers facing re-election won't be inclined to cut spending.

``There are some great challenges,'' White House spokesman Trent Duffy says. ``This president is a big-game hunter. The process is just beginning.''

The Republicans, who gained expanded majorities in both chambers of Congress in the November elections, gave Bush some early successes this year with measures that curbed class-action lawsuits, rewrote bankruptcy laws and paved the way for oil drilling in Alaska's Arctic National Wildlife Refuge.

Easy Wins

These ``were easy wins that were left over from the last Congress,'' says Ethan Siegal, president of the Washington Exchange, which tracks policy for institutional investors. ``Everything else Bush has on the table is very difficult, and the discipline in his party is breaking apart.''

The first stirrings of dissent were heard when lawmakers took up Bush's 2006 budget, which calls for trimming federal benefits and other domestic programs while extending portions of his first-term tax cuts.

Last month, Senator Gordon Smith, an Oregon Republican, led six other Republicans in blocking Bush's plan to cut $14 billion from the Medicaid health program over five years. And when a Senate committee approved Bush's $284 billion highway bill, Senator James Inhofe of Oklahoma assured his fellow Republicans that the funding may be increased later.

Drug Imports

Republicans are also at odds with Bush's position on allowing Americans to import cheaper drugs from Canada. Senator Charles Grassley of Iowa, the powerful chairman of the Finance Committee, is pushing for legislation that would allow the imports, which Bush and drug makers oppose.

Representative Jo Ann Emerson, a Missouri Republican, says she is confident the bill allowing imports can clear the House. Lawmakers' ``constituents are saying, find any means possible to bring down the cost of drugs,'' she says.

Drug makers such as New York-based Pfizer, Whitehouse Station, New Jersey-based Merck and Madison, New Jersey-based Wyeth say the measure won't adequately address these concerns. ``We don't believe that re-importation is a solution to the problems of access and affordability of medications,'' Wyeth spokeswoman Natalie De Vane says. ``And it does pose a safety risk.''

Bush's call for a guest-worker visa program aimed at allowing migrants to fill low-skilled jobs may be the toughest to pass, because so many Republicans are opposed to it, says Bruce Josten, the head lobbyist at the U.S. Chamber of Commerce in Washington.

Opening Floodgates

Representative John Hostettler, an Indiana Republican who heads the House Judiciary Subcommittee on Immigration, said he wouldn't allow any bill easing immigration to be brought before his panel for a vote. ``It is my concern and others' concerns that if you legalize those who have illegally obtained residency here, you will open the floodgates,'' he said in an interview March 31.

The National Restaurant Association, which represents companies such as Tampa, Florida-based Outback Steakhouse and Dublin, Ohio-based Wendy's International, backs Bush's plan. The food-service industry is the largest U.S. employer of undocumented workers -- about 1.4 million of the nation's 8 million immigrants.

Second-Term Blues

These kinds of defections are common in a president's second term, particularly when his party is in power in Congress, says Stephen Wayne, a government professor at Georgetown University in Washington. In four of five second-term mid-term elections since World War II, the party that controlled the White House has lost seats in both chambers, says Jennifer Duffy, an analyst at the Cook Political Report, which tracks political races.

Most lawmakers are aware of this phenomenon, called the ``sixth-year itch,'' Duffy says, and Republicans will cast their votes on Bush's agenda items with this precedent in mind. ``It's a self-preservation issue,'' she says.

There are 15 Republican-held Senate seats on the ballot next year. In the House, where all members are up for re-election, 24 Republicans won their 2004 elections with 55 percent of the vote or less.

This dynamic is already evident in the voting behavior of Senator Rick Santorum of Pennsylvania, the No. 3 Senate Republican leader, who is expected to face a tough re-election contest in 2006 from Democrat Robert Casey Jr., the state treasurer.

Good for Pennsylvania

Santorum has parted ways with the president at least twice in the last month. He proposed a $1.10-an-hour increase to the $5.15-an-hour minimum wage, and voted in favor of an amendment to a 2006 budget plan that rejected Bush's call to cut nearly $2 billion from the Community Development Block Grant program and other economic development programs that are popular in his state.

``You're going to see him deviate on things that make sense for Pennsylvania,'' Duffy says.

Perhaps most significant for Bush's legacy, his plan to establish private Social Security accounts has failed to generate a critical mass of support. The proposal has proved unpopular in the polls, and Republican lawmakers including Representative Jim Nussle of Iowa and Representative John Mica of Florida have not made commitments to support it.

Wall Street Worries

Some Republicans share Wall Street's concern over the effect of the proposal on the budget deficit, which reached a record $412 billion last year. Any plan to create the accounts would add $1 trillion to $2 trillion to the deficit over the next 10 years, according to the Congressional Budget Office.

``The longer we continue to allow the public debt to rise, the more painful the ultimate cuts will be,'' says Lou Crandall, chief economist at Wrightson ICAP LLP, a research firm in Jersey City, New Jersey, that analyzes the effects of federal economic policies.

For many Republicans, though, concern about the deficit is mitigated by the desire to avoid the political pain that spending cuts or moderating Bush's tax cuts would entail.

During last month's Senate debate on Bush's request to extend his $1.85 trillion in tax cuts, only five Republican senators joined the chamber's 44 Democrats and one independent to demand that further reductions be offset by tax increases or spending cuts. While the Senate rejected, 50-50, an amendment to the fiscal blueprint requiring offsets, some Republicans plan to fight again this summer when party leaders advance the legislation.