America's National Debt

Obama's Achilles Heel: China

2010-02-17T14:34:00.000-08:00

UNITED STATES - The US National Debt continues to go up $3.87 billion USD per day and is currently hovering around $12.4 trillion.

The problem is its going to continue to skyrocket as long as the United States is fighting off a recession, two wars and high oil prices. US President Barack Obama thus has his work cut out for him, problems left behind by George W. Bush, and his problems are quantified by the statement that "Most Americans don't buy American, they buy Chinese."

"Most Americans don't buy American, they buy Chinese."

That is not completely true. What is true that on average the USA imports $2 trillion USD worth of products every year of which approx. $300 billion is from China (approx 15%).

That is peanuts when you realize the USA only exports an average of $65 billion to China annually. The end result is an annual trade deficit of $235 billion taken out of the American economy and bolstering China's economy.

China is not the only country that enjoys a trade deficit with the United States. Japan, South Korea and numerous other countries trade heavily with the USA, often in products that Americans "need" in terms of electronics, but also a lot of products that could be made in North America but has been outsourced instead.

What the USA needs is more factories inside America that is hiring people, making products Americans can use (preferably products and equipment that will make them more competitive internationally) and are priced fairly.

Otherwise what we're opening ourselves up to is to communism... Oh dear, I said it. The dreaded C-word.

If the USA cannot shake off the recession and high unemployment rate America's economy will continue to flounder and will eventually be forced to create a more socialist-based economy as capitalism falls apart. This means government "work-fare programs", huge cutbacks to arts & culture funding (including Hollywood), an increase in food stamp usage, and a skyrocketing crime rate as Americans become more desperate for survival.

The 1st thing the USA needs to do is put a halt on all free trade discussions with Asia. America isn't ready for such big trading partners. The economy is too fragile right now.

The 2nd thing the USA needs to do is find cheaper alternatives to expensive oil. Oil prices are simply too high and its hampering transportation costs of materials/products. Hydrogen power perhaps.

The 3rd thing the USA needs to do is cut taxes on the poor, increase taxes on the rich. The poor will spend every dollar they have anyway, whereas the rich have a tendency to stick their money in the bank and sit on it.

The 4th thing is create tax breaks for companies that operate solely in the USA. This will benefit small businesses and new startups.

The 5th thing the USA needs to do is enforce mandatory retirements. Old people who keep working when they should be retired are essentially stealing jobs from younger Americans. Exceptions can be made for industries that have a shortage (ie. doctors), but otherwise these people need to be put out to pasture.

The end goal is to get more Americans working and building things again, creating opportunities for a new generation of hard working Americans.

China passes Japan as largest creditor for US National Debt

2008-11-20T23:41:00.000-08:00

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

2008-11-09T10:00:00.000-08:00

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

2008-11-09T09:58:00.000-08:00

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

2008-11-09T09:56:00.000-08:00

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

2008-11-09T09:54:00.000-08:00

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

2008-11-09T09:52:00.000-08:00

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

2008-11-09T09:51:00.000-08:00

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

2008-11-09T09:48:00.000-08:00

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

2008-11-04T22:24:00.000-08:00

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

2008-09-21T11:47:00.000-07:00

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

2008-09-14T14:26:00.000-07:00

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

2008-09-14T14:25:00.000-07:00

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

2008-09-14T14:23:00.000-07:00

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

2008-09-14T14:21:00.000-07:00

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

2008-09-14T14:20:00.000-07:00

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

2008-09-14T14:19:00.000-07:00

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

2008-09-14T14:17:00.000-07:00

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

2008-09-14T14:16:00.000-07:00

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.''

`Sacrifices'

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.

Opposition

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.''

Deficits

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

2008-09-14T14:15:00.000-07:00

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

2008-09-14T14:12:00.000-07:00

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

2008-09-14T14:11:00.000-07:00

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

2008-09-14T14:09:00.000-07:00

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

2008-09-14T14:07:00.000-07:00

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.

Does Social Security Really Face an $11 Trillion Deficit?

2008-09-14T14:04:00.000-07:00

January 21st 2005 - Bush and Cheney say yes. But actuaries say the figure is "likely to mislead" the public on the system's true financial state.

President Bush and Vice President Cheney have told audiences that Social Security faces an $11 trillion shortfall if nothing is done to fix the current system. But they fail to mention that this is over the course of the “infinite future." Over the next 75 years -- still practically a lifetime -- the shortfall is projected to be $3.7 trillion.

The "infinite" projection is one that the American Academy of Actuaries says is likely to mislead the public into thinking the system "is in far worse financial condition than is actually indicated," and therefore should not be used to explain the long-term outlook.

In a roundtable conversation on January 11, the president said the Social Security system “is going to be short the difference between obligations and money coming in, by about $11 trillion, unless we act.”

Vice President Cheney echoed this claim in a January 13 speech at Catholic University when he said, “Again, the projected shortfall in Social Security exceeds $10 trillion.”

Both are correct -- but fail to mention that nearly two-thirds of that colossal bill doesn't come due until after the year 2078.

The Trustees Report

The projection comes from the 2004 Social Security Trustees report which estimates that the system’s unfunded obligations are $10.4 trillion over the course of what they call the "infinite horizon." Historically, the infinite-horizon projection has not been included in the annual report, and was only added in 2003.

Previously the Trustees had used only a 75-year projection to estimate the system’s long-term deficits, roughly the length of a human lifetime. (Average life expectancy at birth has now increased to just over 77 years, up from just under 75 years as recently as the 1980's, according to the National Center for Health Statistics.) The Social Security Trustees' 2004 projection shows a $3.7 trillion shortfall over this 75-year period.

The Trustees reasoned that the 75-year window should be extended to the infinite future to give policymakers a better idea of the changes necessary to keep the system sustainable indefinitely -- especially beyond 2078 when they said Social Security’s deficit will be increasing even faster than during the next 75 years.

A technical panel set up to advise the Social Security Administration later said that infinite-horizon model is useful but “it is difficult to understand." The panel recommended that the infinite-horizon calculations be expressed more prominently as a percentage of the taxable payroll rather than the actual dollar amount. Referring to the 2003 trustees report, the panel said:

Technical Panel on Assumptions and Methods: The Report also briefly mentions the infinite horizon actuarial deficit of 3.8 percent. This figure is more informative that the dollar value of the infinite horizon unfunded obligations, and should be presented more prominently….

While the…information is useful, it is difficult to understand. The $10.5 trillion is a large figure, but it needs to be seen in the context of the present value of taxable payroll over the infinite horizon, which is on the order of $275 trillion.

Later, in the 2004 report issued last March, the Trustees updated those figures to a $10.4 trillion deficit and a $295.5 trillion taxable payroll.

Social Security Deficit and Payroll Taxes

The percent of taxable payroll is the portion of an employee’s payroll tax that goes toward Social Security and is currently set at the rate of 12.4 percent, half of which is paid by the employer and the other half by employee. Over 75 years, the Trustees estimate the actuarial deficit is 1.8 percent of taxable payroll. This means that for the system to be completely solvent over the next 75 years, without adjusting benefits, payroll taxes would have to go up to 14.2 percent immediately. And to be solvent for the "infinite future," the $10.4 trillion shortfall equals 3.5 percent of taxable payroll, or a tax increase to15.9 percent of wages.

The Infinite Horizon – Is it useful?

Contrary to the technical panel’s endorsement, the American Academy of Actuaries, a nonpartisan organization that sets standards of practice for actuaries in the US , disputes the value of the infinite horizon projection. In fact, they said it probably would mislead anyone lacking technical expertise and that it provides “little if any useful information” about the system’s long-term finances. In a December 2003 letter to the Social Security Advisory Board, the Academy wrote:

American Academy of Actuaries: …The new measures of the unfunded obligations included in the 2003 report provide little if any useful information about the program’s long-range finances and indeed are likely to mislead anyone lacking technical expertise in the demographic, economic, and actuarial aspects of the program’s finances into believing that the program is in far worse financial condition than is actually indicated.

The Academy states that there is already much uncertainty using 75-year projections, and that extending estimates into the infinite future only increases that uncertainty, producing results that "are of limited value to policymakers.” They point out that changes which took place over the last 75 years were unforeseeable to actuaries in 1928, such as the Great Depression or the baby boom, and therefore have no reason to expect that unforeseeable changes will not occur in the future.

Demographic and economic assumptions have always been a controversial issue among demographers predicting the long-term sustainability of Social Security. Significant advances in life expectancy have taken place over the last century, which exert more pressure on the system's finances as people live longer lives. Whether future mortality rates will continue to slow or increase with medical technology, the Academy of Actuaries argues that the inconsistencies which arise from such long-range assumptions are "inevitable" when making projections over the course of infinity. For this reason, they conclude that the infinite-horizon measurement is a “detriment” to the Trustees Report. They write:

American Academy of Actuaries: Thus, we believe that including these values in the Trustees Report is unnecessary and is, on balance, a detriment to the Trustees’ charge to provide a meaningful and balanced presentation of the financial status of the program.

One final note: The Trustees and actuaries give the $10.4-trillion figure and others what is called "present value," a theoretical lump-sum figure that takes into account expected future inflation and interest rates. Otherwise, any continuing deficit projected into the infinite future would automatically become an infinitely large sum.

Deficit deception 2005

2008-09-14T14:02:00.000-07:00

January 5th 2005 - If President Bush needs a name for his deficit-reduction plan, he might consider this: Deficit Deceit. That, at least, would be an honest description of a plan based on made-up numbers, wishful thinking and purposeful obfuscation.

During his re-election campaign, Bush promised to halve the budget deficit in the next five years. Even with an honest effort, that would be a formidable task considering the budgetary hole in which the nation finds itself. As it turns out, the administration isn't going to give it an honest effort.

Instead of using last year's actual $413-billion deficit to measure success, Bush is reportedly going to substitute an inflated projection of $521-billion. So with the stroke of a pen, the goal just got magically closer. Half of the larger amount will be a lot easier to reach, never mind that it is a phony number.

Real progress still will be difficult, given the administration's spending ambitions and intention to make existing tax cuts permanent, not to mention a likely repeal of the alternative minimum tax. So the plan conveniently assumes a highly optimistic (some say unrealistic) doubling of new tax revenues in the coming year, even though the administration's own projections for economic growth are flat.

Still taking no chances, Bush will leave significant expenses out of the budget, including the $100-billion cost of the wars in Iraq and Afghanistan, as though there is no real price to pay for those painful conflicts. And there will be no mention of a key item on his agenda - privatization of Social Security - that is expected to cost a staggering $2-trillion over the next couple of decades.

We are accustomed to exaggeration when it comes to campaign promises, but such deception in federal budget projections carries great risk. Deeper deficits would put an undue burden on future taxpayers and undermine our credibility with foreign investors, who have so far been willing to buy the growing supply of treasury bonds.

Beyond that, we can't understand why Bush would choose to start his second term with such an obviously deceitful budget. He may find out that Americans aren't so easily fooled.

Bush signs $800 Billion Debt-limit hike

2008-09-14T14:01:00.000-07:00

November 19th 2004 - President Bush signed legislation on Friday raising the government's debt limit by $800 billion and clearing the way for Congress to send him an overdue $388 billion spending bill to finance most federal agencies.

The new federal borrowing cap is $8.18 trillion; that's 70 percent the size of the entire U.S. economy, and more than $2.4 trillion higher than the debt Mr. Bush inherited upon taking office in 2001.

The House approved the debt-limit measure Thursday by a near party line 208-204 vote. Its passage was not in doubt because the alternative was a jarring federal default, but it was nonetheless a battlefield for partisan fingerpointing.

Meanwhile, White House and bipartisan congressional bargainers moved to the verge of agreement on the year-end spending package expected to total $388 billion.

The giant spending measure, which leaders hoped to pass by Saturday, bears extra money for priorities like veterans, the wartorn Darfur region of Sudan, biohazard detection equipment for the post office, and likely thousands of projects for lawmakers' home districts.

The legislation was largely defined by Mr. Bush's demands for curbs on domestic spending, with only modest increases for favorites like education and cuts for some of the president's own initiatives.

"Everybody took hits," said House Appropriations Committee Chairman Bill Young, R-Fla., a chief author of the measure. "There will be members who aren't totally satisfied, but we we're committed to stay within the budget number."

Young said the bill would have been $20 billion larger had he accommodated all of his colleagues' requests for more projects.

Late problems included staunch White House opposition to an effort by some legislators to curb Mr. Bush's plan to contract out federal jobs to private businesses, as well as a plan to pay for some of the bill's increases by cutting unspent defense funds.

Democrats said GOP tax cuts were the problem and that the measure should have been accompanied by a revival of a requirement that the budget be cut to pay for any tax cuts or spending increases.

"I understand there's been an election, I understand you won and I commend you for it," said Rep. Charles Stenholm, D-Texas, who was defeated last month after a 26-year career as one his party's most stalwart deficit hawks. "But that also means you have the responsibility for your actions" because the GOP controls the White House and Capitol Hill, he said.

Republicans said Democratic cries for fiscal responsibility contrasted with their frequent calls for higher spending.

"There's nothing like a reformed lady of the evening," said Rep. Dan Burton, R-Ind.

In a written statement aimed at reassuring the financial markets that federal borrowing would be unimpeded, the White House said Mr. Bush would sign the legislation by Monday.

"The president commends the Congress for passing the debt limit increase. Passage of this legislation was important to protect the full faith and credit of the United States," the statement said.

The spending bill contains $14.8 billion for programs for low-income students, 2.5 percent more than last year. Biomedical research by the National Institutes of Health would grow 2 percent to $28.4 billion, well below the robust boosts it won in recent years.

Veterans' health care would grow to $30.3 billion, $1.9 billion over last year but less than veterans groups wanted. Aid for refugees in Sudan would be $404 million. A plan to draw $93 million of the Sudan aid from a slow-spending fund for rebuilding Iraq was dropped in deference to administration demands.

But the bill would cut grants for local water improvements and research supported by the National Science Foundation, and hold the federal subsidy for Amtrak to $1.2 billion, the same as this year.

Ending one lingering dispute, lawmakers agreed to $577 million, the same as last year, to continue developing a nuclear waste storage site at Yucca Mountain in Nevada, one lawmaker said.

Spending-bill bargainers also sorted through a stack of policy changes that lawmakers and lobbyists were trying to shove into one of the last measures Congress will approve this year.

Congressional aides said they believed a milk subsidy extension sought by Midwesterners and an effort to repeal required country-of-origin labels for meat would not make the final bill. Also thwarted was a drive to ease rules designed to protect endangered species from pesticides, the aides said.

The spending measure, covering the government budget year that started Oct. 1, is an amalgamation of nine separate bills financing all federal agencies except the Pentagon and the Homeland Security Department.

Senate votes to let US borrow up to $8.18 trillion

2008-09-14T14:00:00.000-07:00

November 18th 2004 - A divided Senate approved an $800 billion increase in the federal debt limit yesterday, a major boost in borrowing that Senator John Kerry and other Democrats blamed on the fiscal policies of President Bush.

The 52-44 vote, mostly along party lines, was expected to be followed by House passage today. Enactment would raise the government's borrowing limit to $8.18 trillion -- more than eight times the total federal debt that existed when President Reagan took office in 1981.

In his first remarks on the Senate floor since Kerry's presidential bid ended in defeat two weeks ago, the Massachusetts Democrat said his former opponent had presided over ''the worst fiscal turnaround in our nation's entire history."

He was referring to the change from the $5.6 trillion in surpluses that were projected for the next 10 years when Bush took office in 2001, to the $2.3 trillion in deficits now estimated for the coming decade. Kerry and other Democrats complained that those bills will have to be paid by future generations.

''This can be called a birth tax, a birth tax that is dumped on the back of every American child unwillingly," said Kerry, who voted against the borrowing increase.

Republican senators did not join in the debate, underscoring how politically uncomfortable the measure is for them. They had refused to bring the bill to a vote before the elections.

Administration officials urged lawmakers to act quickly. The government reached its $7.38 trillion borrowing cap last month, and since then the Treasury Department has paid federal bills by taking cash from a civil service retirement account, which it plans to repay.

''We are nearing the end of our rope, and it is critical that Congress act," said Treasury spokesman Rob Nichols.

Failure to raise the debt ceiling could force a federal default and leave the government unable to pay Social Security recipients, federal workers, and other obligations.

The Senate took its debt-limit vote as congressional bargainers used the lame-duck session to continue writing a giant $388 billion spending measure to finance scores of agencies over the next 10 months.

Why Democrats Should Be Thankful

2008-09-14T13:58:00.000-07:00

At least they don't have to clean up the Bush fiscal catastrophe.

November 4th 2004 - On Nov. 3, as the bleary-eyed nation returned to work, the Treasury Department announced an impending crisis. If the lame-duck Congress doesn't raise the statutory $7.384 trillion debt limit, which was intentionally breached in October, by Nov. 18, the world's greatest power will run out of cash.

Congress, with the White House's blessing, left town before the election without dealing with the debt limits—but not before passing an appalling, special-interest-written, corporate tax bill that will deprive the government of more than $100 billion in future revenues. That double irresponsibility—the lousy tax bill and the ignored debt limit—was a fitting end to the past four years of essentially one-party rule.

The only solace for sullen Democrats is that now Republicans might have to clean up their own fiscal mess. The fiscal record of the past four years has been one of unmitigated—and seemingly intentional—irresponsibility. A Republican Congress working with a Republican president created the massive new Medicare prescription-drug entitlement, passed a new, subsidy-crammed farm bill, committed hundreds of billions of dollars to war efforts, and loaded up on pork-barrel spending. Meanwhile, taxes were reduced—on wage earners, investors, and companies. The end result: We collected about the same amount of taxes in fiscal 2004 as we did in fiscal 1999. But we spent 34 percent more. The total national debt has risen 30 percent in the past four years. The fiscally conservative Clinton administration had committed government to restraining spending. But now a massive structural gap has opened up between the country's financial inflows and outflows. It's only the willingness of the Chinese and Japanese central banks to buy our debt that keeps us afloat.

Freed of the need to run for re-election, will Bush act more fiscally responsible in a second term? Wishful thinking. This crowd literally doesn't have a clue when it comes to fiscal matters. Bush actually believes he has restrained Congressional spending, Cheney believes deficits don't matter, and most members of the Bush economic team can't—or won't—speak truth publicly. As for Congress, when it comes to managing the nation's fiscal affairs, House Majority Leader Dennis Hastert is a pretty good wrestling coach, and Senate Majority Leader William Frist is a pretty good doctor.

And so, while the moral-values crowd may have won, the fiscal orgy in Washington is sure to continue. Given Bush's mandate and his stated desire to fix the Alternative Minimum Tax (a huge tax reduction), make the temporary tax cuts permanent (ditto), and transform Social Seucrity (massive borrowing), his pledge to halve the deficit by 2009 is absurd.

In decades past, increasing Republican dominance of the House and Senate would have meant more fiscal discipline. But Republicans increasingly dominate the states that are net drains on Federal taxes—the Southern and Great Plains states—while fading in the coastal states that produce a disproportionate share of federal revenue. (It's Republicans, not Democrats, who are sucking on the federal teat.) What Amity Shlaes quaintly identified in today's Financial Times as the "southern culture of tax cutting" has been married to the southern culture of failing to generate wealth and the southern culture of depending on federal largesse. The offspring is an unsightly deficit monster.

Establishmentarians have long wondered when the grown-ups will asserts themselves in the Republican party. The stark truth today is that there are no grown-ups. The day before the election, I saw my congressman, Republican Chris Shays of Connecticut, greeting potential voters on Platform 19 at Grand Central Station, the launching point for the 5:01 to New Haven, the Bushenfreude express. When I thanked him for cutting my taxes, Shays smiled broadly. But when I suggested that he had raised taxes on my children, he looked at me quizzically. "You have to know all these tax cuts aren't really tax cuts. They're just tax shifts," I said. "All this debt has to be paid back."

Shays acknowledged that there had been a massive increase in debt. "But 40 percent of that is due to spending." That was the moment I realized my sober, moderate representative may have slipped the surly bonds of reality. Like virtually every other Republican in Congress, Shays had voted for each of Bush's revenue-reducing tax cuts and every spending-increasing budget. And yet he seemed blissfully, willfully unaware of the role he—and his party—played in controlling, originating, and approving all that spending. "And did you vote for the Medicare bill?" I asked. "I did," he smiled. As I scurried off to get a seat before the doors closed, I heard a plaintive cry from one of the last remaining Republican moderates in Congress: "But I voted against the farm bill!"

If this is what passes for a deficit hawk, we're in big trouble. The Republicans have suffered no political consequences for destroying the nation's balance sheet, after all. Why should they take the painful efforts needed to fix the mess they created? No one is holding them accountable. It leaves those yearning for some return to fiscal sanity in the perverse position of hoping for a crisis in the bond or currency markets to shock the faith-based crowd back into reality. And when that adjustment comes, I can't wait to see how conservatives try to find a way to blame it on Clinton.

Administration pressures Congress to raise debt ceiling

2008-09-14T13:57:00.000-07:00

November 4th 2004 - The Bush administration said yesterday it will run out of maneuvering room to manage the government's massive borrowing needs in two weeks, putting more pressure on Congress to raise the debt ceiling when it convenes for a special post-election session.

Treasury Department officials said they will be able to conduct a scheduled series of debt auctions next week to raise $51 billion. However, an auction of four-week Treasury bills due to be completed on Nov. 18 will have to be postponed unless Congress acts before then to raise the debt ceiling.

''Due to debt limit constraints, we currently do not have the capacity to settle our four-week bill auction scheduled to settle on Nov. 18," Timothy Bitsberger, acting assistant Treasury secretary for financial markets, said in a statement.

Congress is scheduled to return for a lame-duck session beginning Nov. 16 to deal with the debt ceiling, an omnibus spending plan for the rest of this budget year, and other matters.

The Republican-controlled Congress put off dealing with the debt ceiling before adjourning last month, preferring not to force members to vote on the politically sensitive issue of adding to the national debt before the elections. The government hit the current debt ceiling of $7.384 trillion Oct. 14, forcing Treasury to begin a series of bookkeeping maneuvers to keep financing the government's operations.

Reagan Policies Gave Green Light to Red Ink

2008-09-14T13:55:00.000-07:00

June 9th 2004 - The line is not likely to make this week's eulogies to Ronald Reagan, but when Vice President Cheney allegedly declared, "Reagan proved deficits don't matter," he summed up an enduring argument from the former president's economic legacy.

In late 2002, Cheney had summoned the Bush administration's economic team to his office to discuss another round of tax cuts to stimulate the economy. Then-Treasury Secretary Paul H. O'Neill pleaded that the government -- already running a $158 billion deficit -- was careering toward a fiscal crisis. But by O'Neill's account of the meeting, Cheney silenced him by invoking his take on Reagan's legacy.

It wasn't that Reagan's policies proved that government borrowing had no impact on the economy. But his administration's record -- particularly with some years of hindsight -- did give reason to question traditional thinking and provided a new context for future arguments about deficit spending.

"The lesson we should have learned [from those years] is that deficits have little or no short-term economic impacts," said William A. Niskanen, a member of Reagan's Council of Economic Advisers.

As important, they appeared to have no impact politically, said Stephen Moore, a conservative economist at the Club for Growth who worked in Reagan's budget office.

"Voters and politicians became anesthetized to big deficits," Moore recalled. "Reagan was running these big deficits, and liberals argued it was going to be Armageddon. We were going to ruin the economy. Interest rates were going to go through the roof. And none of these things happened."

The fiscal shift in the Reagan years was staggering. In January 1981, when Reagan declared the federal budget to be "out of control," the deficit had reached almost $74 billion, the federal debt $930 billion. Within two years, the deficit was $208 billion. The debt by 1988 totaled $2.6 trillion. In those eight years, the United States moved from being the world's largest international creditor to the largest debtor nation.

To some economists, the impact was clear. Interest rates rose in the late 1980s and early 1990s, the economy slowed, then slipped into recession, and productivity barely advanced. Americans feared their nation had slipped into the shadows of Japan and Germany.

Reagan's "economic policy . . . was a disaster," University of California at Berkeley economic historian J. Bradford DeLong wrote this past weekend on his Web site. "The tax cuts made America a more unequal place, and the deficits slowed economic growth in the 1980s significantly."

But after the boom years of the 1990s, and the steady economic slides of those international rivals, some economists are reevaluating that version of history. The argument against deficits is more about self-righteous moralism than economics, they say.

The Reagan "experience changed the debate dramatically," said Kevin A. Hassett, an economist at the American Enterprise Institute. "Back then, it seems that everybody believed Reagan must be some kind of kook and the people who agreed with these views were flimflam artists. Not so anymore."

Indeed, since the Reagan years, the argument over the deficit has been turned on its head. In the 1980s, prominent liberal economists dismissed the significance of government red ink to head off the slashing of social welfare spending. Now, many liberal economists have become the fiercest deficit hawks to head off still more tax cuts.

But the shifts go beyond politics. For nearly a century, economic orthodoxy has held that federal borrowing harms the economy by driving up interest rates, diminishing investment and productivity, and placing an unfair burden on future generations, who will finance the spending and tax cuts of the present.

Traditional economists argue that as the government enters private capital markets to finance its deficits, it competes with private borrowers. A deficit equal to 1 percent of the size of the economy -- about $110 billion today -- would slap as much as a full percentage point on the interest rates consumers pay to finance a new home or new car. By that measure, today's deficit would account for nearly 4 percentage points of a 6 percent mortgage.

But the new argument holds that interest rates are set on a vastly larger global marketplace. With rising global prosperity, even a federal deficit as large as the United States' would present little competition for would-be investors. A soon-to-be-published paper by American Enterprise Institute economist Eric M. Engen and Columbia University economist R. Glenn Hubbard, the first chairman of Bush's Council of Economic Advisers, concluded that the record budget deficit of 2004 should raise interest rates by 0.12 percent.

"The world's capital markets are lot more sophisticated and flexible than they were then," said N. Gregory Mankiw, the current chairman of Bush's economic council. "That probably means that other things being equal, changes in domestic fiscal situations have less impact."

Indeed, this school of thought is becoming something of a consensus, Engen said. Deficits equal to 1 percent of the size of the economy should raise interest rates by 0.3 percent, he said. That is the low end of the 0.3 to 0.6 percent range postulated by Brookings Institution economists William G. Gale and Peter R. Orszag when they argued deficits are economically significant.

Benjamin M. Friedman, a Harvard University economist who lamented Reagan's fiscal policies in his 1988 book "Day of Reckoning," said the expansion of foreign credit has tempered the feared hikes in long-term interest rates that he thought would cripple the economy. But, he said, "that doesn't let deficits off the hook."

"It's important to realize that interest rates are set on world capital markets; therefore, a large deficit need not impact capital formation," he said, referring to economic investments in new plants and equipment that drive growth. "But that's identical to saying we will continue to do capital formation, but we'll do it by forever borrowing abroad."

And that spells trouble, said Niskanen of Reagan's Council of Economic Advisers. Debt does have to be repaid, and foreign investors -- primarily the central banks of Japan, Britain and China -- own $1.7 billion of federal debt. That, he said, has made the country "terribly dependent" and "terribly vulnerable."

That is a bipartisan fear. "The key point is, even if it were sustainable, it's not desirable," said Orszag, a prominent Democratic economist. "We still will owe the money to foreigners. We're still mortgaging our future national income. Just because you can take out a larger mortgage to buy a bigger house doesn't mean you should."

Bush sends record $521 billion Deficit to Hill

2008-09-14T13:54:00.000-07:00

February 2nd 2004 - President Bush sent Congress a $2.4 trillion election-year budget on Monday featuring big increases for defense and homeland security but also a record $521 billion deficit.

To battle the soaring deficits, Mr. Bush proposed squeezing scores of government programs and sought outright spending cuts in seven of 15 Cabinet-level agencies. The Agriculture Department and the Environmental Protection Agency were targeted for the biggest reductions.

The president declared that his spending blueprint, which will set off months of heated debate in Congress, "advances our three highest priorities" winning the war on terror, strengthening homeland defenses and boosting the economic recovery.

"Our nation remains at war," Mr. Bush declared in his budget message. "This nation has committed itself to the long war against terror. And we will see that war to its inevitable conclusion: the destruction of the terrorists."

The president's plan for the 2005 budget year, which begins next Oct. 1, proposes spending $2.4 trillion for all government activities, up 3.5 percent from the current year. Revenues will total $2.04 trillion, a sizable 13.2 percent increase that the administration forecasts will occur from growing tax receipts powered by a stronger economy.

The budget assumes economic growth of 4.4 percent this year and 3.6 in fiscal 2005. For all of 2003, the economy grew at a 3.1 percent rate.

The president projects the 2005 deficit will be $364 billion, down from a projected record high deficit in dollar terms of $521 billion this year. He pledged to cut that in half over the next five years.

The president's budget states that stronger economic growth and reductions in general government spending will produce steady improvements in the deficit, which the administration projects will fall to $237 billion in 2009.

However, Democrats immediately attacked the spending proposal for what they viewed as harmful reductions in various government programs and the president's insistence on making his 2001 and 2003 tax cuts permanent at a cost projected in the budget of more than $900 billion over 10 years.

"This administration pledged that its tax cuts and policy choices would not turn record surpluses into record deficits, but this budget shows that's exactly what's happened," said Senate Democratic Leader Tom Daschle of South Dakota.

Sen. Ted Kennedy, D-Mass, called on Congress to reject Mr. Bush's spending plan, charging it was the "most antifamily, anti-worker, anti-healthcare, anti-education budget in modern times."

Mr. Bush would boost military spending by 7 percent in 2005, but that does not include the money needed to keep troops in Iraq and Afghanistan. Officials said a supplemental request for these funds will be sent to Congress but not until after the November elections. Congress last year approved an $87.5 billion wartime supplemental for the current budget year.

Homeland security, another top priority would receive a 10 percent boost, including an 11 percent increase in FBI funding to support increased counterterrorism activities.

A firestorm of criticism erupted last week when it was revealed the administration had re-estimated the 10-year cost of the newly enacted Medicare prescription drug benefit program at $534 billion, far above the $400 billion figure Congress used in passing the measure two months ago.
The budget documents said the major reasons for the discrepancy were higher estimates for the number of participants in the program and new projections for health care price increases.

As previously announced, Mr. Bush's budget proposes an ambitious program to return Americans to the moon as early as 2015 and eventually send a mission to Mars. However, the budget only contains $1 billion in new money for the effort over the next five years with another $11 billion reallocated from current NASA programs. In 2005, Mr. Bush proposes increasing NASA's budget by 6 percent to $16.2 billion.

Other programs that would receive boosts in Mr. Bush's budget include his No Child Left Behind education program; job training programs, including one that links community colleges with employers' and an $18 million increase for the National Endowment for the Arts.

Mr. Bush's budget proposes to hold the spending increase for all of the government's discretionary programs — those other than entitlement programs such as Social Security and Medicare — to 3.9 percent in 2005. That average rise includes big boosts for the military and homeland security.

Scores of government programs outside those two areas will be restrained to an overall increase of just 0.5 percent, below the rise in inflation, and some agencies will suffer outright cuts.

The proposed military budget, which goes to Congress to decide its fate, rings in at $401.7 billion. According to figures from the nonprofit Center for Defense Information, that will make U.S. military spending greater than the combined total of the next 21 biggest spenders, including Russia, Britain, China and France.

Under the president's budget, missile defense efforts would receive almost $10.2 billion in the new budget. That is nearly a $1.2 billion increase over this year, according to budget books provided by the Pentagon.

The proposed budget also includes a 3.5 percent raise in base pay for military personnel.

The budget also includes money to purchase 11 V-22 Osprey tiltrotor aircraft, 8 for the Marine Corps and 3 for the Air Force. The program was plagued by deadly crashes during its development.

Bush's budget for 2005 seeks to rein in domestic costs

2008-09-14T13:52:00.000-07:00

January 4th 2004 - Facing a record budget deficit, Bush administration officials say they have drafted an election-year budget that will rein in the growth of domestic spending without alienating politically influential constituencies.

They said the president's proposed budget for the 2005 fiscal year, which begins Oct. 1, would control the rising cost of housing vouchers for the poor, require some veterans to pay more for health care, slow the growth in spending on biomedical research and merge or eliminate some job training and employment programs. The moves are intended to trim the programs without damaging any essential services, the administration said.

Even with the improving economic outlook, administration officials said, the federal budget deficit in the current fiscal year is likely to exceed last year's deficit of $374 billion, the largest on record.

The Congressional Budget Office and the White House budget office have projected a deficit of more than $450 billion this year.

But Joshua B. Bolten, director of the White House Office of Management and Budget, has said the president's policies will cut the deficit in half within five years, through a combination of economic growth and fiscal restraint.

Mr. Bush's budget request, to be sent to Congress by Feb. 2, includes several tax cut proposals, including new incentives for individual saving and tax credits to help uninsured people buy health insurance. The Democratic candidates for president have accused Mr. Bush of doing little to halt the recent rapid increase in the number of uninsured.

Administration officials said the president's budget would call for an overall increase of about 3 percent in appropriations for so-called domestic discretionary spending, which excludes the Department of Homeland Security, the Defense Department and insurance benefits like Medicare and Medicaid.

As he completes work on his budget, Mr. Bush faces criticism from conservatives, who say he has presided over a big increase in federal spending, and liberals, who say his tax cuts have converted a large budget surplus to a deficit.

Total federal revenues have declined for three consecutive years, apparently the first time that has happened since the early 1920's. But in those years, from 2000 to 2003, total federal spending has increased slightly more than 20 percent, to $2.16 trillion last year.

Brian M. Riedl, an economist at the conservative Heritage Foundation, said: ''President Bush is not focusing on his fiscal conservative base right now. He's trying to position himself in between conservatives in Congress and the Democratic Party. It may be good politics, but it's bad policy, a lost opportunity to get runaway government spending under control.''

White House officials deny that they have acquiesced in a domestic spending spree. They insist, as do some liberal advocacy groups, that appropriations for domestic programs are not exploding.

Such spending, they say, will increase 3 percent in 2004, after increases of 5 percent in 2003, 6 percent in 2002 and 15 percent in 2001. Moreover, they say, increased corporate profits should lead to an increase in corporate tax payments, lifting revenues in the coming years.

Richard Kogan, a budget analyst at the Center on Budget and Policy Priorities, a liberal-leaning research and advocacy group, said the increase in military and domestic security spending in the last two years dwarfed the increase in domestic discretionary programs, which did not quite keep pace with inflation.

''The increases for defense, international affairs and homeland security have been much greater -- and thus have played a much larger role in the return to deficits -- than the increases for domestic appropriations,'' Mr. Kogan said.

Housing officials said the administration was alarmed at increases in the cost of vouchers, which provide rental assistance to low-income families, and would take steps to prevent local housing agencies from issuing more vouchers than Congress had authorized. Congress has tentatively decided to provide $14.2 billion for renewal of vouchers this year, an increase of about 15 percent.

Federal officials said they would also require families seeking housing aid to help the government obtain more accurate information on their earnings. As a condition of receiving aid, families would have to consent to the disclosure of income data reported to a national directory of newly hired employees. The directory was created under a 1996 law to help enforce child-support obligations.

Administration officials said the president's budget would also slow the growth of spending at the National Institutes of Health, which doubled in the last five years, reaching $27.1 billion in 2003. Congress has tentatively agreed to provide $28 billion this year, slightly more than Mr. Bush requested, and administration officials said they would seek an increase of 3 percent or less for 2005.

Budget officials defended the proposal, saying they wanted to be sure the agency was properly managing a huge infusion of federal money.

Mr. Bush proposed last year to double co-payments on prescription drugs for many veterans, primarily those with higher incomes and no service-connected disabilities. The White House reaffirmed its support for that proposal in November.

In the last week, the Pentagon has been considering a new proposal to increase pharmacy co-payments for retirees with at least 20 years of military service. Under the proposal, the charge for a generic drug would rise to $10, from $3, while the charge for a brand-name medicine would rise to $20, from $9.

The Military Officers Association of America criticized this as ''a grossly insensitive and wrong-headed proposal.'' In e-mail messages to the White House, members of the association asked Mr. Bush, ''Why do your budget officials persist in trying to cut military benefits?''

Col. Steven P. Strobridge, director of government relations at the association, said he understood that the Pentagon was now inclined to study the issue for a year and renew the proposal, as part of a systematic effort to ''reduce military health care costs.''

Administration officials said they expected Mr. Bush to seek increases of $1 billion, or 10 percent, for the education of children with disabilities and $1 billion, or 8 percent, in Title I grants for schools with high concentrations of students from low-income families.

Budget officials said they were concerned that they did not have enough money for Pell grants to keep pace with a recent surge in low-income students seeking help with college costs. They said Mr. Bush would address that problem in some way, without seeking an increase in the maximum grant, now $4,050.

The budget also seeks money to train more nurses, to encourage sexual abstinence among teenagers and to recruit ''volunteers in homeland security,'' who can respond to emergencies, including terrorist attacks.

Bush Deficit Plan Draws Derision

2008-09-14T13:51:00.000-07:00

December 17th 2003 - President Bush's goal of cutting in half a projected $500 billion federal deficit within five years is being dismissed as too timid by conservatives, unachievable by analysts and laughable by Democrats.

Mr. Bush will include the objective in the $2.3 trillion budget for 2005 he sends Congress in February, nine months away from the presidential and congressional elections. The goal is backed by many Republicans, but conservatives want a bolder move against the record deficits and big spending increases the administration has run up.

"It's a rather anemic goal, actually," said Stephen Moore, president of the conservative Club for Growth. "We should be talking about how to balance the budget."

Administration officials say their goal is a 2009 deficit that is half of this year's level, which White House budget chief Joshua Bolten has said he expects to hit $500 billion.

Achieving a $250 billion deficit in five years, however, could take hundreds of billions in savings, a difficult political task.

White House officials deny warnings circulating on Capitol Hill that they might define their goal as halving the 4.4 percent share of the U.S. economy that a $500 billion deficit would be next year to 2.2 percent in five years. That would make their target 2009 deficit about $320 billion, leaving their task $70 billion easier.

The deficit for the budget year that ended Sept. 30 was $374 billion, the highest ever in dollar terms. Administration officials say the more important measure is how the shortfall compares with the size of the economy, with last year's 3.5 percent share far below the 6 percent post-World War II peak of 1983.

White House officials say to achieve their goal, Mr. Bush will rely chiefly on two strategies. He will propose extending tax cuts that would otherwise expire, which they say will spur the economy, and limiting the growth of spending that Congress must approve each year, probably to 4 percent or less.

"We're working with Congress to hold the line on spending," Mr. Bush said Monday. "And we do have a plan to cut the deficit in half."

Democrats say that even if Mr. Bush achieves his objective, he would leave huge shortfalls because he has driven deficits so high. Mr. Bush took office when large surpluses were projected for the foreseeable future, a forecast since dashed by recession, the costs of fighting terrorism and wars, and tax cuts.

"It's like so much with this administration in respect to fiscal matters, it's all spin, all the time," said Sen. Kent Conrad of North Dakota, top Democrat on the Senate Budget Committee.

A $250 billion deficit would be the fifth highest on record in dollar terms. A $320 billion shortfall would be the second worst.

Thanks to projections that the economy will continue to strengthen, deficits are expected to gradually improve after this year.

The nonpartisan Congressional Budget Office projected last August that after peaking at $480 billion this year, the gap would drop to $170 billion by 2009 — if no new tax cuts are enacted and spending grows only at the rate of inflation.

Those assumptions have already proved untrue. Congress since August has enacted a Medicare expansion creating prescription drug coverage and improvements in veterans' benefits projected to add a combined $53 billion to the deficit in 2009.

Other costly proposals in the works include Mr. Bush's plan to extend expiring tax cuts; a revision of the alternative minimum tax to prevent middle-income earners from paying it; and energy legislation that has already passed the House.

If, along with those items, spending controlled by Congress grows at the average 7.7 percent annual rate seen since 1998, the resulting 2009 deficit would be $666 billion, G. William Hoagland, budget aide to Senate Majority Leader Bill Frist, R-Tenn., warned senators in a recent memo.

That would mean $416 billion in budget savings — an enormous amount — would be needed to reduce that year's red ink to $250 billion.

If congressionally approved spending grows only at the rate of inflation, the 2009 deficit would be $432 billion, Hoagland wrote.

Lawmakers have shown little taste for such a small increase. If they did — and that would mean no unforeseen expenses like new wars it would still require $182 billion in 2009 savings.

Acknowledges House Budget Committee Chairman Jim Nussle, R-Iowa, who supports Mr. Bush's goal, "It's not an easy lift."

That's an understatement, say many budget analysts. They say that considering the added tax cuts and spending increases Congress is likely to enact, it would take politically unthinkable tax increases and cuts in popular programs to achieve the savings needed to halve the projected deficit.

"Given the current makeup of Congress and the incumbent in the White House," halving the red ink in half is "fanciful," said Robert Reischauer, former Congressional Budget Office director and president of the Urban Institute.

"It's not a plan, it's a set of wildly optimistic assumptions," said Robert Bixby, executive director of the bipartisan Concord Coalition, which lobbies for balanced budgets.

Aging population makes this deficit scarier

2008-09-14T13:49:00.000-07:00

June 15th 2003 - Huge tax cuts, soaring spending and rising deficits. It's beginning to look a lot like the 1980s again — with one big difference.

When deficits started taking off 20 years ago, the retirement of the baby boom generation was just a distant worry. Now, as the nation faces years of red ink, including at least a $400 billion shortfall in 2003 alone, the graying population is a fast-approaching reality that will put unprecedented strains on Medicare, Social Security and the economy starting around 2010.

While recent advances in productivity are expected to help the nation cope with the bulge in retirees, the reduced workforce, possible slowing of immigration and huge new fiscal burdens mean that, unlike the 1990s, the nation could have a tougher time growing out of new budget problems, economists say.

At the same time, by locking in years of deficits, lawmakers and the White House are reducing national savings and putting upward pressure on interest rates. That could limit their flexibility to increase taxes, issue bonds or take other steps to reform the massive health and retirement programs — while forcing deeper benefit cuts.

Warning from Greenspan

Federal Reserve Chairman Alan Greenspan has warned of an "unstable system" of rising debt relative to the size of the economy without changes in budget and program policies.

"On the one hand, from an economic point of view we should be stimulating the economy," says Robert Pozen, former vice chairman of Fidelity Investments and a member of President Bush's 2001 Social Security Commission, referring to the need for deficit spending in light of current, sluggish growth.

But, he adds, building in deficits now increases pressures down the line. "It's a serious problem, and it's not just Social Security, it's Medicare," Pozen says.

Legislation to add a 10-year, $400 billion prescription drug benefit to Medicare, which the Senate could vote on this week, could make the problems far worse. The White House, which originally wanted any drug bill to include major changes to reduce costs and move Medicare closer to the private insurance market, has largely dropped those demands.

Thomas Saving, director of the Private Enterprise Research Center at Texas A&M and one of the public trustees overseeing Medicare and Social Security, estimates the drug plan could add nearly $3 trillion in costs over a 75-year forecasting window — based on the assumption Congress will extend the benefit.

Today, Social Security and Medicare payroll taxes are generating a trust fund of surpluses. But by 2008, the government will have to start pumping more money into Medicare. Even without a drug benefit, the health program alone is expected to consume 20% of all revenue by 2026.

"The pressure on the Treasury really begins when the surplus in these programs peaks, and that's going to happen in just a couple of years," Saving says. "At that point, the actual revenue coming into Treasury, net of what they have to use for Social Security and Medicare, will start to fall."

Deficits expected through 2011

Overall, the non-partisan Congressional Budget Office (CBO) forecasts a 2003 deficit of $400 billion, with private economists expecting a bigger shortfall next year. Excluding the Social Security surplus, the CBO, which projected a $5.6 trillion, 10-year surplus in 2001, expects deficits through 2011. That does not include the Medicare drug plan.

Demographic changes are already having an impact in other industrialized nations. Austrian and French workers have been striking in protest of planned cuts in government pension plans. Germany and other nations face similar pressures and forecasts of lower growth as their populations age.

The USA is in comparatively good shape. While there are graying pressures in some developing nations, like South Korea, the USA will have the slowest rising median age of any country for the next 50 years, says Paul Hewitt, director of the global aging initiative at the Center for Strategic and International Studies.

Still, he predicts, "The boomers leaving will create a giant sucking sound in the workforce," making it harder to maintain elevated productivity. Mexico, a major source of immigrants, is aging faster than the United States and may not supply as many workers. Expected slower growth in Europe could affect the USA.

"If it was just the pension crisis, we wouldn't have a crisis. ... The problem is all on the health care side, driven by our crazy system," Hewitt says.

The Fed predicts that in the next 30 years, the U.S. working-age population will increase about 0.5% a year, compared with 1% now. The percentage of the population over 65 will rise from less than 13% to about 20% by 2030.

Spending on Medicare, Social Security, Medicaid health care for the poor and interest on the federal debt, could zoom from 8% of the economy to 21% by 2075, according to the CBO.

The impact of deficits is political, as well. Two years ago, with a $5.6 trillion surplus, it seemed reasonable for politicians to claim they could finance major changes — a Medicare drug benefit or the hefty upfront costs of transforming Social Security into a system of private investment accounts.

While the surpluses were never sufficient for the job, lawmakers may be losing political cover and public trust in their ability to act as responsible stewards as the deficits steadily pile up.

A May poll by the Pew Research Center for the People and the Press asked a variety of questions about the economy and the latest, $350 billion tax cut. More than half thought it would mainly help the wealthy and increase the deficit, 44% said it would help the economy, while 42% said it would force spending cuts. About a fifth thought it was fair to all.

Greenspan, who in the early 1980s chaired a commission that recommended raising taxes and increasing the retirement age to solve a previous Social Security financing gap, has told Congress the earlier it acts, the better chance it has of minimizing economic and social dislocations.

"I must say, the silence is deafening," he recently told a congressional hearing.

Many economists, while heeding Greenspan's warnings, argue the deficits — including the $350 billion tax cut law signed by Bush last month — have been necessary, given the slack economy. With interest rates already at historic lows, they argue the Fed has limited room to act.

"When you have an economy that's underperforming and far away from potential, the opportunity that you miss every year by not being back to full employment, the cost is enormous," says Jim Glassman, chief economist at J.P. Morgan Chase. He predicted the recent tax cut could increase economic growth by 1/2 percentage point in the next two years,

Dimitri Papadimitriou, president of the Levy Economics Institute at Bard College, says the deficit should be as much as $600 billion to jolt the economy, though he would have preferred a payroll tax cut. "For the time being, I don't think one should worry about the deficits," Papadimitriou says.

Others say Congress and the White House have used short-term economic problems as an excuse for policies with long-term ramifications. The House last week passed $82 billion in 10-year tax cuts — on top of the $350 billion measure, Bush's 2001 $1.6 trillion tax cut plan and a 2002 stimulus bill.

"It builds up the pressure to cut benefits over the long run," says Art Benavie, economics professor at the University of North Carolina at Chapel Hill, who has written a book on deficits.

"You're going to have structural deficits down the road as far as we can see, long-term deficits in an economy that's eventually going to be around full employment, which crowds out private investment ... personally, it makes me nauseous," Benavie says.

G.O.P. Senators Oppose Size of Bush Tax Cut

2008-09-14T13:48:00.000-07:00

March 14th 2003 - President Bush's proposal to spur the economy by cutting taxes $726 billion over the next decade was dealt a potentially serious setback today when two Republican senators said they would support no cut larger than $350 billion.

The Republicans, Olympia J. Snowe of Maine and George V. Voinovich of Ohio, joined two Democrats, Max Baucus of Montana and John B. Breaux of Louisiana, to send a letter to their parties' Senate leaders stating that they were committed to vote against any tax cut beyond $350 billion unless it was offset by tax increases elsewhere or specific spending decreases.

If the Republicans stick to the pledge, the Bush proposal probably cannot win Senate passage.

The Senate has 51 Republicans, 48 Democrats and 1 independent. One Democrat, Zell Miller of Georgia, supports Mr. Bush, but the other 47 and the independent, James M. Jeffords of Vermont, are believed to oppose the tax plan. One Republican, Lincoln D. Chafee of Rhode Island, has said he will not vote for a tax cut this year under any circumstance.

So if Ms. Snowe and Mr. Voinovich stand fast, at least 51 senators seem to be against Mr. Bush's proposal. Two other Republicans, John McCain of Arizona and Susan Collins of Maine, have also expressed strong reservations about the plan, but the pledge by Ms. Snowe and Mr. Voinovich seems to carry even more weight because it was written and signed. The two took the stand, they said in the letter, because of ''international uncertainties and debt and deficit projections.''

Senator Tom Daschle of South Dakota, the Democratic leader, proclaimed, ''The president's plan is now officially dead.''

But Claire Buchan, a White House spokeswoman, dismissed that notion.

''We saw the same thing in 2001,'' Ms. Buchan said. ''Just as in 2001, we are confident that the president's proposals to create jobs and growth will prevail.''

What Mr. Bush calls his growth plan has two main parts. The first would eliminate income taxes for individuals on most stock dividends. The other would put in place this year reductions in tax rates enacted in 2001 but not scheduled to go into effect until 2004 or 2006.

Tonight, the Senate Budget Committee voted along party lines to approve a budget that would accommodate the $726 billion in tax cuts and allow them to be considered in the Senate under a procedure that bars a filibuster.

The first test of Senate support for Mr. Bush's tax package could come next week when the budget reaches the floor. The plan, a budget resolution, does not carry the force of law, but it sets a framework for all tax and spending measures Congress will consider this year.

Mr. Voinovich said tonight that he might vote for the budget, but that if he did, he would make it clear he would vote against the tax-cut element if it came up in legislation.

The Senate budget would permit $800 billion in added tax cuts that the president wants over 10 years, including extension of the repeal of the federal estate tax. But these would be considered later and would not be protected against filibuster.

The budget President Bush sent Congress last month would require the government to run deficits for at least 10 years, the Congressional Budget Office has reported. The plan of the Senate Budget Committee shows a budget surplus in 2013.

The committee accomplished that through spending restraints from 2009 through 2013 that are much tougher than what the administration has contemplated.

Democrats on the committee offered amendments today to reduce the tax cuts and permit more spending, but all were defeated. One by Senator Kent Conrad of North Dakota would have blocked most legislation that would result in a higher deficit until Mr. Bush gave Congress a detailed estimate of the cost of a war with Iraq.

But the committee chairman, Senator Don Nickles of Oklahoma, asserted that no Congress had ever provided money for a war before it started and that it was impossible to estimate how much a war and its aftermath might cost.

The House Budget Committee approved its version of a budget at 1:30 this morning. The plan was revised after midnight so money would be available for Mr. Bush's proposal to set some prescription drug coverage under Medicare only if most of the money for it was found by cutting spending elsewhere in Medicare or other benefit programs.

Government hits national debt ceiling

2008-09-14T13:47:00.000-07:00

February 20th 2003 - Replaying a drama from last year, the government is once again bumping against the debt limit of $6.4 trillion and the Treasury Department has begun taking evasive actions to prevent an unprecedented default on the national debt.

Treasury Secretary John Snow informed leaders of Congress on Wednesday that the government would reach the borrowing limit on Thursday and he would begin pulling investments out of a $48 billion government pension fund to make room for normal public borrowing auctions.

In a reference to the looming possibility of a war with Iraq, Snow urged Congress to act without delay to raise the borrowing limit.

"I know that you share the president's and my commitment to maintaining the full faith and credit of the U.S. government, especially at this critical time," Snow said in his letter.

"Together we must continue working to enact an increase in the statutory debt limit as quickly as possible to avoid any negative repercussions at home or abroad," Snow said.

The drama was similar to one that unfolded last year as Congress finally raised the debt ceiling from $5.95 trillion to the current limit of $6.4 trillion on June 28, but only after months of debate and brinksmanship with then-Treasury Secretary Paul O'Neill having to resort to ever-more elaborate procedures to shift funds in order to clear room for necessary borrowing.

Republicans will push to approve the Bush administration's request for a higher debt limit, citing the need to protect the country's excellent credit rating. U.S. Treasury securities are considered the safest investment in the world because the government has always met its obligations.

But Democrats are certain to use that request as a chance to criticize President Bush's tax cut policies, which they contend have led to record budget deficits and the need for a higher debt limit.

Democrats and deficits

A group of conservative House Democrats promised to oppose any increase in the debt limit that was not coupled with a plan to deal with the rising deficits.

"Less than nine months after raising the federal debt ceiling by a whopping $450 billion, the Treasury Department is once again demanding a blank check from Congress," the Blue Dog Coalition said in a statement. "We will only do harm to our country, our economy and our citizens if the federal government continues to borrow and spend with no regard for the burden it places on taxpayers and generations to come."

Snow said the administration would begin making room for normal borrowing Thursday by not fully investing in the Government Securities Investment Fund, often called the G-fund. This fund, which totals $48 billion, is used by the government to credit earnings for federal employees' pensions.

Snow stressed in the letter that any investments taken out of the G-fund to make room for other government borrowing would be replaced with interest earnings once Congress passes a new debt ceiling. Congress currently is in a weeklong recess.

The government can take similar actions with other government funds and there is a possibility it could make it to April 15 when a flood of tax payments will bolster government coffers.

Last year, the administration sought an increase of $750 billion in the debt ceiling, hoping to avoid a second battle so soon in the new Congress. However, Democrats in the Senate successfully blocked that effort and the actual amount approved was a much smaller $450 billion.

This time, Brian Roseboro, Treasury's assistant secretary for financial management, said the administration is not asking for a specific amount, leaving that decision up to Congress.

In testimony last week, Federal Reserve Chairman Alan Greenspan said Congress should consider doing away with the debt limit, saying it "has never in my judgment been successful in doing what it is supposed to have been doing, namely constrain spending."

Roseboro said the administration agreed with that sentiment, citing a comment made by O'Neill last year when he called the debt ceiling "an abomination."

While the debate over the debt limit often grows intense, as a practical matter Congress would be very unlikely to allow government finances to reach a point where there would be the possibility of an actual default on any part of the national debt, given the effect that would have on the government's credit rating and future interest levels it would have to pay on its substantial debt.

The national debt subject to limit stood at $6.392 trillion as of Tuesday, just $8 billion shy of the $6.4 trillion limit.

Social Security funds needed to balance books

2008-09-14T13:34:00.000-07:00

August 29th 2001 - This year's federal budget surplus has plunged to $153 billion because of the nation's economic doldrums and the Bush administration's tax cut, meaning the federal government will have to cover $9 billion of spending by dipping into Social Security, the nonpartisan Congressional Budget Office projected Tuesday.

The new estimate for the federal surplus is sharply lower -- off by 44 percent --- from the $275 billion figure the CBO was predicting just three months ago. The reduction means that President Bush and congressional lawmakers will be hard pressed to keep their pledge not to use Social Security funds for any other government spending, save for a planned, steady retirement of the government's outstanding debt.

The CBO projected Tuesday that, if current spending habits aren't changed, the Social Security surplus would be dipped into again in 2003, for $18 billion, and in 2004, for $3 billion. The congressional accounting office projects a return to overall budget surpluses large enough to spare the Social Security fund in later years.

For the 10-year period from 2002 to 2011, the CBO calculates the nation will have a total surplus of $3.4 trillion -- three-quarters of which would be made up of excess monies in the Social Security trust fund. That number, however, is $2.2 trillion less than was projected just last May, and the reason for most of that drop is the $1.35 trillion tax cut championed by President Bush.

The new numbers offer a dimmer view of the federal budget than that provided by the White House Office of Management and Budget last week. The Bush administration has pointed out that the overall surplus is the second largest in the nation's history, and argues it is just big enough this fiscal year -- which ends September 30 -- to barely avoid use of Social Security funds.

That is politically significant because both Bush and congressional lawmakers from both parties have pledged to avoid dipping into the retirement fund reserve. So, although the surplus remains large by historical standards, the pledge makes most of it off-limits, because it is made up of Social Security receipts.

In past years, before the recent spate of robust surpluses, the federal government routinely dipped into the Social Security surplus for additional spending money. But in recent years, in light of questions about the viability of the retirement program in the coming decades, both Democrats and Republicans vowed to leave the fund alone, and only use that money to pay off the national debt.
Social Security's future

Should the new CBO estimates be borne out, the $9 billion taken from the Social Security Trust Fund will not have an immediate effect on disbursement of benefit checks. Money will continue to flow to beneficiaries every month, and the program will continue to take in more than it pays out annually.

But, Social Security won't stay flush with the looming retirement of the nation's 76 million "baby boomers." In the course of the next decade, more people will be drawing benefit checks, and fewer will be paying into the system. Social Security is at risk of running a deficit.

Many lawmakers of both parties -- and interest groups representing sectors of the population that expect Social Security to be available to them later in this century -- are concerned that continued use of the Social Security surplus for other government spending will jeopardize their retirement security.

President Bush has suggested his campaign proposal to allow individuals to invest some of their Social Security payroll taxes in the stock market could allay some of these fears. He has convened his Commission to Strengthen Social Security to deliberate over suggestions for modernization.

Shrinking federal surplus estimates, meanwhile, have prompted fears that the United States will not be able to pay down its long-term debt in the same time period.

The new CBO numbers project it will now be 2010 before the debt can be retired. In May, that was expected to happen in 2006.
Dems blame tax cut

Democrats have been quick to use the new budget numbers as backing for a claim they have been making for months -- that the Bush tax cut is too costly, especially in tandem with the administration's proposals to increase spending for defense, education and other programs.

Sen. Kent Conrad, D-North Dakota, who is chairman of the Senate Budget Committee, cautioned that the CBO projections do not include Bush's proposed spending over the next decade on items such as defense and education.

"When you put those together, what you find is that the invasion of the trust funds is far more serious than has been reported so far, far more serious," Conrad said on Tuesday.

"This is their spending plan. This is their tax plan. They have created this problem," he said of Bush and Republicans in Congress. "They have an obligation to tell us -- for example, when the president asks for $18 billion more for defense next year -- how is he going to pay for it?"

But administration officials and congressional Republicans have defended their priorities and last week's OMB numbers, and say the president's plan will continue to protect the Social Security surplus. GOP lawmakers have said over the past few weeks, as news of the dwindling surplus surfaced, that the tax cut will help to stimulate the economy, and the biggest threat to the surplus is too much spending by Congress.

"The budget is tight, and that is exactly where we want it to be and where we need it to be," said Rep. Jim Nussle, the Iowa Republican who is the House Budget Committee chairman. Nussle noted that much of the surplus was used for tax relief, to put money back in the hands of the taxpayers. He said Congress should be able to garner savings by going after excessive government spending.

Nussle stressed the new numbers are only projections, which he noted are often wrong, as they were in May. "The books aren't closed," he said. "This is a weather report. You've got to wait for the weather to happen."
Rough road ahead

The debate over the dwindling surplus and the budget will likely be the main order of business when both the White House and Congress return from their far-flung vacation destinations next week.

At the top of Congress's 'to do' list in the coming weeks will be completion of the 13 yearly appropriations bills, which will determine how the nation's $2 trillion, fiscal 2002 budget will be spent. The new budget numbers are bound to be a critical factor in the budget battles over that new spending. Already, Democrats have questioned whether the nation can afford some of Bush's spending priorities, in particular the proposed boost for defense spending.

Part of the difference in the estimates between the CBO and the OMB is accounted for by differences in economic forecasts. Last week, OMB predicted the national economy would rebound at the end of this year -- or the beginning of the next -- and grow at a healthy clip of 3.6 percent next year.

The CBO is predicting that the nation will avoid falling into a recession, but its prediction for economic growth next year is considerably lower, just 2.6 percent.

Bush unveils budget

2008-09-14T13:32:00.000-07:00

February 22nd 2001 - In his first presidential news conference, President Bush said Thursday he would resist "the Christmas tree effect" as he pushes a budget plan, saying he hoped business leaders and Congress would resist the temptation to add a multitude of projects to his proposal.

"I don't want people putting ornaments on my plan," the president said. Bush said he hoped business interests "will listen to me, and I hope they will help me."

"I will resist the temptation of folks to pile on their pet programs onto our tax cut," he added.

"We thought long and hard about the right number," he said of the $1.6 trillion tax cut proposal. "We think it's just right."

"I have a reasonable and balanced budget," Bush said. "It funds priorities, and my administration has no higher priority than education." He said the budget would "honor the commitments to America's senior citizens," including support for Medicare and Social Security.

"Our budget is fiscally responsible. If enacted, it will reduced the deficit by an unprecedented amount over the next four years."
Bush turns aside questions on Clinton pardon

The news conference was announced barely more than an hour before it began, and Bush chose to hold the session in the less formal White House Briefing Room, rather than the more traditional East Room.

The news conference came on a day when much of the news was focused on Bush's predecessor, former President Bill Clinton and the pardons issued shortly before he left the White House in January.

Bush tried to turn the attention to the budget he will submit to Congress next week.

"I think the press corps will ferret out any wrongdoing," Bush said, in one of several attempts to turn aside questions about the pardons.

"As far as this White House is concerned, it's time to go forward. I've got too much to do ... to be worrying about decisions that my predecessor made," Bush said. "To the extent that the Justice Department looks at this matter, it will be done in a non-political way."
President to discuss espionage with Russia leader

Other topics touched on by Bush included:

• The spying case of FBI agent Robert Philip Hanssen, accused of gathering information for the Russians. Bush expressed confidence in FBI Director Louis Freeh, and said he would wait for proposals on how to improve FBI security. Bush said he was "very concerned" about the espionage and would discuss it with Russian President Vladimir Putin.

"I intend to deal with Mr. Putin in a very straightforward way, to be up front with him on all matters," Bush said.

• A U.S. missile defense proposal. "I was pleased to see comments from the Russian leadership that talked about missile defense," Bush said. "Their words indicated that they recognize there are new threats in the post-Cold War era, threats that require theater-based anti-ballistic missile systems. I felt their words were encouraging."

• The Persian Gulf. Six days after U.S. and British planes struck targets in Iraq, Bush shrugged off a question about more than half of the bombs missing their targets. He said the air strikes had two missions -- sending a signal to Saddam Hussein and degrading his military abilities. Bush asserted that both were successful.

Bush said Secretary of State Colin Powell, about to visit the Middle East, planned to listen to allies and form a policy that would convey to Iraqi leader Saddam Hussein: "We won't tolerate you developing weapons of mass destruction and we expect you to leave your neighbors alone."

"The primary goal is to make it clear to Saddam that we expect him to be a peaceful neighbor in the region and we expect him not to develop weapons of mass destruction," Bush said.

• Bush's support of so-called faith-based institutions to provide government-funded social services. Asked whether such an arrangement violated the Constitution, Bush said, "I understand full well that some of the most compassionate missions of help and aid come out of faith-based programs and I strongly support the faith-based initiative we are proposing.

"I do not believe it violates the separation between church and state," he said.

President Clinton announces another record budget surplus

2008-09-14T13:30:00.000-07:00

September 27th 2000 - President Clinton announced Wednesday that the federal budget surplus for fiscal year 2000 amounted to at least $230 billion, making it the largest in U.S. history and topping last year's record surplus of $122.7 billion.

"Eight years ago, our future was at risk," Clinton said Wednesday morning. "Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice President Gore and I took office, the budget deficit was $290 billion, and it was projected this year the budget deficit would be $455 billion."

Instead, the president explained, the $5.7 trillion national debt has been reduced by $360 billion in the last three years -- $223 billion this year alone.

This represents, Clinton said, "the largest one-year debt reduction in the history of the United States."

"Like our Olympic athletes in Sydney, the American people are breaking all kinds of records these days. This is the first year we've balanced the budget without using the Medicare trust fund since Medicare was created in 1965. I think we should follow Al Gore's advice and lock those trust funds away for the future," he said.

In June, the administration predicted the surplus would be $211 billion, and would increase by as much as $1 trillion over the next 10 years.

"The key to fiscal discipline is maintaining these results year after year. We need to put our priorities in order," Clinton said.

The president's news comes as lawmakers on Capitol Hill continue to wrestle with the fiscal year 2001 budget numbers. The new budget year begins October 1, and work has been completed on only two of the 13 annual spending bills, as the Republican-led Congress and the White House remain at odds over spending allocations.

"I am concerned, frankly, about the size and last-minute nature of this year's congressional spending spree, where they seem to be loading up the spending bills with special projects for special interests, but can't seem to find the time to raise the minimum wage, or pass a patients' bill of rights, or drug benefits for our seniors through Medicare, or tax cuts for long-term care, child care, or college education," Clinton said.

"These are the things that need to be done and I certainly hope they will be and still make the right investments and the right amount of tax cuts," Clinton said.

Rep. J.C. Watts, R-Oklahoma, chairman of the House Republican Conference, said the GOP wants 90 percent of the surplus used for the debt. In a CNN interview, he said the other 10 percent should be used to "take care of a lot of priorities we have, like prescription drugs, making sure that our education needs are met, making sure some of our national security needs are met, and doing that while at the same time protecting the Social Security surplus and the Medicare surplus."

That approach would be in lieu of tax cuts, which "we can't do this year because the president vetoed it," Watts said.

Clinton unveiled the new numbers in a statement at the White House before departing for fund-raising events in Dallas and Houston.

"This is part of our fiscal discipline to reduce the debt with the federal surplus," said one White House official who asked not to be identified. Reducing the debt, the official said, has "real effects for real Americans." It means lower interest rates for mortgages, car loans and college loans, and leads to an increase in investment and more jobs."

It is the third year in a row the federal government has taken in more than it spent, and has paid down the debt. The last time the U.S. government had a third consecutive year of national debt reduction was 1949, said the official.

The federal budget surplus for fiscal year 1999 was $122.7 billion, and $69.2 billion for fiscal year 1998. Those back-to-back surpluses, the first since 1957, allowed the Treasury to pay down $138 billion in national debt.

National Debt Clock stops

2008-09-14T13:25:00.000-07:00

September 7th 2000 - The plug was pulled on the National Debt Clock, which has kept track of the federal government's red ink since the electronic billboard near Times Square was erected in 1989.

In its final moments Thursday, the sign read: "Our national debt: $5,676,989,904,887. Your family share: $73,733."

New York real estate developer Seymour Durst invented and bankrolled the clock to call attention to the then sky-rocketing national debt. He died in 1995.

"My father's purpose in putting it up was to show the increase in the debt and to get people aware of the size of the debt and how it was growing," said his son Douglas Durst. "And the clock certainly was helpful in accomplishing that."

The 11-by-26-foot clock was covered with a red, white and blue curtain after it quit ticking. The younger Durst was skeptical the clock would remain covered for long.

"We'll have it ready in case things start turning around --which I'm sure they will," Durst said. "The politicians will do what they have always done and start spending more than we can afford."
Debt rose $13,000 per second

When it first was plugged in, the odometer-style clock whirred furiously as the national debt rose by $13,000 a second. Often the last few digits increased so fast they were just a blur. And at one point in the mid-1990s, the debt was rising so fast the clock's computer crashed.

But the clock, which calculated the second-by-second increase in the debt based on data from the U.S. Treasury, began doing a strange thing this year.

Rather than cranking higher, it started ticking in the opposite direction, shaving off roughly $30 a second at last count, with a newly frugal Washington to thank.

Much to the bewilderment of passers-by, the clock began ticking down shortly after the government -- flush with surplus funds from America's decade-long economic boom -- announced in August 1999 it would start paying off its debts.

The government has paid off roughly $100 billion of the national debt so far this year.
Ticking down sending wrong message

"I was waiting for a friend, and that was the first thing I was going to ask him -- why is the clock going down?," said Glen Allen, who often spends his lunch hour near the corner of 42nd Street and Sixth Avenue at the entrance to Bryant Park.

"It's great that it's going down, but what does it really mean? I don't know. If it turns in the opposite direction, I would have no way of knowing what caused it," Allen said.

Durst said that kind of confusion was far from his father's wish to inform the public on the ballooning debt.

"I think it's sending the wrong message at this point," he said.

Some prominent Wall Streeters agreed.

"When the public debt was rising at the rate it was a decade ago, it was a great idea. But now it just becomes a basis for complacency," said Lou Crandall, who follows Treasury financing at the Wall Street research firm Wrightson & Associates.

Vice President and Democratic presidential nominee Al Gore has outlined a plan that he says would eliminate the debt by 2012.

Senior economic advisers to Texas Governor and Republican presidential candidate George W. Bush agree with the principle of paying down the debt but have not committed to a specific date for eliminating it.

Clinton Announces Record Payment on National Debt

2008-09-14T13:23:00.000-07:00

May 1st 2000 - President Bill Clinton said Monday that the United States would pay off $216 billion in debt this year, bringing to $355 billion the amount of the nation's debt paid down in the three years since the government balanced the budget and began running surpluses.

In a written statement, Clinton said the $216 billion payment represented the largest debt paydown in American history, and he said that the federal government's long-term debt is now $2.4 trillion lower than projected to be when he first took office.

However, the U.S. government still has a long way to go before it pays down the entire national debt, which now stands at $5.7 trillion.

"We should take advantage of this historic opportunity to use the benefits of debt reduction to extend the life of Social Security and Medicare and pay off the entire national debt by 2013 for the first time since Andrew Jackson was president," Clinton said.

Clinton has asked Congress to dedicate the interest savings from paying down the national debt to the Social Security Trust Fund, which will add 54 years to its life, according to White House estimates.

Clinton also used the announcement to take issue with Republican tax cut plans, noting that "the debt quadrupled in the twelve years before I came into office," a reference to his Republican predecessors, Ronald Reagan and George Bush.

"We should not jeopardize the longest economic expansion in history with risky tax cuts that threaten our fiscal discipline," said Clinton, who credited his administration's 1993 and 1997 budgets as well "tough choices in each and every year" for the debt turnaround.

"As a result, interest rates are lower, leading to stronger investment and growth while saving money for American families," he said.

US to buy back National Debt, first time in 25 years

2008-09-14T13:15:00.000-07:00

August 4th 1999 - For the first time in 25 years, the US Government plans to reduce the size of the national debt.

The news represents a transformation of the US budget position, after struggling with huge deficits for most of the last decade.

And it comes as a riposte to Republican plans to use the budget surplus to fund more tax cuts.

The last time the US tried to reduce its debt was in 1972.

It now says it will begin repurchasing Treasury bonds before they fall due, as early as next February, cutting back on the $3.6 trillion (£2.4 trillion) it owes to the public.

Treasury Secretary Lawrence Summers said that "reducing the supply of Treasury debt held by the public brings enormous benefits for our economy".

He argued that savings could be used instead for more productive investment in factories, while reducing the total amount of debt would help cut interest rates.

But the repurchase scheme will not begin until after a consultation to consider "a number of complex issues that will need to be worked out".

Surplus squabble

The proposal comes as Democrats and Republicans squabble over what to do with the growing US budget surplus.

Last year, the government had a surplus of $69.2 billion, a total which is likely to be exceeded this year. It is the first time since 1957 that the US has had two consecutive years of budget surplus.

Official projections suggest trillions of dollars in budget surpluses over the next 15 years, boosted by a strong economy and strict controls on spending.

But there is no agreement on what to do with the money.

The Republicans are proposing a $792bn tax cut, while President Clinton and the Democrats want to add funds to the social security retirement programme and Medicare, which provides health care for older people.

But in a change of tack last month, the Clinton administration indicated that it was also prepared to consider using some of the surplus to reduce the overall government debt.

Such a course of action has long been advocated by Alan Greenspan, the influential chairman of the US central bank, the Federal Reserve.

He argues that reducing government debt should take priority over tax cuts, as the move will free funds for private investment and lower government spending.

Less debt to sell

The government surplus means that it needs to sell fewer bonds to the public.

It is going to reduce the number of times it sells 30-year Treasury bonds, from three times a year to twice a year.

The government hopes that by making repurchases, rather than just selling less debt in the future, it can better manage its portfolio to save money.

By retiring longer term debt, while issuing more cheaper short-term bonds, it will keep the cost of the debt repayments lower.