Katrina and Deficits: Right Topic, Wrong Question
Katrina and Deficits: Right Topic, Wrong Question
The costs of Katrina have served as a fiscal tipping point that has finally put our escalating budget deficit back on the political radar screen – even for some Republicans. Yet, while the renewed focus on rising deficits is a step in the right direction, unfortunately, the entire discussion has been reduced to the question of “how should we pay for Katrina?” With apologies to thousands of fourth grade teachers, there is such a thing as a bad question, and this is a textbook example.
Getting the question right is no small matter. Focusing national attention solely on finding the one-time savings to pay for the one-time cost of this horrible natural disaster risks distracting us from the far more damaging long-term fiscal deterioration caused by the administration’s man-made economic policies.
Why is it that the entire policy establishment and press corps have only asked how we can pay for Katrina, but have virtually never asked how we can pay for the dramatic, perpetual costs of permanent marginal, estate, dividend and capital gains tax cuts for America’s most fortunate or the escalating tab for the president’s prescription drug bill? How is it that the media repeatedly ask how we will pay to rebuild the communities and lives devastated by Katrina, but never ask how we will pay for the $500 billion it will cost us during the next decade to implement the president’s proposal to eliminate the estate tax for the very few well-off couples with estates over $5 million?
Consider the following: prior to Katrina, Goldman Sachs estimated that the next 10 years – which had been projected to be surplus years when Bush took office – will now see a cumulative deficit of $4.75 trillion. Projections from Economy.com came in lower, but still over $4 trillion, while the bipartisan Concord Coalition had projected an even higher $5.7 trillion deficit. It is this dramatic swing from projected 10-year surpluses of over $5 trillion to near $5 trillion deficits – and not the one-time costs of Katrina – which poses the most serious threat to global economic stability, our long-term national savings rates, and our ability to address Medicare and Social Security, while still investing in our children. Simply finding one-time savings to pay for the one-time costs of Katrina just means that Goldman Sachs’ estimate will stay at $4.75 trillion and not $5 trillion. Not a staggering accomplishment.
Indeed, while finding one-time savings for a one-time crisis does virtually nothing to ameliorate long-term fiscal deficits, efforts that strengthen our long-term fiscal position can make it far easier to deal with one-time costs of war or crises without damaging economic effects. Indeed, a primary justification for long-term fiscal discipline has been to save for the proverbial rainy day, and as we saw with Katrina, actual rainy days as well. The rainy day savings of the 1990s – which led to a $5.6 trillion projected 10-year surplus when President Bush took office – gave America a fiscal cushion to help us handle these economic and security challenges.
If the Bush administration faced the $400-$500 billion projected annual deficits that it is primed to leave to its successors, the $700 billion a year fiscal deterioration under its watch could have pushed the deficit above $1 trillion—an unsustainable 10 percent of our GDP. Such unprecedented deficits could weaken our capacity to respond to economic and security crises without destabilizing economic effects. For Americans who are not only witnessing the destruction from Katrina, but darkly wondering about the even worse costs of a future disaster or terrorist attack, the notion that the Bush administration is leaving future administrations in such a tenuous fiscal situation should be of great concern.
The White House tries to shun responsibility for what former Nixon Secretary of Commerce Pete Peterson has called “the worst financial deterioration in our history” by falsely suggesting that the run up was due only to war and recession. This is not even close to true. The largest cause of today’s fiscal deficits has been the administration’s insistence on passing tax cuts and at least one major new entitlement bill without ever asking – no less taking seriously – how they should be paid for. Indeed, the cost of these unpaid for Bush initiatives is higher in a single year than the highest multi-year estimates of the costs of rebuilding after Katrina.
The right course for progressives is to combine measures to improve our long-term fiscal path with a strong “putting people first” response to Katrina. This response should include proposals for tax incentives linked to job creation and higher wages, retraining for the unemployed, increased housing choice, and assurances that, to the greatest degree possible, rebuilding jobs with decent prevailing wages will go to the displaced. What will be most important for our fiscal future is whether we use this period to reevaluate who truly benefits from this administration’s deficit exploding policies, who is being asked to sacrifice, and whether or not these choices are consistent with our values of generational responsibility and our commitment to building a stronger, more inclusive middle class with more opportunity for those struggling to work their way up.
Of course, if part of a progressive package to restore fiscal discipline includes long-term savings from not extending tax cuts to individuals making over $400,000 and estates over $5 million per couple, the White House will simply say, “the last thing in the world we need to be even thinking about is raising taxes.” Yet, those who can put supply-side ideology to the side for even a moment should pause to ask: Can we still afford both unnecessary spending and subsidies as well as extending new tax cuts for those with the highest incomes if we are to have the fiscal strength to best confront the known challenges of Medicare, Social Security and education as well as unknown costs of future natural disasters and national security crises? Pardon my immodesty, but that seems like a good question.
Gene Sperling is a senior fellow at the Center for American Progress.
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