The Tax-Cut Pendulum and the Pit (soon interest rates rise, dollar crashes

[papau]

foreign lenders reject U.S. debt, interest rates rise, and the value of the dollar crashes.

http://www.washingtonpost.com/wp-dyn/articles/A16134-2004Oct7.html




washingtonpost.com
The Tax-Cut Pendulum and the Pit

By Jonathan Weisman
Washington Post Staff Writer
Friday, October 8, 2004; Page A01


In 2002, with midterm elections approaching and the nation edging toward war in Iraq, President Bush's economic team divided into opposing camps, with one side worried about rising budget deficits and the other pressing for tax cuts to stimulate a stagnant economy.

One group, led by Treasury Secretary Paul H. O'Neill and White House budget director Mitchell E. Daniels Jr., watched anxiously as the government's 2002 balance sheet swung from a record $313 billion surplus projected when Bush took office to a $157 billion deficit projected that August. How could the president demand fiscal discipline from Congress, they argued, then push expensive reforms of Social Security and the tax code if he continued cutting taxes?

The other side, led by White House economists Lawrence B. Lindsey and R. Glenn Hubbard, focused on economic growth, which had slipped from a 5 percent surge in the first three months of 2002 to 1.3 percent in the next quarter. Employment had slid by 235,000 jobs between January and September. Deficits would have little if any effect on the economy, they assured Bush, but if the president wanted to halt the stock market's slide and prop up incomes, he had to cut taxes more.

After weeks of debate, Bush made his choice clear, unveiling a $674 billion tax-reduction package on Jan. 6, 2003, that was larger and bolder than even Hubbard and Lindsey had expected. The proposal locked in Bush's record as a tax cutter. But it also contributed to mounting budget deficits and debt that may prove to be one of Bush's most enduring legacies.

When Bush took office in January 2001, the government was forecasting a $5.6 trillion budget surplus between then and 2011. Instead, it is now expecting to accumulate an extra $3 trillion in debt -- including a record $415 billion in the fiscal year that ended Sept. 30. The government has to borrow an average of more than $1.1 billion a day to pay its bills, and it spends more on interest payments on the federal debt each year -- about $159 billion -- than it does on education, homeland security, justice and law enforcement, veterans, international aid, and space exploration combined.

Without doubt, the fiscal turnaround started with the bursting of the stock market bubble and was pushed forward by recession, terrorist attacks and corporate scandals not of the president's making. But conservative and liberal budget analysts agree that deficits were increased by the administration's policy choices: tax cuts amid swelling red ink and the costly invasion of Iraq.

The consequences are just coming into view. The White House has ordered draft budgets for 2006 that would cut spending on homeland security, veterans affairs and education, according to White House documents. Some economists -- although by no means most -- see a reckoning on the horizon, when foreign lenders reject U.S. debt, interest rates rise, and the value of the dollar crashes.

"The pressures going forward are too great to allow us to borrow these kinds of moneys on the international market on a sustained basis," said Douglas Holtz-Eakin, a former White House economist who heads the Congressional Budget Office.<snip>