[Congressional Record (Bound Edition), Volume 149 (2003), Part 7]
[Senate]
[Pages 9397-9399]
[From the U.S. Government Publishing Office, www.gpo.gov]




      JEFF MADRICK ON ``THE U.S. ECONOMY AND THE IRAQI TIME BOMB''

  Mr. KENNEDY. Mr. President, last Sunday's magazine section of the New 
York Times contained an excellent and insightful article by Jeff 
Madrick on the Nation's troubled economy as a result of huge tax cuts, 
the stalled economy, and the cost of the war and the reconstruction of 
Iraq. His article emphasizes the severe consequences we will face if we 
fail to bring the exploding deficit under control. Mr. Madrick's 
article, ``The Iraqi Time Bomb,'' will be of major interest to all of 
us in Congress, and I ask unanimous consent that it may be printed in 
the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

        [From the New York Times Magazine Section, Apr. 6, 2003]

                          The Iraqi Time Bomb

                           (By Jeff Madrick)

       The denial of economic reality that permeated Wall Street a 
     few years ago has now migrated to Washington. On Wall Street, 
     when companies did not generate the promised profits to 
     justify the bubble in stock prices, many analysts told 
     investors that profits did not matter. A new economy would be 
     gauged by other measures, they insisted. Today, in similar 
     fashion, as the federal budget has plunged into the red over 
     the past two years, President Bush's economic team is telling 
     the nation that deficits no longer matter.
       At first, perhaps, the claim seemed plausible. Damage to 
     the economy was not yet evident. And I, for one, am not a 
     deficit hawk. At times, deficits are necessary to stimulate 
     economic growth, and their dampening impact on private 
     investment is occasionally exaggerated. But because of the 
     Bush administration's policies and a weak economy, deficits 
     are now approaching unmanageable levels, as they did in the 
     1980's. In fact, the federal government's fiscal health has 
     deteriorated at a pace so stunning that few have yet caught 
     up with the facts.
       Here are some of those facts. Even without a war, the 
     budget deficit would have exceeded $300 billion this year--
     just three years after the budget experienced a surplus of 
     nearly $240 billion. (This was in the midst of a four-year 
     run of substantial surpluses.) But

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     with war costs escalating and revenues falling as a result of 
     the flat economy, this year's deficit could rise to $400 
     billion. In fiscal year 2004, it is likely to be higher.
       The president has asked Congress for $75 billion to finance 
     war-related costs, but many think a more realistic estimate 
     of the combined costs of war and reconstruction will be 
     closer to $200 billion. More alarming is the decline of 
     government revenues over the long run. Instead of generating 
     $5 trillion to $6 trillion in surpluses over 10 years from 
     rising tax revenues on growing incomes, the government will 
     now probably come up nearly $2 trillion short through 2013. 
     That recession and slower growth have shrunk tax revenues is 
     predictable enough. But the sinking stock market has taken 
     more of a toll than expected: there are no more outsize 
     capital gains to tax. These yielded fat revenues in the late 
     1990's, when stocks were soaring, exaggerating the fiscal 
     health of the nation. Now the train is running in reverse.
       Finally, the Bush tax cuts have made long-term financial 
     prospects significantly worse. Occasionally, tax cuts make 
     sense. But the $1.4 trillion tax-cut package passed in 2001 
     would have been more productive if it had been temporary and 
     applicable to more taxpayers. Instead, it was skewed to the 
     rich (who are prone to save rather than spend) and will be 
     permanent--far from disappearing should the economy improve, 
     the tax cut will grow larger. The administration proposed a 
     second major tax cut in early January, estimated to cost $726 
     billion over 10 years, and it appears to be even less 
     effective as a near-term stimulus: more than half of the 
     total results from the elimination of taxes on dividends, an 
     idea raised at Bush's economic summit in Waco, Tex., last 
     August by a stockbroker, Charles Schwab. In addition, the 
     Bush administration followed up this tax plan with a new 
     budget that would extend the 2001 cuts three years past their 
     expiration, costing another $600 billion.
       The Senate has since voted to reduce the $726 billion 
     budget request by half, but last week it was still far from 
     clear that this change would prevail, given that the House 
     passed a budget resolution that assumed the president's tax 
     cuts.
       The consequence of all these steps? Budget deficits as far 
     as the eye can see. When Bush took office, his budget team 
     estimated there would be a cumulative surplus of some $5.6 
     trillion over the next 10 years. Now, in light of the 2003 
     tax cuts and the new Bush budget, the Congressional Budget 
     Office, the nonpartisan economic research arm of Congress, 
     calculates that a long-term surplus will turn into a $1.8 
     trillion deficit between 2004 and 2013.
       Unfortunately, economists outside the government estimate 
     that the deficit will be even larger. William Gale and Peter 
     Orszag of the Brookings Institution figure the deficit is 
     likely to approach $2.5 trillion. The Wall Street economists 
     William Dudley and Edward McKelvey of Goldman Sachs say that 
     the deficit will exceed $4 trillion by 2013.
       The timing of this looming deficit could not be worse. The 
     retirement of baby boomers is about to begin en masse. In 10 
     years, the costs of Social Security and Medicare will start 
     rising rapidly. By the 2020's, these costs will begin to 
     reach roughly 12 to 15 percent of gross domestic product, 
     compared with about 6.8 percent today. To put this in 
     perspective, consider that all current federal expenditures 
     now come to only 20 percent of G.D.P.
       The concern about large deficits is that they reduce long-
     term economic growth and produce even less revenue for social 
     programs. When large enough, government deficits require so 
     much federal borrowing that they can displace private 
     investment and push up interest rates on mortgages, consumer 
     credit and business borrowing to levels that thwart home 
     buying, consumer purchases and capital investment. (If 
     interest rates should stop falling, home refinancing, which 
     has recently been a principal source of more money for 
     consumers, will be less attractive.) Big deficits also make 
     the U.S. economy especially vulnerable to the loss of capital 
     investment from overseas. Because Americans save so little, 
     and because the nation imports much more than it exports, the 
     United States must attract close to $500 billion of foreign 
     capital annually to finance its growth. High budget deficits 
     could easily reduce the confidence of foreign investors, who 
     already own 36 percent of U.S. government debt. If they sell 
     some of those securities, they will drive down the value of 
     the dollar and U.S. investments will become even less 
     attractive. Over the last year, the dollar has already fallen 
     by 20 percent against some major currencies.
       The slower growth that results from large deficits affects 
     everybody. It leads to lost jobs, lower wages and fewer 
     business opportunities. A return to the sluggish economy of 
     the 1980's and early 1990's is not only possible but likely.
       Straitened conditions are being felt already. States, 
     starved for revenues because they cannot borrow to make up 
     for the deficits caused by the economic downturn, are now 
     cutting education, health and poverty programs aggressively. 
     State and local governments are also complaining that money 
     promised by Washington for homeland security has not arrived. 
     And the president recently told the states that there's no 
     extra money for them.
       Given the pinch, how can we explain the administration's 
     fiscal choices? Some economists in the Bush camp claim that 
     lower tax rates and the elimination of taxes on dividends 
     will both motivate people to work harder and investors to 
     invest more. The economy will grow faster than traditional 
     economic models anticipate, producing tax revenues that will 
     reduce projected budget deficits. But most economists say 
     there is a large measure of ideological wishful thinking 
     here, reminiscent of the supply-side economists who advised 
     President Reagan. Bush's economic advisers argue, for 
     example, that the dividend tax cuts may generate more growth 
     than any conventional economic model can predict by making 
     investment in stocks more attractive; rising stock prices 
     will in turn encourage investment. Few economists agree, 
     however that eliminating dividend taxes will have more than a 
     modest impact on stock prices. And even a 20 percent boost in 
     stock prices from current levels does not restore them to 
     their recent highs.
       Narrow politics, of course, can partly account for the Bush 
     administration's tax proposals. The tax cuts 
     disproportionately benefit the wealthy, which, after all, is 
     Bush's natural political constituency. But Bush's policies 
     may, in fact, best be explained by another, more radical 
     agenda. Extensive tax cuts will require Congress to limit the 
     growth of social programs and public investment and undermine 
     other programs altogether. If that is your vision of the best 
     direction America can take, the strategy makes some sense. 
     So, we were wrong about how dividend tax cuts stimulate 
     growth, you can almost hear the Bush advisers thinking. No 
     problem. Rising deficits will inevitably force Congress to 
     starve those ``wasteful'' social programs. The prospective 
     high deficits may even make it imperative to privatize Social 
     Security and Medicare eventually. Social spending is the 
     problem, goes the argument, not tax cuts.
       The Bush administration has been inconsistent about its 
     economic rationales since it earliest days in office. First, 
     President Bush justified his $1.4 trillion tax cut in 2001 by 
     claiming the government should return surpluses to taxpayers 
     when the economy is strong. He found a convincing ally in 
     Alan Greenspan, chairman of the Federal Reserve, whose 
     influence was critical to the tax cut's passage. Then, as the 
     economy appeared to be weakening, Bush argue that a tax cut 
     was needed for an entirely different reason. It would 
     stimulate the weak economy inherited from Bill Clinton. This 
     made sense, but as noted, the tax package was not a short-
     term stimulus package.
       When, by early 2003, there was no escaping the fact that 
     the federal budget would remain in long-term deficit, the 
     Bush administration's budget office did not issue the 
     customary 10-year forecast. Instead, it only forecast a five-
     year budget. Beyond that, the Bush team said, economic events 
     were too uncertain.
       The Congressional Budget Office, however, does not enjoy 
     such flexibility. It produced its standard 10-year outlook, 
     which spelled out the obvious. But to give the Bush 
     administration its due, a more recent C.B.O,. analysis also 
     tried to take into account the possible growth incentives of 
     the tax cuts. Based on at least seven different approaches to 
     how government policies may affect future finances, none of 
     the Congressional Budget Office's economic projections 
     eliminated the future deficit. To the contrary, they all 
     clustered around the original $1.8 trillion deficit figure 
     that the office had calculated earlier. (The number of 
     possible approaches to these forecasts alone suggests how 
     little is truly known about the impact of such changes.) 
     There would be a significant budget deficit every year 
     through at least 2013, and, by implication, for many years 
     after.
       Can we live with these new deficits? If they remain as low 
     as the budget office predicts, they will come to less than 1 
     percent of gross domestic product in the last few years of 
     the forecast. Even so, this will probably impede economic 
     growth. And by 2014, when baby boomer liabilities begin to 
     rise rapidly, there will be no easy way to finance them. As 
     Lee Price, the chief economist of the Senate Budget Committee 
     Democrats, points out, by 2010 or even earlier, the nation 
     will have to start gearing up to pay for the baby boom 
     retirement. This will require either a very large tax 
     increase or substantially reduced benefits. The financial 
     markets will force the government to become more responsible 
     about spending, or interest rates will be driven to 
     damagingly high levels.
       And that's based on a moderately optimistic forecast, one 
     that assumes the economy grows at a healthy rate. 
     Specifically, it assumes that productivity--the output per 
     hour of work that is the primary source of growth--will rise 
     by 2 percent year. That is a rate slower than that of the 
     booming late 1990's, but it is considerably faster than the 
     average pace between 1973 and 1995.
       The C.B.O.'s projection incorporates only changes proposed 
     in the Bush budget. But other costly adjustments will be 
     necessary. Most important, tax cuts will subject as many as 
     40 million taxpayers to the higher

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     alternative minimum tax. (The A.M.T. forces taxpayers, whose 
     payments would be very low on account of large deductions, to 
     pay at least a minimum rate.) The government will almost 
     certainly change that, further reducing tax revenues. Also, 
     some expiring tax provisions will surely be extended. Gale 
     and Orszag of the Brookings Institution find that these 
     factors add another $700 billion to the 10-year deficit. This 
     does not include war expenditures.
       Dudley and McKelvey of Goldman Sachs reach their estimated 
     $4.2 trillion 10-year deficit by adding war and 
     reconstruction estimates. They also expect that Congress will 
     pass a substantially higher provision for reimbursement of 
     prescription drug costs under Medicare than Bush has 
     proposed, and that economic growth will be slower than 
     anticipated.
       These and several other realistic assumptions result in a 
     federal deficit that is unquestionably a terrible burden. The 
     deficits will require so much borrowing that the Goldman 
     economists figure that the size of the federal debt will rise 
     from 33 percent of gross domestic product to 49 percent. 
     This, even more than annual deficits, alarms economists. The 
     federal revenue needed just to pay the interest will be 
     enormous.
       Even this estimate does not take into account a realistic 
     view of the costs of war and a new foreign-policy doctrine 
     that could mean military involvement elsewhere. The $75 
     billion in appropriations that the Bush administration 
     recently asked for covers only the first six months in Iraq. 
     As for the costs of peace, it is hard to make any sensible 
     assessment. Some military experts claim that the presence of 
     only 50,000 troops will be required. Gen. Eric Shinseki, the 
     Army chief of staff, estimates that as many as 200,000 troops 
     will be needed. That could well cost $50 billion a year. 
     There are wide-eyed hopes that Iraq's oil revenues will 
     defray most of the cost of reconstruction, but it will take 
     several years to bring production to its full potential, as 
     well as billions of dollars--and that's assuming there is 
     complete peace. Some put the estimates of maintaining peace 
     and building democracy in the hundreds of billions of 
     dollars.
       And implementing the new world vision Bush has discussed 
     recently will require still more money. An ongoing presence 
     in the Middle East beyond Iraq will soak up additional 
     billions; potential crises in Korea and elsewhere will demand 
     expensive attention. As I understand it, since even before 
     the war started, the Defense Department has been spending 
     money so fast it can't keep track of it. In sum, the new 
     defense commitment looks open-ended.
       The budget resolution the House passed last month makes 
     clear the dollar amount of cuts in domestic programs that 
     would have to be made in order to retain something close to 
     fiscal balance in Washington in 10 years. They will involve 
     deep cuts in programs from Medicaid to school lunches to 
     college loans to, perhaps most cynically in the current 
     environment, veterans' benefits. The Center on Budget and 
     Policy Priorities calculates that reductions in mandatory 
     programs for the elderly, veterans and the poor would come to 
     $265 billion over 10 years. Another $210 billion would be 
     lopped off of discretionary programs. The total of $475 
     billion is about equal to the tax reduction the president is 
     requesting for the top 1 percent of earners in America.
       To make this politically palatable, the reductions would be 
     phased in. Average reductions would be only 1 percent in the 
     first year, but they would rise rapidly and would average 4 
     percent over 10 years. In the worst years, the budget for 
     Medicaid would be cut by 7 percent.
       But the House bill is based on the C.B.O. projections. If 
     other economists are right, and the deficits are considerably 
     larger, still greater cuts will be required to balance the 
     budget over time--in fact, perhaps double the amount. The 
     Bush administration insists that it can live with the budget 
     deficits and still maintain many of these programs. Denial 
     has become almost a ritual. But it cannot have anticipated 
     how quickly America's finances have turned to red, and it is 
     not very likely that it is prepared to face the reality that 
     the financial markets, if not Congress, will eventually 
     impose on it. If there is no growth miracle on the horizon 
     that would raise government revenues, the Bush 
     administration's options will be limited not only 
     domestically, which may be part of its design, but also 
     militarily. The administration may well be compromising its 
     own dearest goals.
       The longer we wait, the harder it will be to correct the 
     nation's finances. Most of us will be hit from both ends. 
     Incomes will not rise the way they did in the late 1990's, 
     and it will be difficult to save for retirement. The rising 
     costs of education and health care will be harder for the 
     typical family to meet. Meanwhile, government will not have 
     the money to help. Programs may be cut across the board. And 
     consider what was not accomplished in the 1990's, despite the 
     nation's prosperity. More than 40 million Americans still 
     have no health insurance. The United States has the highest 
     proportion of children born into poverty in the developed 
     world. The quality of education remains grossly unequal. Even 
     two-worker families cannot afford quality day care. Much 
     remains to be done.
       There is time for a course correction. But the longer the 
     nation waits, the harder the problems will be to fix. 
     Forecasting the economic future, as everyone knows by now, is 
     no sure thing. But the federal government simply cannot 
     indefinitely spend so much more than it takes in. At some 
     point, the nation will either raise taxes significantly or 
     make painful cuts in cherished federal programs.
       But as long as the full consequences of Bush's extravagance 
     are not immediate, and war limits serious public criticism, 
     the president may for now get away with promising guns and a 
     little butter. And we will all pay for it.

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