Museum of Modern Arts 2005 March
Current Economic and Social Issues View Comments
Almost all of the death, injury, damage and destruction arising from hurricane Katrina is the result of the crimes of the Bush administration.
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President Bush was criminally negligent in diverting funds that had been requested to protect the people of New Orleans for use in the criminal war of conquest in Iraq. The Bush administration did this in full knowledge of the impending danger. The highest government agency in charge of dealing with disasters, the Federal Emergency Management Agency, warned of the potential for disaster as early as 2001.
With the complete evacuation of New Orleans, tens of thousands trapped without food, water, or electricity, thousands of homes destroyed and the death toll mounting by the hour, this is a disaster of unprecedented proportion. It profoundly affects Black people, who are a major part of the population in Louisiana, Alabama, and Mississippi, and are suffering disproportionately because they are subject to racist discrimination—which leaves them in poverty and most vulnerable to such disasters. Seventy percent of New Orleans’ residents are Black and live in apartheid-like conditions.
Some politicians are calling it “our tsunami.” The tsunami last December also took an excessive toll of life because of criminal neglect. But a tsunami comes rarely. Hurricanes come to the delta region almost every year. This disaster was not only predictable but predicted. What seems like an inevitable tragedy caused by nature was foreseen long ago by scientists, engineers, government agencies, environmentalists and experts in disaster management.
The science writer for the Houston Chronicle wrote on Dec. 1, 2001:
“New Orleans is sinking.
“And its main buffer from a hurricane, the protective Missis sippi River delta, is quickly eroding away, leaving the historic city perilously close to disaster. ...
“So vulnerable, in fact, that earlier this year the Federal Emergency Management Agency ranked the potential damage to New Orleans as among the three likeliest, most catastrophic disasters facing this country.” The other two were an earthquake in San Francisco and a “terrorist attack on New York City.”
The federal, state and local governments knew of the danger. They knew what caused it and how to deal with it. But they did little or nothing. They left the people of the delta region unaware and helpless to deal with the inevitable disaster.
Why did they do nothing? An Aug. 30 dispatch of Editor and Publisher revealed that “$250 million in crucial projects” planned by the Army Corps of Engineers in the delta for shori ng up levees and building pumping stations could not be carried out. “The Corps never tried to hide the fact that the spending pressures of the war in Iraq, as well as homeland security—coming at the same time as federal tax cuts—was the reason for the strain.
“The 2004 hurricane season was the worst in decades. In spite of that, the federal government came back this spring with the steepest reduction in hurricane and flood-control funding for New Orleans in history.”
The Houston Chronicle’s 2001 report cited a study by a consortium of government agencies several years ago. This consortium recommended that between $2 billion and $3 billion dollars was needed for projects that could rectify the problem. That is less than the cost of one month of spending on the Iraq occupation, which costs $4 billion a month at the minimum! Certainly part of the $300-billion-plus spent on the war could have been used to take preventive measures.
Of course, while Bush is the immediate culprit, it must not be forgotten that the Democratic Party voted for the war and every nickel spent on it. So the Democrats are also criminally liable for both the devastation in New Orleans and the illegal war and occupation.
Now that the capitalist authorities have let this disaster happen, Bush is taking a business-as-usual approach to dealing with the disaster. Just as during the tsunami, it took him days to disrupt his vacation and step away from his Crawford ranch.
The federal government is the only authority capable of mobilizing the resources necessary for the rescue mission and the reconstruction. It is said that a million people were evacuated from New Orleans and the surrounding parishes (counties) before the hurricane. Actually, the government did not evacuate anyone. The authorities simply declared a mandatory evacuation and then left it to people to get out. Now they are saying that “at least a hundred thousand people” were left in the city itself.
People have no place to stay. Many have no food. Their personal belongings are all gone. Medical care is cut off. Schools are inaccessible. Countless are homeless. The immediate crisis requires a national mobilization of medical personnel, social workers, rescue experts, hydraulic engineers.
Food, water and medical supplies should be immediately commandeered for the emergency from agribusiness, supermarket chains, pharmaceutical companies. Wal Mart and other retail giants should be required to ship, gratis, clothing and other necessities to meet basic needs. Government food storage supplies in warehouses throughout the Midwest and other regions should be made available.
Every form of transport—planes, helicopters, buses, ambulances, small boats—should be mobilized to the region. These and other measures should be immediately implemented by the federal government based on its emergency powers and responsibilities.
In other words, all of this society’s material and human resources should be made available to the victims in this crisis. The corporations have control of these resources, but the workers who created them have every right to them.
Let the government and the bosses pay. Putting people—the suffering people of the delta—before profits should be the order of the day. The property restrictions of capitalism must be overruled in the interest of the masses.
Particularly, the oil companies should be forced to cough up billions of dollars for reconstruction out of the super-profits that they pump out of the delta region every day. Exxon Mobil refines 493,000 barrels of oil a day in Baton Rouge; Chevron, 325,000 a day in Pascgoula, Miss.; Conoco Phillips, 247 ,000 a day, to name a few. All this wealth has been taken out of the region, not to speak of the wealth spent trying to conquer Iraq and its oil. And they should not only give back the profits they gouged from the people by raising gasoline prices to over $3 a gallon—they should be forced to lower prices drastically.
In general, the giant multinationals should be made to ante up because of all the wealth and labor they have taken from New Orleans—through which so much of the wealth of this country flows—while the majority of people are left with just enough to survive.
As for the reconstruction effort, the authorities are taking a narrow approach. They are talking about months and years to recover. People with flood insurance can stand in line once they can get back to their neighborhoods. Poor people who have no flood insurance are on their own. Perhaps FEMA will give a few handouts to tide them over for a while. All the racist hysteria being whipped up about “looters” is a cover-up for the fact that the government has made no provisions to feed the people, and that so many Black people are living in dire poverty.
But the truth is, there is a much more rapid and comprehensive solution to turning the situation around right in front of the government’s nose. There are millions of workers who can be mobilized to go to the region to help out.
Right now there is a “housing boom” where hundreds of thousands of construction workers are toiling away as real-estate developers race to make super-profits on the speculation in the housing market.
What is needed is a full-scale mobilization of the building trades, construction workers, hydraulic engineers, medical personnel, social-service workers and workers from all over the country to stop capitalist business as usual and mobilize to help the people of New Orleans, Biloxi and the delta region—fully funded by the government.
Millions of unemployed workers could be hired at union wages to pitch in. Organized labor could be in the vanguard of organizing the reconstruction effort.
With all their technology, the bosses are preoccupied with how they can collect damages from the insurance industry, how they can get their profitable refineries back on line, and how they can resume making profits in the area as soon as possible. The working class, in contrast, is concerned with the fate of the masses of people, especially the Black, Latin American poor white and the exploited who suffer the most and will get the least help.
Once the reconstruction effort begins and communications become possible, unions, community organizations, and move ment groups should set up independent channels by which they can give aid and assistance to the people of the stricken area.
Mass mobilization, putting people before property, is how reconstruction projects are handled in Cuba and under the socialist organization of society. The demand should be put forward that the government treat this as a national emergency crisis of the greatest magnitude. Measures should be taken in proportion to the extent of the crisis—measures such as giving extended unemployment insurance to everyone in the area. Personal property loss should be fully restored. And the government should subordinate all its efforts to giving effective short term and long term aid to the victims. But at the same time the working class in this country should try to find a way to get beyond the capitalist authority and bring whatever aid and assistance it can to the people of the delta.
Political aspects of the Reaganomics
Given all of these economic consequences of the 1st
With respect to these questions, there might be following two answers: the first is related with Republican Party’s clever political strategy during the election period. From a political perspective,
“Republicans held the symbolic high ground that the Democratic Party had once own in national politics – the party of growth and prosperity. On the contrary, Democratic presidential candidate proposed painful remedies – a major tax increase and substantial budget reductions to restore fiscal order.” (610)
From historical perspective, the historic positions of the two dominant political parties were reversed for the first time in political history during the 1984 election. “The Democratic Party felt trapped by its past government deficit policy, still tarnished by the inflationary anxieties experienced under
In the meantime, the president’s party had effectively abandoned the old Republican orthodoxy that the Democrats started to attempt to mimic. From 1984 election, Republicans started to appeal their rhetorical loyalty to the idea of a balanced budget and fiscal order.
Of course, however, the conservative party had adopted the opposite in actual policy – an economy driven by increased federal spending (mainly for military subsidies) and increased debt (mainly from tax cuts), the most serious fiscal deficit policy ever attempted in peacetime. The old Republican complaint that deficit spending ultimately led to ruinous inflation was conveniently discarded in the presence of Republican federal deficits.
Secondly,
But from the benefits of hindsight, the
Nonetheless, what most ordinary citizens knew from their own lives appeared to match what the President told them. “The anxiety of price inflation was gone. Most important of all real disposable income per capita was rising throughout the campaign year at an extraordinary pace. In 1980, when
Theoretical implication of the 1980s
From theoretical perspectives, economic policies adopted under the
However, unlike the forward-looking expectations of “supply side economics,” it was “demand side” which pulled and induced the investment. Even under the dire circumstances, it was not capitalist or entrepreneurs but ordinary households and consumers who spent their money leading entrepreneurs to expand their production facilities. In this sense, Keynesian notion of “effective demand” has remained effective even under the dominance of “supply side economics” in economic policy area.
Furthermore,
However, apart from the question related with adequate quantity of money (how can we know and to what extent is the overall quantity of money necessary in a given condition?), his explanation missed the significant role of the velocity of money. If the velocity of money changes due to various reasons, his argument that the Fed should focus on the overall quantity of money, instead of trying to regulate real interest rates, would lead us in the wrong direction.
In sum,
Concluding remarks
It seems necessary for me to conclude this review essay by introducing the merits of this book. The first virtue that I would like to mention is its style and structure. It is written and organized in plain English. Even those readers with basic level of English proficiency would not find any serious difficulties in understanding the main contents of the author’s arguments. Even though it seemed to be somewhat thick compared to ordinary paperbacks at first glance (717 pages for main contents and total 798 pages including reference, appendix and index), the way of writing was easy to follow and even exciting. It took a week for me to finish reading the book.
Second, the book is well organized. The book consists of four major parts, each of which mainly deals with the Fed’s institutional characteristics (“Part one: secrets of the temple”), its history and traditional roles (“Part two: the money question”), the Fed’s monetary policies in 1980s and their repercussions (“Part three: the liquidation”) and finally evaluations of the Fed’s economic policies in socio-political perspectives (“Part four: the restoration of capital”). Every chapter is closely connected with each other.
Third, this book is based on wide range of references, data analysis and intensive interviews. As you can see, the author spent for about 5 years to gather basic data and references. He also conducted in-dept interviews with former Fed chairman and many government officials in order to represent policy debates and economic climates around the Fed and the White House at the time. The author’s honest and meticulous descriptions of the affairs offer enough information about the Fed and
Fourth, this book contains wide range of knowledge about the
In sum, this book will be a very helpful guide for those who want to understand the history of US economic affairs – how does it develop and where will it go. Instead of doing laborious work for myself, I would like to finish this essay by citing the following precise praises for the potential readers: “startling and revelatory as well as probing and incisive. It is not only a major journalistic achievement but a major public service, for it is an immensely valuable addition to our understanding of the hidden forces that shape our lives.” – Robert A. Caro; “I expect this book to shake up
* Reference for this review
Krugman, P. 1990. The Age of Diminished Expectations – U.S Economic Policy in the 1990s,
------------. 1994. Peddling Prosperity – Economic Sense and Nonsense in the Age of Diminished Expectations,
* Further reading list about the history and roles of the Fed and the
Greider, W. 1992. Who Will Tell the People – The Betrayal of American Democracy,
Rothbard, M. 2002. A History of Money and Banking in the United States – The Colonial Era to World War Ⅱ, Alabama: Ludwig von Mises Institutes (deals with the history of the US central bank system from the perspective of Austrian school of economics)
Stiglitz, J. 2003. The Roaring Nineties – A New History of the World’s Most Prosperous Decade,
Global consequences Ⅰ – in the name of ‘glory’ of the strong dollar
Until now, we focused on
First of all, it would not be so difficult to understand that the world economy has started to enter into the same economic recession due to the Fed’s contractionary money policy. The underlying logic was simple: once the richest market in the world declined, exporters around the world started to lose their customers. When the ordinary wage earners in the North America started to suffer from their losses of jobs and reduced incomes due to higher interest rates, it was natural for export-driven “developmental economies” in the
Even in these circumstances, however, central banks of other industrial nations had no other options but to raise their interest rates too allowing the depression of their own domestic markets. If they resisted raising interest rates in their own countries whatever the reasons, huge amount of money invested on their domestic capital account would flight into the U.S financial market for the short term arbitrage causing abrupt withdrawal and financial disorder in the domestic financial market.
It is not purely theoretical; newly elected socialist president of
Secondly, there was another aspect the Fed’s monetary policy had. It was more indirect process but surely exacerbated by the Fed’s high interest rate policy. The higher interest rates available in the
From then on, an international bank or a corporations or private investor who wished to buy dollar assets would have to pay with more francs or pounds or yen. “From July 1980 to September 1981, the dollar appreciated by 36 percent in its international exchange value with the German mark. In 1979, the yen had traded at less than 200 yen to the dollar. By 1983 the ratio was 235 yen to the dollar.”(414)
This rapid appreciation of the dollars in turn “drove away foreign buyers of American products, just as high interest rates drove away the domestic customers from goods and services. It made US exports more expensive for overseas customers proportionately, and at the same time made foreign imports cheaper in American marketplace.”
In extreme case, for example, American farmers who have previously produced their grains and corn much more cheaply in
In the meantime, “foreign producers of auto, steel, machine tools, computer chips and a long list of other manufactured products grabbed a larger and larger share of the American domestic market. US import of manufactured goods rose by 66 percent over four years’ time and
In a sense, this process can be described as an exploitation of producers for the interest of consumers, which every mainstream economic textbook cites as an example of the benefits of free trade. However, since American consumers are consisted of owners of farms and agricultural workers, owners of small scale of factories and industrial workers, the process of cost and benefit analysis will be highly complicated; Those who were engaged in farming and middle scale manufacture industries would lose their lands, factories and jobs due to expensive money borrowing. Those who barely succeeded in maintaining their factories and farm would now finally lose their lands and factories due to the rapid appreciation of their national currency.
During these periods, “hundreds of thousands, perhaps millions of US jobs were extinguished by the strong dollar. The
But what damaged American production was rewarding for American finance, especially for the major banks active in international markets. The rising dollars meant that the value of their overseas dollars was rising too. It also meant that market demand was growing for the commodity that American financial institutions traded –
Admittedly, the
Given this unique balance of power controlling the international value of the dollar, it is still mysterious why the then US Treasury did not intervene with international exchange market, allowing the rapid appreciation of the dollars. The author of the book,
Global consequences Ⅱ - the
However, the most serious impacts of the Fed’s economic policy on global economy were on the less developed countries (LDCs) in the Third World, whose economies largely depended on the
First of all, their economic output and real incomes fell disastrously as much as 10 percent in some instances, as their export markets dried up and the price of raw material commodity such as copper and rubber price began to fall sharply. “What was to become a severe recession for Americans was catastrophe for the citizens of these poorer countries in Africa and Latin America and
At the same time, the debt burdens of the LDCs expanded dangerously. The worldwide spike in interest rates had raised the cost of the debt, the hundreds of billions in outstanding loans previously borrowed from the banks of Europe and
In a sense, the debt crisis had its origins in the Fed’s policy failure itself. In the late 70s and early 80s, the Fed and other
The Fed’s failures of regulation are now turning its direction to the
The first challenge originated from
In theory at least, the debt crisis might have been avoided if the Fed had not chosen such an abrupt approach to decelerating price inflation. The LDCs were heavily dependent on credit. But the Fed had drastically raised the cost of their borrowing while simultaneously depressed their sales and incomes. “If the world economy had not been pushed down so far, if interest rates had not been forced so high, these debtor nations might have survived the contraction. As it was, they had no time to adjust and really no alternative but to keep borrowing more, just as weakened American corporations had to increase their borrowing to survive the recession.”(521)
In this respect, whether there were no alternative to the Fed’s aggressive anti-inflation policy seemed to be relevant. The Fed tightened money to curb the inflation. “The general public agreed that double-digit inflation must be curbed somehow, but if the question was examined carefully, it was not at all clear that a deep recession induced by the Fed’s monetary policy was the best way. The 1981 inflation, for instance, was driven by escalating prices in oil and agriculture. In this case, the price inflation might have been contained by temporal price controls and other aggressive government policies.”(394)
The cost and benefit analysis
The Fed imposed the most severe discipline on the
Despite various problems, however, this policy worked. “The GNP contracted in real terms by more than $82 billion from its peak, and since 1979 the country had accumulated as much as $600 billion in lost economic output. The excess supply of goods, the declining incomes, and the surplus labor had worked to force down their wages and commodity prices. Overall price inflation fell dramatically from above 13 percent to less than 4 percent by 1983.”(507)
Even though the Fed succeeded in its anti-inflation campaign, the cost was tremendously high. We can analyze this cost in its effects on the transformation of the
First, the Fed’s tight money policy affect unevenly on various industrial sectors. As we already mentioned, those who borrowed huge amount of money to expand their lands and production facilities had to face dire circumstances in which their debt burdens increased substantially in a short notice. Those who borrowed money to buy house and car had to suffer from both their reduced incomes and increased interest payment at the same time. Some of farmers and small scale manufacturers went bankrupt losing everything. Some households had to lose their real estates, and suffer from credit (mortgage and loans interest) payment for a long time.
However, there was another manufacturing industry which gained the monopolist profit. Apart from financial investors, the military industry was a major winner under the Reagan-Volcker’s strategy. The production of armaments was an important special case among manufacturing sectors. “The defense companies and their allied support industries enjoyed two special advantages under
Second, the Fed’s stabilization of money was also an underlying cause driving the frenzy of corporate take-over battles in the 1980s. “The Fed deplored the practice and even introduced regulations to curb the use of the junk bond used to finance many of the corporate buy outs. Nonetheless so long as monetary policy maintained such high real returns for financial investments and simultaneously depressed the return from real assets, smart investors would naturally seek ways to get their capital out of one and into the other.” (661)
Third, there is another issue related with household’s consumption patterns. In the age of inflation, it was wise decision for ordinary consumers to buy houses and cars with mortgage or credit whatever the interest rate might be. If the inflation continues, buying something today is a good deal because the credit interest rate will be undermined by high inflationary pressures. From this era on, the ordinary Americans’ consumption pattern would be a good source for boastful strong consumer power.
However, this pattern did not change even after their real incomes were reduced substantially because even under these circumstances people had to buy something to live. But the behind logic became different. While American consumers tried to buy today during the inflationary era because it was a good deal, this time they do the same thing because they could not accept the new reality of their reduced status. “By going deeper into debt, they kept spending and hoped that their prospects improved. Millions of families borrowed money to spend during and since
From now on, previously praised strong American consumer powers now started to turn out to be a castle in the air. The
The
Secondly, the retreat from home buying was more fundamental to the American standard of living. During the 1980s, a lot of young couples were priced out of the housing market by high mortgage interest rates or by reduced personal incomes that were too depressed to support a mortgage. For the first time in forty years, the percentage of American families that owned their own house actually decreased during the Reagan Presidency. “The rate of homeownership among Americans had increased steadily from 44 percent in 1940 to 66 percent by 1980. Starting in 1981, homeownership began to decline for the first time since World War II. By 1984, it was down to 64.5 percent. By 1986, it fell to 63.9 percent.” (654)
Finally, the Reaganomics had detrimental effects on income distributions. The 1981 tax legislation proved to be regressive in a more fundamental way. It became the pretext for a vast redistribution of incomes, flowing upward on the income ladder, through another powerful channel – interest rates. The largest benefits in reduced tax burden went to the wealthiest taxpayers, and the tax relief became proportionately smaller and smaller for families that were less well off.
According to the US Census, “only families on the top 20 percent of the economic ladder enjoyed real increases in their after-tax household incomes from 1980 to 1983. The others, the bottom 80 percent actually lost. The highest fifth, families earning $38,000 or more, gained an average of $1,480 per household in real income, and the top 5 percent, earning more than $60,000, gained an average of $3,320. Families in the middle lost about $560 and the working poor lost about $250.”(401)
Apart from these analyses, the author argues that the Fed strategy may have left larger consequences for the
The Fed in action
The time when the
Traditionally, the Fed had rights to regulate various financial resources including overall money supply, credit markets derived from the original money and bond market. In the early 1970s, however, the
Thus, when Volcker was nominated as a new chairman, he found that the only option for the regulation of the financial market was the control of the supply of money by trading government bonds. This is the determinant of the “federal fund rate.” Once the federal fund rate is determined by the Fed’s “open market operation,” this will also determine other commercial bank’s interest rates accordingly. Combined with the Fed’s right to urge bank to maintain certain range of reserve rate, this monetary policy will affect overall economy indirectly.
As interest rates rose in financial markets, many potential customers would be discouraged from buying at the higher prices. Customers who still wanted to buy despite the higher interest rates would find it harder to obtain loans. Many farmers who borrowed at the higher interest rates in order to buy land and expand production facilities started to learn the hard way in the face of high pressure of repayment. Many families who borrowed at the higher interest rates in order to buy homes and cars started to realize that they were burdened with higher interest payment. They went into deeper debt to compensate for their shrinking incomes and interest payment.
However, the impact of higher credit did not fall on evenly all American people and enterprises. Some were forced to go without. The millions of American who depended on borrowing started to suffer additional distress – consumer, farmer, home builders, auto dealers, business of every type in small scale started to suffer from high interest rates without understanding the behind economic logic.
Contrast to situations of ordinary citizens, those who lend money would naturally gain from higher interest rates. At that time, “among individuals, the top 10 percent of American families owned 72 percent of corporate and federal bonds held by individuals plus 86 percent of state and local bonds. Among institutions, commercial banks owned about 20 percent of the outstanding Treasury debt and another 10 percent was owned by insurance companies and other corporations. The same people likely to hold the bonds in their personal portfolios also owned the stock of the corporations and banks that owned bonds.”(372)
At any rate, the Fed under Volcker’s leadership started to control overall quantity of money instead of regulating interest rates directly. In economics, there are only two ways to achieve certain range of interest rates. One is to control overall quantity of money, and the other is the regulation of real interest rates indirectly through the Fed’s bonds trading. Volcker and other Board members adopted officially new monetarist rule when they tried to fight against inflation.
Pendulum swung – from liberal Keynesian to conservative monetarism
We should pay a little attention here to the theoretical and ideological terrain of the time in order to understand the behind logics underlying the Fed’s monetarist rules. Since the Great Depression in the 1930s the U.S federal government and most other western industrialized countries had adopted the same in nature expansionary government’s fiscal and monetary policy under the guide of Keynesian economics.
The
However, liberal administrations from Franklyn D. Roosvelt to
This liberal Keynesian economics had really worked until it faced new economic phenomena called “stagflation” in the mid-1970s. From then on, the
With respect to the role of monetary policy, he observed that both the original collapse of 1929 and the long lasting economic contraction of the real economy in 1930s were partly caused by and surely exacerbated by the Federal Reserve’s failure to provide adequate money supply. Instead of trying to manage the overall quantity of money in accordance with the pace of economic growth, the Fed pumped out too much money and eased the credit when the actual economic situation is on the process out of recession thereby leading to fervent economic bubble and burst. On the other hand, the Fed had tightened money too much when the money for various investments was really needed the most.
In this way,
If you remember the term “economic policy entrepreneurs” used by Paul Krugman in his book, Peddling Prosperity – Economic Sense and Nonsense in the Age of Diminished Expectations(1995) to designate those who sold profound economic ideas to politicians in the simplistic way, Friedman’s monetarism was the best selling ideas adopted by a group of conservative economic policy entrepreneurs called “supply siders” in real politics from the mid-1970s. In the end, faced with intense criticism from both monetarism of academics and supply siders of Republican Party, the Fed had to change its target of monetary policy from the management of interest rates to the management of aggregate money supply.
In the face of massive tax cuts
There was another reason why the Fed chairman tried to tighten money supply extremely. Since 1980 newly elected president
To foster business expansion, he proposed additional tax relief for corporations as well as relief from federal regulations. All together, this supply side economics would reduce the federal government’s revenue by a total of $540 billion over five years.
Nonetheless, the
That was why Volcker warned continuously against
Book Review on Secrets of the
The History and the Role of the
This book is about the contemporary history of U.S central bank, the Federal Reserve Board system. The U.S Fed has influenced not only U.S domestic market but also the shapes of world economy through its unique monetary policy. However, its organization is totally different from those of other U.S federal government agencies. Unlike other democratic government agencies, it does not follow the basic principle of representative democracy. It is organized and operated by bureaucratic technocrats who have been trained in the fields of financial corporations. It is exempted from regular monitoring by the U.S congress not to mention by the White House.
Even though the U.S President has a right to appoint one or two members of the Board of Governors in the Federal Reserve Board for every 4 years, the president cannot influence the Fed policy once he or she nominates the chairman of the Fed. In other words, during these 4 years of tenure, the members of the Board of Governors can adopt certain monetary policies based on their own judgment on the state of the economy without any institutional interruptions. This book introduces the brief history of the U.S Fed, and explains how this federal bank has gained its unique institutional independence and the relative autonomy throughout about 1 hundred years of its history.
Economic scene in the late 1970s
However, this book is not merely about the modern history of the US Federal Reserve system. It is more about its economic policies and their significant effects on the U.S economy on macro level as well as their global consequences in the 1980s. The 1970s in the
To use economic jargon, at that time every economic agent from household to big firm started to gain “rational expectation,” based on its past experiences of continuous inflation, that overall price level would continue to rise in the future: ordinary wage earners tried to raise their nominal wages in order to prevent their wages’ real purchasing power from falling; Every corporation tried to raise the price of its products in order to retrieve its probable losses from nominal wage increase and increasing capital cost.
Admittedly, most economic agents do not know exactly to what extent the future inflation rate will be. However, this uncertainty for the future does not play a role as an antidote for inflationary pressures but intensifies these inflationary pressures at an unprecedented level. Nobody knows whether my previous wage bargaining was appropriate or not. Nobody knows whether your firm’s previous price markup was at a relevant level. However, one thing is certain: Even though you have bid up your nominal wage too much, or your executive managers have increased the price markup too much, it will not matter unless the whole economic system turns its direction abruptly.
Inflation – who gain and who lose
In this sense, the inflation itself does not do any harm to both the owners of the firms and those who sell their labor force in the market as long as they can receive higher nominal wages and profits in accordance with the inflation. But continuous overall price increase does harm to those who finance the operation of corporations. In modern eras, those who accumulate huge amount of money (either from their previous investment on productive capital or from robbery, either from their previous industry or from their parents’ huge heir does not matter) usually invest their money in financial markets in order to make more money.
Traditionally, most capitalist firms and corporations borrow their “capital cost” for new plants, factories, new machines, etc., as well as “labor cost” from commercial banks. Banks usually lend them from their own financial assets and savings deposited by ordinary citizens. However, modern capitalist market has also developed different kinds of financial markets including “bonds market,” “money market,” “stock market,” etc., as well as highly sophisticated financial techniques to facilitate various financial transactions.
These financial markets are no longer composed solely of private entrepreneurs and individual investors; the government has been one of the most significant players in the market. Both private firms and government borrow their budgetary or fiscal expenditures by selling their meticulously decorated papers called “stocks” and “bonds,” all of which are certifying their financial assets and liabilities of future payment. The “premium” financial investors are supposed to gain from their investment risk is usually determined by nominal “interest rates” printed on the fore front of the financial certificates issued by borrowers.
However, once the general price level started to rise and remain at an extraordinarily high level, the real “arbitrage” which had induced the owners of financial assets to invest in the market would be reduced substantially. Let us suppose that you will be paid back 10% of annual interest 3 years after now when you buy a newly issued government bond at $1000 cost. You will receive $300 interest from your bond after three years or $100 interest per year during three consecutive years in the future.
In spite of this interest gain, if the inflation will be continued at an annual rate of 8%, your $100 interest per year will turn out to be 2% losses. Even though you will earn10% “nominal interest” from your first financial investment, the “real purchasing power” which your interest earning has will be minus from your original investment. In this way, If inflationary pressures are allowed to continue, most financial asset holders will not have any other choices but to tolerate their substantial losses from investment or decide to withdraw their financial assets from the market.
Current Economic and Social Issues View Comments
CONGRESSIONAL BUDGET OFFICE
Douglas Holtz-Eakin, DirectorU.S. Congress
Washington, DC 20515
September 6, 2005
Honorable William H. Frist, M.D.
Senate Majority Leader
United States Senate
S-230 Capitol
Washington, DC 20515
Dear Senator Frist,
The Congressional Budget Office (CBO) has received numerous inquiries regarding the
likely consequences of Hurricane Katrina for the national economy, federal receipts, and federal
outlays. While the primary consideration is the human cost of the disaster, it will also likely
spawn economic impacts, some of which will spread throughout the economy.
Those impacts will arise from the disruption of production (especially of oil and oil
products) and spending in the affected areas, from the loss of wealth of those most directly
affected, and from the loss of life. In addition, the disaster is also likely to have budgetary impacts
beyond the recently enacted supplemental. Some of those will flow directly from federal
involvement in the cleanup from disaster; others will come from the disruption to production and
private spending.
While it is not possible at this time to provide a clear picture of the impacts, CBO staff
have put together some initial thoughts about those economic and budgetary effects in the
attachment to this letter. To provide context, recall that the overall economy was growing steadily
at the time the disaster. (CBO’s summer forecast called for 3.7 percent real growth in 2005 and
3.4 percent in 2006.) The devastation in the Gulf Coast region is unlikely to knock the economy
far from that course. While making specific estimates is fraught with uncertainty, evidence to date
suggests that overall economic effects will be significant but not overwhelming. Because they are
concentrated in this year, there is the potential to reduce growth by between one-half and one
percentage point at an annual rate in the second half of 2005. (On a year-to-year basis, the impact
may be as small as a few tenths of a percent of GDP). Last week, it appeared that larger economic
impacts might occur, but despite continued uncertainty, progress in opening refineries and
restarting pipelines now makes those larger impacts less likely.
Page 2. Honorable William H. Frist, M.D.
While Katrina has devastated ordinary business, it will also likely lead to a boom in
clearing and reconstruction activity, first in the areas along the coast that escaped persistent
flooding, and then in New Orleans. This follows a pattern familiar from past natural disasters
(such as Hurricane Andrew in 2002), but with the caveat that such reconstruction may begin a bit
less rapidly.
At this point the ultimate impact of Hurricane Katrina on the federal budget is unclear, but
it will be dominated by legislative actions of the Congress. The President has already requested
and Congress has appropriated $10.5 billion in emergency assistance. In addition to that
legislation, substantially more funding is likely to be provided for assistance to businesses and for
long-term reconstruction efforts. There may be other changes in spending—both increases and
decreases—associated with the disaster, in part because the disruption of payments systems in the
Gulf Coast region may affect the timing of several kinds of federal payments and of tax receipts.
I hope that you find the attachment useful. CBO would be pleased to address any further
questions that you may have.
Sincerely,
Douglas Holtz-Eakin
Director
Attachment
Identical Letters sent to: Honorable Harry Reid, Honorable J. Dennis Hastert, and Honorable
Nancy Pelosi.
September 6, 2005
Macroeconomic and Budgetary Effects of Hurricane Katrina
Katrina could dampen real gross domestic product (GDP) growth in the second half of the year
by ½ to 1 percentage point and reduce employment through the end of this year by about
400,000. Most economic forecasters had expected 3 percent to 4 percent growth during the
second half, and employment growth of 150,000 to 200,000 per month. Economic growth and
employment are likely to rebound during the first half of 2006 as rebuilding accelerates.
The Congress has appropriated $10.5 billion for spending on emergency relief, and many
analysts expect more to be provided in the near future. Katrina will affect the budget in a number
of ways in addition to the emergency spending—outlays may be affected by disruptions in the
submission or processing of claims for federal payments, reductions in royalty payments from oil
and gas drilling, and the sale of oil from the Strategic Petroleum Reserve; and tax receipts will be
affected by immediate reductions in national income and gasoline consumption, along with
temporary tax relief provided by the Internal Revenue Service—but it is still too soon to estimate
what the net effects on the budget might be.
Macroeconomic Effects
Katrina’s macroeconomic effects will be greater than those of previous major hurricanes such as
Andrew and Hugo, which caused a great deal of devastation but which had a small effect on the
macroeconomy. Katrina’s effects will be greater because of the greater devastation, the long-term
flooding of New Orleans (which will preclude immediate rebuilding), and the destruction of
energy and port infrastructure.
Energy Supply
The supply of petroleum products and natural gas will be lower than it otherwise would have
been, but the reduction in supply will not necessarily hurt economic activity nationwide
significantly. If most of the refineries come back online during the next two weeks and there are
no significant periods of total unavailability of product—that is, if rationing is done through the
price mechanism alone—energy use will tend to be put to its highest-value uses, and economic
activity will not be seriously affected.
Spot prices for energy products have begun to fall from last week’s highs.
2
Petroleum and DistillatesThe pipelines for refined product have been largely restored, but three of the major refineries that
were shut down may not reopen for more than a month, and petroleum production from some oil
rigs in the Gulf will be curtailed for many months. The supply of crude oil from the Strategic
Petroleum Reserve (which is already being sent to refineries), the reallocation of petroleum
product within the United States, and the likelihood of more petroleum product from overseas
(which may take three or four weeks to get here) will dampen the adverse effects of the reduction
in supply.
Natural Gas
Natural gas markets have been affected by the storm in four main areas: production, processing,
electricity generation, and local distribution. First, production from the Outer Continental Shelf
was shut down before the storm and cannot fully resume until production platforms in the Gulf
are all inspected and restaffed (and repaired, where necessary). Half the original loss of natural
gas supply—which totaled nearly 15 percent of the nation’s supply—has been restored. Second,
four natural gas processing plants that help produce pipeline-quality gas were closed. The
Congressional Budget Office (CBO) cannot confirm the status of those gas plants—any lingering
problems could impede pipeline deliveries. Third, the Louisiana electric utility, Entergy, has had
some problems delivering gas to its generating plants, although current reports indicate that gas is
being received. And fourth, local distribution of natural gas to customers throughout the region is
disrupted because of broken lines.
Production and Employment in the Directly Affected Areas
Production
Production of electricity, oil, refined products, port services, housing services, manufacturing,
retailing, tourism, and other consumer services will be sharply curtailed for at least a few months
in the affected areas. The gross state product of Louisiana is about 1.2 percent of U.S. GDP, and
that for Mississippi is about 0.7 percent. If half of that product were lost for three months
(September to November), the level of real GDP would be lowered by about 1 percent from what
it otherwise would be, cutting about 1.3 percentage points from the annualized growth rate for
the third quarter and about 2.7 percentage points from the fourth quarter. It is unlikely that
production would be hurt that much for that long, however. Presumably some people in New
Orleans and other parts of the coast will be able to return to work in one or two months, and
construction employment will be picking up during the fourth quarter. Therefore, it is more likely
that economic activity in the affected area would directly reduce the growth of GDP by less than
1 percent for both the third and fourth quarters.
3
EmploymentThe main areas likely to experience prolonged and substantial disruption of economic activity
and employment are the New Orleans-Metairie-Kenner metropolitan statistical area (MSA) of
Louisiana and the Gulfport-Biloxi and Pascagoula MSAs of Mississippi. Other areas were
affected by the storm but are likely to experience little if any sustained disruption of activity.
Employment for September will decline significantly—estimates of the impact range from
150,000 to half a million—as a direct consequence of the hurricane. The Bureau of Labor
Statistics (BLS) may or may not be able to estimate the size of this effect when it releases the
September data on October 7. Employment will increase in subsequent months, as workers return
home and businesses reopen and as reconstruction activity gathers steam. The large-scale
relocation will generate additional demand for workers in receiving communities; some of those
jobs will be filled by the evacuees themselves. Once New Orleans residents are able to return
home, the net effect on the level of employment will be positive, as reconstruction activity
continues.
Louisiana.
New Orleans and most of its suburbs have been evacuated, and it will takeconsiderable time before basic services are restored and most residents are able to return. Total
employment (based on the BLS’s Establishment Survey) in the New Orleans-Metairie-Kenner
MSA was 616,000 in 2004, including 510,000 private-sector workers. Data from the BLS
Quarterly Census of Employment and Wages
indicate that of the 596,000 workers covered byunemployment insurance within that MSA, 248,000 were employed in Orleans Parish (City of
New Orleans), 213,000 in Jefferson Parish, and the remaining 135,000 in the other five parishes
making up the MSA. Not all of the suburban areas experienced flooding to the same degree as
New Orleans itself, so some workers and residents of those areas may be able to return sooner.
Some of those workers, especially those whose jobs involve the provision or restoration of
essential services and those involved in reconstruction, are likely to return to work soon and
remain on payrolls. Some others, including federal and state government workers and employees
of large multiestablishment corporations, may be able to work from alternate locations until they
are able to return home. But it is reasonable to expect that the majority will be off payrolls at
least through September, with only a gradual rebound. That effect will be partially offset by
large-scale hiring of construction workers.
Mississippi.
The Gulf Coast areas sustained major damage, but more from wind and stormsurges than from flooding. Thus, residents should be able to return much sooner than in the New
Orleans case. Total employment last year stood at 113,000 in the Gulfport-Biloxi MSA. That
includes roughly 14,000 employed by casinos, which were severely damaged or destroyed.
Another 54,000 were employed in the Pascagoula MSA. Aside from the effect on casino
workers, many of whom are reportedly still being paid, the effect on employment should be
smaller and of shorter duration than in Louisiana (and will again be offset to a considerable
degree by reconstruction activity).
4
Effect of Katrina on the Ability to Make PaymentsThere are few reported problems related to the inability of people to make payments. Apparently,
the Federal Reserve’s contingency plans are intact. Although the New Orleans branch of the
Atlanta Federal Reserve Bank remains closed, other branches of the Atlanta Fed are covering
currency demands and check-processing needs.
• News anecdotes indicate that many financial companies are relaxing their payment
requirements and waiving late fees for contractual obligations (loan and insurance
payments, for example) of those affected by Katrina. Some banks are waiving ATM
(automated teller machine) fees for cash withdrawals by nondepositors.
• By last weekend, about 80 percent of the roughly 240 Federal Deposit Insurance
Corporation-regulated banks in the Katrina-affected area had been reached by regulators.
Most were open for business in some fashion.
• Social Security recipients can go to any Social Security office to pick up their monthly
check.
• Although the lack of electricity makes credit card payments difficult, people are making
do. For example, one news report indicates that one business is recording payments with
paper and pencil for future debiting.
• Some Blue Cross/Blue Shield plans in the affected areas were not making payments to
medical providers last week.
• The Texas Workforce Commission is assisting the Louisiana Department of Labor in
processing Louisiana disaster unemployment assistance claims.
Reconstruction
Rebuilding will take place along several dimensions—rebuilding of residences, businesses,
infrastructure, and stocks of consumer durables. Nationwide, each housing start adds over
$200,000 to GDP. So, each block of 100,000 housing units (homes and apartments) that needs to
be completely rebuilt raises GDP by over $20 billion, or about 0.2 percent. Repairs and major
replacements of structures not completely destroyed would add to that figure. To estimate the
amount of eventual rebuilding, CBO will need information on the number of housing units lost
or the dollar value of housing losses (both insured and uninsured). Replacements of destroyed
residences will be needed whether the former residents rebuild in the same place or elsewhere.
Nonresidential structures—shops, factories, streets, bridges—will also need to be rebuilt. CBO
has no information on the value of such structures destroyed by Katrina, but it is likely to be
substantial. Nationwide, the stock of private nonresidential fixed assets is about 90 percent as
large as the stock of residential fixed assets, in dollar terms, while the stock of government fixed
assets (for example, roads and schools) is about half as large as the stock of residential fixed
assets.
5 The timing of such rebuilding is highly uncertain. Presumably, clearance and rebuilding will start
almost immediately in the areas of the coast that have not suffered persistent flooding but will be
delayed up to several months in New Orleans. Nonresidential structures typically take longer to
build than residential structures, so one might expect this rebuilding to proceed more slowly than
the rebuilding of lost residences.
Reconstruction activity will employ a large number of construction workers and will increase the
demand for construction materials such as cement and plywood. The demand for those resources
is likely to cause a slight increase in the cost of construction elsewhere in the country.
Insurance
Preliminary estimates suggest that privately insured losses from Hurricane Katrina could exceed
$30 billion. (By comparison, insurers paid about $32.5 billion after 9/11.) Undoubtedly, some
businesses have business interruption coverage which will allow them to continue to meet their
payrolls, but other businesses likely did not purchase that coverage. (A significant portion of the
insured losses after 9/11 were for business interruption insurance.)
Although no estimates have been published, federal flood insurance payments are also likely to
be substantial. Those payments could exceed the program’s reserves and thus necessitate
Congressional action. Additional payouts on federal crop insurance are also possible. Finally, the
Congress may enact additional supplemental relief.
Production Elsewhere in the United States
Economic activity in the rest of the United States will be adversely affected through higher
energy prices, which will temporarily reduce other consumption (and reduce saving), and through
any reduction in port activity, which may keep energy supplies and raw materials from getting to
producers and consumer goods from getting to retailers.
The supply of petroleum products, as indicated above, does not appear to be a major
macroeconomic problem, but higher gasoline prices will temporarily reduce both gasoline
consumption and consumption of other goods and services. The increase in gasoline prices is
basically a temporary redistribution of income from consumers of gasoline to the stockholders of
refiners. As a ballpark estimate, assume a 40 percent average rise in gasoline prices in September
and that consumers, on average, reduce nongasoline spending by 40 cents for each dollar increase
in gasoline prices. Since gasoline accounts for 2.7 percent of consumption (without the price
increase), the rise in prices would reduce consumption (net of the rise in gasoline prices) by 0.4
percent (40 percent x 40 percent x 2.7 percent), or about $38 billion at an annual rate. If
sustained, that would reduce annualized GDP growth for the third quarter by 0.4 percent and for
the fourth quarter by 0.9 percent. That effect is temporary: as gasoline prices return to pre-
Katrina levels, consumption would bounce back, meaning higher GDP growth.
6 The damage to the Port of Southern Louisiana is significant, but most shipping will be able to
resume in a few weeks or be diverted from the New Orleans facilities to other facilities on the
Mississippi (such as Baton Rouge) or to Houston. Vessels drafting more than 39 feet cannot
currently use the river. Only one grain elevator appeared to be severely damaged, and the others
are coming back into operation as power is restored.
Budgetary Effects
At this point, it is unclear what the ultimate impact of Hurricane Katrina will be on federal
spending. Thus far, the President has requested and the Congress has appropriated $10.5 billion
in emergency assistance, with $10 billion of that total going to the Federal Emergency
Management Agency’s (FEMA’s) disaster relief account. (The remaining $500 million was
appropriated for operation and maintenance for costs incurred by the Department of Defense for
evacuation, deployment of personnel, and related efforts.) CBO expects that most of the outlays
from that supplemental appropriation will occur in fiscal year 2006. Much of the new funding
may be obligated in this month (that is, within fiscal year 2005), but most of the checks are likely
to be written in subsequent months. In addition, FEMA may spend at least a few hundred million
dollars more in September—from funds previously appropriated—than it would have expended
otherwise.
That initial funding is likely to be used mostly for short-term emergency assistance for
individuals adversely affected by the hurricane. It is likely that more funding will be provided for
assistance to businesses and for long-term reconstruction efforts.
The hurricane will affect federal spending in September and the months beyond in a number of
other ways. Some of those effects may simply be a shift in the timing of spending or in the
collection of offsetting receipts. In the near term, some programs may experience lower outlays
because federal agencies or their agents may not be able to process payments as rapidly as usual
or because recipients of payments may be delayed in submitting claims. Offsetting receipts from
royalty payments for leases on the Outer Continental Shelf are likely to be lower—by at least a
few hundred million dollars—for one month or more this fall. However, the Department of
Energy will collect receipts for the sale of oil from the Strategic Petroleum Reserve, possibly in
the neighborhood of $2 billion (for the announced sale of 30 million barrels). In addition, federal
flood and crop insurance payments could increase, and the government may experience an
increasing number of defaults in some of its loan and loan guarantee programs. Most of the
outlay effects of those near-term changes are likely to occur after September (that is, in fiscal
year 2006). It is still too soon to tell what the net effects for either fiscal year 2005 or fiscal year
2006 might be—though the effects in 2005 are likely to be small, since there is so little time left
in the fiscal year.
The effects of Hurricane Katrina on tax receipts are also unclear at this point. Federal receipts
will be affected not only because of the immediate reductions in national income and gasoline
consumption, but also because of temporary tax relief provided by the Internal Revenue Service.
7 Victims of Hurricane Katrina in Louisiana and designated areas of Mississippi, Alabama, and
Florida can delay their estimated payments of individual and corporate income taxes beyond the
normal September 15 due date. Those tax payments instead will not be due until at least October
31, therefore delaying some tax receipts into fiscal year 2006. Taxpayers who reside outside of
the affected areas but have their financial records or tax practitioners within the areas also can
qualify for the delay in payments. Other payment delays applying to withheld income and
employment and excise taxes do not currently last into fiscal year 2006. Also, through September
15 penalties will not be assessed on taxpayers who sell for highway use certain dyed diesel fuel
(which is normally available only for tax-exempt purposes). All of the payment delays may be
extended at a later date for certain taxpayers.
Current Economic and Social Issues View Comments
WASHINGTON, Sept. 7 - Hurricane Katrina is about to blow a hole in the federal budget, and it is already jeopardizing President Bush's agenda for cutting taxes and reducing the deficit.
The Congressional Budget Office reported today that it had told congressional leaders that Hurricane Katrina could reduce employment this year by 400,000 jobs and could slow the economy's expansion by as much as a full percentage point. As a nonpartisan advisor to Congress, the office had previously predicted that the economy would grow by 3.7 percent in 2005 and by 3.4 percent in 2004. The budget office's report came in a nine-page memo delivered Tuesday to Sen. Bill Frist, Republican of Tennessee and the majority leader.
Also on Tuesday, administration officials told Republican lawmakers that relief efforts were running close to $700 million a day, and that the total federal cost could reach as high as $100 billion.
That would be many times the cost of any other natural disaster or even the $21 billion that was allocated for New York City after the terrorist attacks of Sept. 11, 2001.
Still, the budget office saidin its report that the start of the recovery of the country's refineries was promising. "Last week, it appeared that larger economic impacts might occur, but despite continued uncertainty, progress in opening refineries and restarting pipelines now makes those larger impacts less likely."
It added: "While making specific estimates is fraught with uncertainty, evidence to date suggests that overall economic effects will be significant but not overwhelming."
But the expenses of Katrina are mounting just as Mr. Bush and Republican leaders are trying to push through spending cuts for programs like Medicaid and student loans, extend about $70 billion in expiring tax cuts, and reduce the federal budget deficit.
"There is no question but that the costs of this are going to exceed the costs of New York City after 9/11 by a significant multiple," said Senator Judd Gregg, Republican of New Hampshire and chairman of the Senate Budget Committee.
White House officials are planning to ask Congress as early as Wednesday for a second round of emergency financing, perhaps as much as $40 billion, but they said even that would be a "stopgap" measure while they assessed the full costs.
Though it is still too early for accurate estimates, the costs are all but certain to wreak havoc with Mr. Bush's plans to reduce the federal deficit and possibly his plans to extend tax cuts.
On Monday, Mr. Frist postponed plans to push for a vote on repealing the estate tax, a move that would benefit the wealthiest 1 percent of households, costing more than $70 billion a year once fully put in effect.
House and Senate leaders are also grappling with their pre-hurricane plan to propose $35 billion in spending cuts over the next five years for entitlement programs like Medicaid, student loans, food stamps and welfare payments.
Those cuts could suddenly prove politically unpalatable to Mr. Bush and Republican lawmakers, who are trying to rebuff criticism that the federal government shortchanged the hurricane's poorest victims.
Congressional Democrats are already using the hurricane as a reason to block Republican tax and spending plans.
"Democrats think this is the worst possible time to be cutting taxes for those at the very top and cutting the social safety net of those at the very bottom, and adding $35 billion," said Thomas S. Kahn, staff director for Democrats on the House Budget Committee.
Budget analysts said the magnitude and unique characteristics of the hurricane made it unlike any previous natural disaster, resulting in a variety of extraordinary costs:
¶Shelter for as many as a million people for months.
¶A potentially high share of uninsured property losses that stem from flooding, which is not covered by private insurers.
¶Education and health care for hundreds of thousands forced to live outside their home states.
"Katrina could easily become a milestone in the history of the federal budget," said Stanley Collender, a longtime budget analyst here. "Policies that never would have been considered before could now become standard."
Indeed, there were signs on Tuesday that Republicans and Democrats had already begun to compete with each other over who might be willing to spend more.
Senator Harry Reid of Nevada, the Senate Democratic leader, predicted on Tuesday that costs could total $150 billion. Top Republican lawmakers, meanwhile, have begun to call for "stimulus" measures to buck up the overall economy.
White House officials contend that costs attributable to the hurricane are separate from Mr. Bush's underlying budget goals, which include cutting the deficit in half over the next four years and permanently extending most of the tax cuts passed in 2001 and 2003.
Budget analysts also note that natural disasters are essentially one-time costs that do not affect the government's long-run fiscal health.
"We can afford $100 billion - one time," said Douglas Holtz-Eakin, director of the Congressional Budget Office. "What we cannot afford is $100 billion in additional spending year after year."
The problem is that, even without the hurricane, the federal government's underlying fiscal health is in poor shape. In July, the White House predicted that surging tax revenues would reduce the deficit this year to $333 billion from $412 billion in 2004.
But many analysts believe that the tax surge was largely a one-time event and that overall government spending is still poised to climb rapidly as a result of the war in Iraq, the Medicare prescription drug benefit and the growing number of baby boomers who will soon reach retirement age.
Before the hurricane, House and Senate Republicans were preparing to work out $35 billion in spending cuts over the next five years that would trim Medicaid payments by $10 billion and make smaller cuts in student loan programs, farm programs, food stamps, housing and cash assistance to poor families.
Under the budget resolution that Congress passed this spring, Congressional committees are supposed to spell out the proposed cuts by Sept. 16. House and Senate leaders had been planning to pass the cuts within a week or so after that.
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