Paying for Katrina

Lately the deficit hawks in the Republican House of Representatives have been well covered in their call to cut out the pork as a way to pay for Katrina relief. It is amazing that someone can serve multiple terms in Congress and not know the basics of budgeting. Then again, the postal reform debate showed that Mr. Flake and his cohort are more talented at rhetoric than research.

The fact of the matter is that pork, also known as earmarked spending, is the diversion of money from the discretion of the Adminstration to the discretion of Congress. If there were less pork, there would be more money for agencies to spend at their discretion based on the law and on administration priorities. Stopping pork would simply increase administration discretionary funds, unless you divert money collected from the gas tax to hurricane relief. (Money that would not even be collected if those taxes were suspended to lessen the impact of high gas taxes).

All earmarks function in this way. To divert money from existing spending to hurricane relief the Concurrent Budget Resolution must be amended, cutting some appropriations while increasing others.

Some hurricane spending can come by simply redirecting money under current appropriations. For example, the Corps of Engineers could stop all non-essential projects outside the hurricane zone and redirect those resources to the Gulf. There are only so many contractors capable of doing that kind of work, so this type of reprogramming makes sense.

Many people who relocated were in public housing anyway. Obviously some of this money can be redirected to other jurisdictions within the HUD budget. The sad fact of the matter is, however, that the hurricane has increased the amount of work that the government must do. It did not lessen the need for government action in other areas of the country. Spending must ultimately increase. It can either be funded by debt or by increased taxation.

The Chinese have been more than glad to finance the Bush deficit until now, since this allows them to gain financially without actually having to buy anything made in America. Additional income earned by Chinese workers is therefore spent in China, increasing the growth of the Chinese economy while shrinking our productive capacity. They can only do this for so long, however. Eventually the amount of outstanding American debt will raise interest rates. This will attract more American investors, who are currently confining their investments to other places (such as the building of Chinese factories). In other words, the export of our debt to China happens because there are more lucrative opportunities for those wealthy Americans who had their taxes temporarily cut by the Republicans. It won't last forever.

When interest rates increase we will face a choice. We can either borrow money from wealthy Americans or tax them. If we borrow it we will pay them interest. If we tax them, we won't have to. Eventually, either the wealthy or their children will have to pay higher taxes, since increasing taxes on the non-wealthy will slow the economy and lead to still higher deficits. Only by taxing the rich can you balance the budget and grow the economy, as happenned under Clinton.

In a few fiscal years much of the Bush Tax Cut legislation will sunset unless the Republicans can find five Democratic votes. That is not likely. Given the President's approval ratings he is likely to lose strength in the Senate, which is not effected by the gerrymandering which keeps the Republicans in the majority in the House. So......

....the question of higher taxes is very much open. The President knows, or should be told in words of syllable that he needs to compromise on taxes on the wealthy. If he does not the next president will simply let them die, which is tragic because the 25% tax rate is a good idea. Some of the tax reform enacted was a good idea and should be preserved. If the President wants to make it permanent, he needs to do a real deal, one that the leadership of the Democrats can stomach. To do this, he must increase taxes on the wealthy and on wealthy heirs.