The billions of federal dollars that President Bush plans to spend to rebuild New Orleans and the Gulf Coast after the ravages of Hurricane Katrina likely will give a positive jolt to the U.S. economy and help offset the impact of higher gasoline prices, economic analysts say.
But they say his massive reconstruction plan, complete with tax incentives to help businesses reinvest in the devastated city, will drive the federal budget deficit higher in the next several years, putting the treasury in a more perilous condition just as the first Baby Boomers reach retirement age in 2008.
Katrina also is having enormous impacts beyond the bounds of the Deep South. With four large oil refineries still shuttered on the Gulf Coast, gasoline supplies are extremely tight. Demand has softened since Labor Day, but some analysts predict that gasoline prices could well start rising again soon. Heating oil and natural-gas prices will soar this winter, squeezing consumers.
In the nation’s capital, efforts to reduce the size of the federal deficit through spending cuts have lost momentum, and congressional staffers said any further attempts at budget-trimming could be dropped. A Republican proposal to reduce Medicaid spending for the poor by $10 billion is in jeopardy, GOP staff members said.
Rep. Jack Kingston (R-Ga.), vice chairman of the House Republican Conference, said many GOP members would like to offset the Katrina spending with cuts in other expenditures, but “it’s not going to be easy.”
Congress already has passed more than $62 billion in recovery aid for New Orleans and the Gulf Coast, with much more to come. Some members say the tab could run as high as $200 billion or more as Bush’s plan kicks in, although no one knows for certain at the moment.
In addition, Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, is working on a major tax-cut bill designed to help hurricane victims. Some budget analysts said they feared that the Grassley measure could turn into a “Christmas tree” bill sought by many special interests seeking benefits that have nothing to do with hurricane relief, further deepening the deficit.
At the very least, Katrina has transformed the president’s economic policy, converting him into one of the biggest-spending presidents in U.S. history. Philip Verleger, an energy economist in Colorado, said that in many respects Bush has adopted the “guns and butter” policy of former President Lyndon Johnson–with one major addition, large tax cuts.
Bush also is seeking to make his tax cuts permanent and on Friday rejected a tax increase to pay for hurricane relief, saying other federal spending would have to be cut. Some budget experts said that at a time of war, soaring gasoline prices and a natural disaster, Bush is not asking the American people to make any sacrifices.
“Sacrifice?” Brian Riedl, a budget analyst at the Heritage Foundation, asked rhetorically. “At this time, there is none.”
Borrowing overseas
The billions in new dollars that Bush plans to spend over the next few years most likely will have to be borrowed overseas from such countries as Japan and China. The federal budget deficit hit a record $412 billion in fiscal 2004, and until Katrina hit was estimated at $333 billion for the 2005 fiscal year ending Sept. 30.
In fiscal 2006, the deficit could reach $400 billion once again as a result of Katrina spending, said Robert Reischauer, head of the Urban Institute and a former director of the Congressional Budget Office. After that, he said, federal money going to New Orleans will begin to taper off and reduce pressure on the deficit.
But Riedl said he expects the deficit to take a leap in the next few years, rising to a record $500billion in 2008. He cited the cost of repealing the alternative minimum tax, a levy that will increasingly hit middle-class Americans, along with paying for new spending already built into the budget, such as the Medicare prescription drug program and the Iraq war. The continuing conflict and rebuilding costs in Iraq eventually will total $300 billion to $600 billion, he predicted.
Relatively speaking, Bush isn’t the biggest-spending president since World War II. The deficit totaled 7.2 percent of gross domestic product in 1946 under Harry Truman and 6 percent in 1983 under Ronald Reagan.
The red ink is 2.7 percent of GDP this year and could rise to 3.5 percent next year, Riedl said. Bush’s budget this year totals about 20 percent of GDP, compared with Reagan’s 23.5 percent in 1983, the highest percentage since World War II.
In his speech Thursday night outlining his rebuilding program, the president emphasized incentives to induce companies to return to New Orleans to help rebuild the economy. Kingston said the reconstruction program would stress GOP principles by creating “the atmosphere and incentives for the private sector” to return to New Orleans through creation of a Gulf Opportunity Zone.
Susan Beal, director of the Center for Business and Economic Research at Louisiana State University’s branch in Shreveport, said many people who ran New Orleans’ businesses have expressed reluctance about returning. But she said the new tax incentives could help many change their mind if they find they can turn a profit. Moreover, the city has its own historic lure, she said.
In addition to helping New Orleans recover, the robust new spending will come at a time when the economy has begun to slow because of higher oil prices.
“The economic stimulus from rebuilding will help offset the economic drag caused by higher energy prices,” said Adam Sieminski, an energy economist for Deutsche Bank.
CBO projects lower growth
The Congressional Budget Office reported recently that Katrina would knock from one-half a percentage point to a full percentage point off the economic growth rate in the second half of 2005. Before the hurricane, the CBO had estimated second-half growth at 3.7 percent.
Brian Bethune, an economist at Boston-based Global Insight, an economic consulting firm, said the economy will weather the spike in oil prices easily if the price of gasoline falls back to pre-hurricane levels of $2.50 to $2.60 a gallon, as his firm expects. That estimate is widely shared by experts in financial markets.
But the price of gasoline could deliver a much larger blow to the economy. Seth Kleinman, an energy analyst for PFC Energy, a Washington consulting firm, sees gasoline prices still over $3 a gallon next year as a result of tight supplies. Verleger said he worries that gasoline could jump to $5 a gallon by next summer in the peak driving season. “We’re in uncharted territory,” he said.
As the White House and Congress deal with hurricane victims and the economic impact, the Federal Reserve meets Wednesday to consider whether to raise interest rates once again. Since June 2004, it has increased its benchmark overnight bank lending rate 10 straight times, each by one-quarter of a percentage point, to 3.5 percent.
With the economy being hurt by Katrina and rising energy prices, many analysts said they hoped the central bank would pause in its efforts to bring interest rates back to a “neutral” or more normal level.
David Wyss, chief economist at Standard & Poor’s, the credit-rating company, said it didn’t make much sense for the Federal Reserve to raise interest rates at a time when Bush is trying to stimulate the economy with more spending.
“If they raise rates, they would be fighting the rest of the government,” he said.
Yet Chairman Alan Greenspan’s central bank has grown more apprehensive about rising inflation in recent weeks, as energy prices and the housing boom have accelerated inflationary pressures.
———-
wneikirk@tribune.com
