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Saturday, September 17, 2005 - Page updated at 12:00 AM

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Massive recovery plan likely to deepen U.S. debt

The president's plan


Some of President Bush's major proposals for assisting in the recovery from Hurricane Katrina:

Education

$2.6 billion to compensate public-school districts and private schools that take in the estimated 372,000 evacuated students.

Help for workers

Individual accounts of up to $5,000 for payments to unemployed workers who have exhausted their 26 weeks of unemployment benefits. Money could be used for job training or to pay for child care or transportation while individuals are looking for work.

Help for business

An estimated $2 billion in special tax breaks through 2007 to encourage businesses to build or expand facilities in hurricane-devastated areas. Small businesses would be able to deduct from their taxes the cost of investments in equipment up to $200,000; all businesses would be provided with a 50 percent bonus depreciation allowance; loans and loan guarantees would be available to help small businesses and minority-owned businesses start running again.

Urban homesteading

Federal land giveaways for homes to low-income evacuees through a lottery. Claude Allen, the president's domestic-policy adviser, said yesterday that officials were looking first at an estimated 4,000 government-owned foreclosed homes in the affected areas. On land where there was no home, private relief organizations such as Habitat for Humanity would be encouraged to help build houses with prospective homeowners providing "sweat equity."

Homeland security

Department of Homeland Security ordered to review emergency-response and evacuation plans for every major city in the country.

Military

Military would take a "broader role" in responding to domestic emergencies such as Katrina.

The Associated Press

WASHINGTON — The proposed record reconstruction spending in the wake of Hurricane Katrina, estimated as high as $200 billion, is all but certain to add to a mushrooming national debt that already has the country dependent on foreign investors.

The sum is about equal to what has been spent on the wars in Iraq and Afghanistan. It's almost half the size of this year's domestic discretionary spending, essentially everything the government does besides national defense, Social Security, Medicare and Medicaid.

President Bush vowed yesterday to rebuild the tattered Gulf Coast, "whatever it costs." He ruled out tax increases, which means the new spending will add to the burden on taxpayers from the federal budget deficit, now $331 billion, and the national debt, now $4.6 trillion.

"It means we're going to have to make sure we cut unnecessary spending," Bush said. "It's going to mean that we maintain economic growth and we should not raise taxes."

Economists say that even a $500 billion federal deficit won't injure the economy in the short term. It will stimulate growth, in fact. But it will have costs, both short term and long.

Each year's deficit spending adds to the federal debt, which is passed to future generations. The net national debt has increased from $3.4 trillion to $4.6 trillion under Bush.

Taxpayers will pay about $208 billion for the fiscal year starting Oct. 1 simply to cover interest costs on that debt. That's more than 25 times next year's $8.2 billion budget for the Environmental Protection Agency, illustrating that exploding deficits impose large costs on taxpayers.

The money for interest payments on the debt goes to investors in Treasury bonds, such as the Chinese government. Foreigners now hold 46 percent of the Treasury's debt.

Increasingly, financing the federal deficit depends in part on the kindness of foreigners, because they determine demand for Treasury bonds. If those nations sour on U.S. treasuries, interest rates would have to rise to keep investment coming in.

Some political analysts said Bush appeared to be calculating that he needed to, in effect, spend his way out of his current political troubles — including an all-time-low approval rating — by adopting a spare-no-expense approach to Katrina to make up for the government's early sluggish response.

"The president had some damage control to do," said Stu Rothenberg, an independent political analyst. So "the president is showing the love, and the way he's showing the love is by writing a big check."

Asked yesterday about the impact of rising deficits and debt on tomorrow's taxpayers, Bush called on Congress to make offsetting cuts in spending on other things. He didn't specify what.

In February, Bush proposed killing or paring back 154 government programs to save $15.3 billion. Most of the proposals were crumpled up and tossed in the trash. The House Appropriations Committee killed off programs totaling $4.3 billion, but all of that money was redirected to other programs.

"My answer to those that want to offset the spending is sure, bring me the offsets, I'll be glad to do it," said House Majority Leader Tom DeLay, R-Texas. "But nobody has been able to come up with any yet."

Sen. Tom Coburn, R-Okla., said, "It is inexcusable for the White House and Congress to not even make the effort to find at least some offsets to this new spending."

Bush, who declined to try to put a price tag on the costs, expressed no worry.

"You bet it's going to cost money. But I'm confident we can handle it and I'm confident we can handle our other priorities," he said during a news conference with Russian President Vladimir Putin. "It's going to cost whatever it costs."

Sen. John McCain, R-Ariz., and other fiscal conservatives suggest that the first place to begin is to chop the $287 billion highway bill, which Congress passed this summer. They see $24 billion in savings by eliminating "earmarks" that individual lawmakers inserted for special projects back home — in other words, "pork-barrel" projects that the usual review committees hadn't approved.

"We have to be concerned about future generations of Americans upon whom we're laying an additional $100 [billion], $150 [billion], $200 billion in debt burden that they're going to have to pay for," McCain said. "We're going to end up with the highest deficit probably in the history of this country."

The Heritage Foundation, a conservative research center, also emphasizes that Katrina's costs require Washington to slash spending on other government programs.

"Offsetting the cost of rebuilding is all the more important because the rebuilding effort follows a 33 percent expansion of the federal government since 2001," Brian Riedl of Heritage wrote in a report.

Democrats, however, emphasize rethinking all the tax cuts that have passed since Bush became president.

"I'm not really into cutting [spending] right now," Senate Minority Leader Harry Reid, D-Nev., said Thursday. Instead, he urged Republicans to abandon plans to make the 2001 and 2003 tax cuts permanent, especially the repeal of the estate tax.

"While we're talking about saving money, maybe we could get the Republicans over here to consider not having $70 billion more in tax cuts for the wealthiest in this country," Reid said.

But with history showing that Congress is highly unlikely to cut existing programs anywhere near $200 billion, most, if not all, of Katrina's cost will be absorbed by taxpayers.

That spells trouble down the road.

"I think the short answer is it is going to make the budget situation even worse, and the way we're going to pay for it is borrow the money," said Robert Bixby, executive director of the Concord Coalition, a bipartisan group that advocates fiscal responsibility.

Adding to the debt is particularly risky because it complicates a grim scenario that's just around the bend. In 2011, the first wave of the baby-boom generation will turn 65. For the two decades that follow, budget experts warn, there will be unprecedented strain on government spending for retirement and health-care programs.

"We're on the verge of a huge national expense, and we have no idea how to pay for that," Bixby said.

"The danger here is that we're simply making that problem even worse by entering it with the budget so deeply in deficit."

Compiled from Knight Ridder Newspapers, The Associated Press and Newsday

Copyright © 2005 The Seattle Times Company

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