Hi, Doug
I think this article is worth attention:
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DJ. BARRON'S: Editorial Commentary -- Rooting For Dollars: Incre...
DJ. BARRON'S: Editorial Commentary -- Rooting For Dollars: Increasing The
National Debt Limit Is A Symptom Of Far Bigger Problems
By Thomas G. Donlan
The pig has come to the wedding. Arriving unexpectedly at the top of the
government's list for immediate action is an increase in the national debt
limit. By the end of this month, the federal government will have borrowed to
the hilt of the old limit of $5.95 trillion. In theory, the debt limit would
then cause the U.S. Treasury to default, because it would not be able to borrow
new money to roll over old debt.
On Capitol Hill, the situation is critical, but not serious. After all,
almost all of the growth in debt relates to the Social Security trust fund, the
mechanism by which the Treasury grabs excess Social Security tax revenues for
general expenditures, depositing special non-marketable Treasury bonds in the
trust fund as promises that the government will someday cut spending or raise
taxes to support the retirement of the Baby Boom generation.
Politicians who live with this kind of accounting are more concerned about
shedding and spreading blame than they are about the national fisc. Republicans
in the House recently tried to bury an increase in the debt limit in a corner
of an "emergency" spending bill; Democrats in the Senate vowed to bring up a
separate bill so that they could highlight the new deficits and link them to
the public's existing worries about the future finances of Social Security and
Medicare.
Republicans also want to add at least $750 billion to the debt limit, which
they think will put the next such embarrassing vote safely beyond the next
presidential election. Democrats want a small increase and lots of votes.
They are ignoring a real change in position: Most of the growth in debt is
related to the Social Security trust fund, but not all of it. The Treasury is
borrowing at least a few billion dollars from the public this quarter, and it
has said -- optimistically, in our view -- that next quarter's borrowing will
hit $55 billion.
Fortunately, international capital markets are not panicking: Investors
presume that a majority of Congress members will whine, cry, declaim and dicker
for special treatment before beating the deadline and raising the limit, as
they have so many times before. And if Congress can't act, the Treasury will
find a sleight-of-hand trick to make the problem vanish -- as it has before.
But suppose it turns out that the Congress holds its breath and turns blue,
and the Treasury has less up its sleeve than the markets assume? Well, we've
never tried default, have we?
We never used to shut down the government for lack of appropriations; now it
seems we do it every second or third year.
Even if the United States does fail to make a timely payment on some Treasury
bills, it still prints something that the rest of the world is grateful to
consider money. More importantly, it has a pretty good record of not often
abusing the privilege -- not often trying to print more dollars than the world
needs.
Even if there's a default, and certainly if the Treasury performs some kind
of legerdemain, Capitol Hill will get around to legalizing the mess, and all
those who rely on the full faith and credit of the United States eventually
will get dollars for their T-bills, with interest.
But the United States of America will have taken one more step on the trail
blazed by Argentina, Russia and so many other countries that are wealthy in
resources and human knowledge, but foolish in the way they handle their
finances. The dollar is only money because the world's people believe we won't
abuse them.
The causes of the incredible disappearing surplus should be even more
interesting to investors and politicians than the consequences.
Revenues have fallen a good deal short of expectations. Not primarily because
of last year's tax cut -- the great bulk of which has not taken effect -- but
because the recession has reduced personal and corporate income tax receipts
and the stock market has stopped creating abundant capital gains and
stock-option profits to be taxed.
The Congressional Budget Office's latest monthly report notes that receipts
in April were $95 billion less than in April 2001, a drop of about 29%. For the
fiscal year that began last Oct. 1, receipts are $75 billion, or 11%, lower
than projected.
The CBO said the sharp decline in receipts occurred mainly in income taxes
not covered by withholding, such as the capital gains tax and taxes on mutual
fund distributions, and in taxes on self-employed people. They shrank by $67
billion, or 33%, which was the largest percentage decline in decades.
April is the cruelest month for such dismal news, because it is the most
important month in the federal financial calendar. April's receipts largely
consist of final payments of individual income taxes for the previous tax year.
Reductions of receipts driven by the tax cuts were much lower: Individual
income tax refunds were only $8 billion higher than last year, and corporate
tax receipts were off $14 billion. Withholding tax receipts were off $7
billion.
Spending, meanwhile, is running substantially ahead of last year's rate, and
not primarily because of September 11 -- extra outlays for new security
measures and the war in Afghanistan so far total $12 billion. The CBO report
says total outlays through April were 8.1% higher than those in the comparable
period last year. Military expenditures were up $22 billion, or 11.5%. Social
Security benefits were up $14 billion, or 5.5%. Medicare benefits were up $11
billion or 10.8%. Medicaid spending was up $11 billion, or 14.6%. Unemployment
insurance payments were up $11 billion, which is a whopping 67.2%. Net interest
on the public debt was down $25 billion, or 19.6%.
Except for the military, these expenditures are largely uncontrolled, arising
from previous legislative decisions. Outlays in the more controllable part of
the budget -- defense plus spending for all the other programs and activities
from mining to the exploration of outer space -- look like they will grow $86
billion in the full current fiscal year, from $644 billion in fiscal 2001 to
$730 billion in the current fiscal year. That's an increase of 13.3% in a
period of negligible inflation. It's also $42 billion more spending than
officially estimated as recently as February.
Although the Office of Management and Budget and the Congressional Budget
Office won't make new official estimates until next month, the current fiscal
year is likely to end with a deficit of $150 billion or more, compared to the
$9 billion deficit projected in February and the $313 billion surplus projected
just 16 months ago.
With such amazing changes in such a short time, no sensible person outside
More To Follow In Story Number 64450
FSN55893 CO ECONOMY FINANCIAL
2002-06-01 02:55:14 UTC
^^^^^ |
