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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (114653)	9/13/2003 9:48:19 AM
From: Sam Citron	Read Replies (1) \| Respond to of 281500

Experts Worry Iraq to Be Drag on Economy By MARTIN CRUTSINGER The Associated Press Tuesday, September 9, 2003; 4:36 PM WASHINGTON - President Bush's request for $87 billion in new spending for Iraq and Afghanistan will worsen already gloomy forecasts for the budget deficit - sending it above the half-trillion-dollar mark next year - and could ultimately translate into weaker economic growth in the United States. That is the assessment of private economists who believe the surging federal deficits, while helping to boost a lagging economic recovery this year and next, will mean trouble down the road in the form of rising interest rates and higher inflation. This scenario of a classic "guns and butter" conflict between competing military and domestic priorities was visibly demonstrated in the 1960s when President Lyndon Johnson's "Great Society" programs ran up against escalating costs for the Vietnam War, triggering higher inflation and rising interest rates. Bush administration officials, briefing reporters on the details of the president's plan, rejected this bleak scenario. They said the additional $87 billion that Bush is seeking for military operations and reconstruction will not prevent the administration from achieving its goal of cutting the budget deficit in half over the next five years. But these officials, who spoke on condition of anonymity, conceded the request will add from $50 billion to $60 billion to next year's deficit, which the administration projected in July would hit a record $475 billion. The Congressional Budget Office, in its own mid-year update last week, was even more pessimistic with a 2004 deficit forecast of $480 billion. Adding $60 billion to that figure would result in a deficit of $540 billion next year. The CBO, without taking into account the extra spending for Iraq, had already forecast that the deficits over the next decade will total $1.39 trillion, a remarkable turnaround from when President Bush took office and officials were forecasting surpluses over a decade that would total $5.6 trillion. Part of the deterioration in the government's books reflects the 2001 recession and the weak recovery since that time. Analysts said the administration was right to push through tax cuts and increased government spending to jump-start growth over the past three years. Many now believe growth will be boosted by more than 1 full percentage point this year and next because of the stimulus provided by Bush's third round of tax cuts, which took effect this summer, and the increased government spending on the military and homeland security. "The tax cuts are getting spent and all the money the government is spending to buy new tanks and planes and missiles represents jobs as well," said David Wyss, chief economist at Standard & Poor's Co. in New York. The trouble will come, analysts said, if the huge deficits persist, as they now expect, after the economy starts growing at faster rates. Then the government's huge borrowing costs will bump up against investment needs of private companies seeking to expand and modernize. The increased demand represented by higher government and consumer spending will threaten higher inflation in an economy operating at full capacity. Higher interest rates and higher inflation will mean slower economic growth. "We are on an irresponsible path for fiscal policy," said Martin Baily, senior economist at the Institute for International Economics and head of the Clinton Administration's Council of Economic Advisers. Baily said this deficit binge was occurring at a time when the country needs to be preparing for the coming retirement wave of baby boomers, which will put severe strains on government benefit programs. He said the $1.4 trillion 10-year deficit estimate by CBO does not include the cost of making Bush's tax cuts permanent, estimated at $1.1 trillion through 2013, and something the president has said will be a top priority. Other private economists also questioned how long the U.S. commitment in Iraq will last. The $87 billion request will cover just the 2004 budget year, which begins Oct. 1. While the biggest concern is what the huge deficits will do in terms of crowding out private borrowing needs once the economy picks up steam, many economists said they believe the spectre of huge deficits in the future was already having an impact on long-term interest rates, which have been rising steadily since mid-June. "Investors' expectations are being changed," said Mark Zandi, chief economist at Economy.com. "I don't think anyone anticipated the magnitude of the commitment we are now taking on in Iraq." © 2003 The Associated Press washingtonpost.com