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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: DuckTapeSunroof who wrote (549890)	3/9/2004 11:32:08 AM
From: DuckTapeSunroof	Read Replies (2) \| Respond to of 769667

In Congress, Rising Deficit Hangs Over Bush Tax Cuts The president faces a harder sell to make the reductions permanent, even among the GOP. THE NATION By Janet Hook Times Staff Writer latimes.com March 9, 2004 WASHINGTON — President Bush's push to extend his trademark tax cuts, a goal that Congress once seemed all but certain to ratify, is running aground on the shoals of an enormous budget deficit. Bush repeatedly called on Congress to make permanent the tax cuts enacted over the last three years, which he presented as the cornerstone of his policy for economic growth and job creation. But Republicans in Congress say there is no way that will be accomplished this year — and it will not get any easier in the future. The debate over Bush's tax cuts is central to the presidential campaign. Bush wants them to be made permanent so that one of his biggest first-term achievements will endure. The foundering of Bush's tax cuts is part of a political and fiscal climate that has changed with projections that the federal deficit could reach $521 billion this year, nearly double the record before Bush took office. After three years of piling up unchecked, the deficit is beginning to impinge on the legislative ambitions of the White House and lawmakers of both parties. Bush's long-sought energy bill will have to be trimmed if it is to pass. Some advocates of repealing the estate tax are considering a stripped-down alternative. Republicans may even try to trim Bush's budget for once-sacrosanct defense and homeland security programs. While the deficit's precise effect on spending remains to be seen, its impact on the revenue side of the budget is already evident. This year is shaping up as the first since Bush became president in which Congress will not give him just about everything he wants on the tax front. "The question is, how do we get this deficit under control?" said Rep. Rob Portman (R-Ohio), a close Bush ally. "People will want to extend whatever tax cuts we can, but not all of them." Instead, Congress this year is likely to extend only three elements of Bush's tax cuts that expire this year — an increased credit for families with children, relief for married couples and rate cuts in the lowest income bracket — and to put off action on tax breaks that expire later. Even some Republicans are having second thoughts. "I and many others have reservations about making the entire tax package permanent," said Sen. Susan Collins (R-Maine). "I would have considerable concerns about making the top rate cut permanent as long as we are still running significant deficits." Among the other signs of Congress' dwindling appetite for big new tax cuts: • A business tax bill before the Senate last week was expressly designed not to increase the deficit. The bill would replace an existing export tax break, which had been ruled illegal by the World Trade Organization, with a broader business tax cut. But the cost of the new tax breaks is covered by repealing the old export credit and closing other tax loopholes. Meanwhile, a key House Republican who had been pushing a bigger tax break for months agreed last week to sharply cut the bill's price tag. • Some Republican opponents of the estate tax — which is scheduled to be repealed in 2010 and reinstated in 2011— are backing down from the effort to make repeal permanent. Instead, Sen. Don Nickles (R-Okla.) and others are developing an alternative that would reduce but not repeal the estate tax. • Republicans are scaling back the tax breaks included in the Bush-backed energy bill, which stalled in part because of objections from conservatives about its price tag. To revive the bill, proponents have cut its cost from $31 billion to about $14 billion over 10 years. Bush's all-but-certain Democratic challenger, Sen. John F. Kerry (D-Mass.), cites the president's tax cuts as an emblem of Bush's tilt to the wealthy. He calls for repeal of the tax cuts that benefit upper-income people — a proposal Bush says amounts to a tax increase. "Come November, the voters are going to have a very clear choice," Bush said in a recent speech. "It's a choice between keeping the tax relief that is moving the economy forward, or putting the burden of higher taxes back on the American people." One Bush aide argued that the president would have the best of both political worlds if Congress made only the most popular parts of the tax cut permanent. That would give Bush bragging rights for some election-year tax relief and leave it to voters to reelect Bush to finish the job. At issue is the 2001 law that cut taxes by $1.35 trillion over 10 years. The law called for gradually reducing income tax rates, phasing out the estate tax, cutting taxes on married couples and doubling the $500-per-child tax credit for middle- and lower-income families. A 2003 law, intended to stimulate the economy, accelerated most of the 2001 tax cuts. Both laws included expiration dates for most of the tax cuts — "sunset" provisions that were designed to keep their costs politically acceptable. Most elements of the 2001 law were written to expire at various points between now and 2011. Many provisions of the 2003 law also phase out this year. When the "temporary" tax cuts were enacted, it was widely assumed that Congress would not let them lapse as scheduled. The skyrocketing deficit has raised questions about whether Congress can afford to extend all of them — at a cost of some $1.9 trillion over the next decade. Even ardent supporters of making all the cuts permanent acknowledge they cannot prevail until the deficit is in check. "The numbers aren't there right now," said Rep. Paul Ryan (R-Wis.). Such supporters are resigned to doing no more this year than temporarily extend the three breaks that expire at the end of this year. Without congressional action, the per-child tax credit would drop from $1,000 to $700 next year, the standard deduction for married couples would shrink, and the amount of income covered by the 10% tax rate would drop from $7,000 to $6,000 with the extra $1,000 moved back to the 15% bracket. Most other tax breaks do not expire until 2009 or 2010, and lawmakers calculate that they can postpone action on them. Bush argued for quicker action. "Uncertainty in the tax code will make it harder for our citizens to make rational decisions about spending money," he said. The budget resolution that came before the Senate on Monday assumes that only the three expiring provisions would be extended this year, at a cost of some $80 billion over five years. The House Budget Committee is expected to adopt a companion resolution this week that assumes the same. Those resolutions, which are to guide Congress as it enacts annual spending and revenue bills, reflect a determination by many Republicans to move more aggressively against the deficit than did Bush's budget, which calls for cutting the deficit in half within five years. The Senate resolution would halve the deficit in three years. Although most recent efforts to curb spending have focused on domestic programs, some lawmakers argue that defense and homeland security spending should also be scrutinized. The Senate resolution would provide $7 billion less for defense than the $421 billion Bush requested. House Budget Committee Chairman Jim Nussle (R-Iowa) is considering a plan to shave $2 billion from Bush's Pentagon request. But even those modest restraints on defense spending have met strong opposition from many Republicans. And lawmakers have resisted pleas from Bush to scale back a big election-year highway bill. Still, Maya MacGuineas, executive director of an anti-deficit group known as the Committee for a Responsible Federal Budget, is encouraged that some lawmakers consider Bush's tax-cut promises unaffordable. "I thought I would spend months getting people to even mention the word 'deficit,' " she said. "Now you hear it all the time. The issue has come onto the agenda much more quickly than anyone anticipated." Times staff writer Richard Simon contributed to this report.

To: DuckTapeSunroof who wrote (549890)	3/9/2004 12:14:05 PM
From: DuckTapeSunroof	Read Replies (1) \| Respond to of 769667

PULLING OUT THE RUG by Kurt Richeb�cher Apparently, the consensus economists are still convinced that the growth acceleration in the second half of 2003, and above all a sharp rise in profits, have laid the foundation for sustainable growth. In particular, sustainable growth with sufficient creation of employment. We disagree. But we must admit that our own assessment is prejudiced by the postulate of the Austrian school, that "the thing which is needed to secure healthy economic growth is the most speedy and complete return both of demand and production to its sustainable long-term pattern, as determined by voluntary consumer saving and spending." Friedrich Hayek said in 1931: "If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into the wrong direction and a definite and lasting adjustment is again postponed. And even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises." We think this precisely describes what has been happening and continues to happen in the United States. The Greenspan Fed has discovered a new, amazingly easy and quick way to create higher consumer spending virtually from thin air - by way of so-called wealth creation through asset bubbles. It began with the stock market bubble, to be followed by bubbles in bonds, house prices and mortgage refinancing. Measured by real GDP growth, it seems a successful policy. But measured by employment and income growth, it is an outright disaster. The so-called "wealth effects" are not for real, neither for the economy as a whole nor for the individual asset owners. The reality in the long run is only the horrendous mountain of debts that consumers, corporations and financial institutions have piled up. Given the general euphoria about the U.S. economy and its recovery, there appears to be a general apprehension in the markets that the Federal Reserve will be forced to raise interest rates in the foreseeable future. The Fed is clearly anxious to dispel any such fears - and this, in our view, is for a compelling reason. U.S. economic and financial stability have become inexorably dependent on the existence of a steep yield curve allowing and fostering unlimited carry trade in long-term bonds. Any major rise at its short or long end would shatter this artificial stability and send the economy and financial system crashing. Considering all the imbalances impairing U.S. economic growth, we are unable to see the sustained, strong recovery. A closer look at the recent economic data [and last Friday's jobs report] confirms this skepticism. Possibly, if not probably, economic growth has already peaked. For us, the question rather is when general disappointment will gain the upper hand. That, of course, is sure to soothe the bond market, allowing moreover the Fed to maintain low interest rates. But it will conjure up another, even greater risk at the currency front. It will pull the rug out from under the dollar. In our view, the U.S. trade deficit is big enough to cause a true tailspin of the dollar against all currencies. So far, two things have prevented this threatening dollar collapse: the gargantuan dollar purchases by Asian central banks and the still rather positive perception around the world of the U.S. economy. In our view, few people realize its true weakness and vulnerability. There is widespread hope that the falling dollar will go a long way to lower the U.S. trade deficit. It takes a lot of wishful thinking to believe that. Its persistent growth has various reasons. One of them is that the gap between exports and imports has simply become too big to be reversible. Last year, exports amounted to $1,018.6 billion and imports to $1,507.9 billion. Just to prevent a further rise of the deficit, exports would have to rise 50% faster than imports. Principally, the trade flows of a country are exposed to three major influences: first, relative prices and the exchange rate; second, relative demand conditions; and third, relative supply conditions. Empirical experience suggests that exchange rate changes by themselves have very little effect on trade flows. One obvious reason is that Asian as well as European exporters readily adjust their prices to maintain their market shares. For years, the United States has been top in the world with its domestic demand growth propelled by the loosest monetary policy in the world. For sure, lacking demand growth in the rest of the world has played a role in boosting the U.S. trade deficit. Yet what matters most for the trade balance is not U.S. growth in relation to other countries, but U.S. demand growth in relation to U.S. capacity and capital-stock growth. In essence, such a deficit indicates an equivalent excess of domestic spending over domestic output. More precisely, the U.S. trade deficit reflects gross overspending on consumption on the demand side and a grossly unbalanced investment structure on the supply side. There was gross underinvestment in manufacturing versus gross overinvestment in retail, finance and high-tech. Our assumption is that there is no intention or will on the American side to correct any of these maladjustments. Given their enormous size, it is a Herculean task, too Herculean, in fact, to be seriously addressed. Principally, American policymakers and economists take only two economic problems seriously: high rates of inflation; and, in particular, slow growth and rising unemployment. They could not care less about the dollar. The low inflation rate is the excuse for more of the same extreme monetary looseness. There is quite a variety of accidents waiting to happen in the markets, but the most predictable and biggest risk is a dollar crisis. In addition to the gargantuan trade deficit, looming in the background are existing foreign holdings of dollar assets in the amount of $9 trillion. As explained, the tremendous vulnerability of the U.S. bond market due to its underlying heavy leveraging prohibits any defense of the dollar through tightening. Instead, the plunging dollar will pull the rug out from under the bond and the stock markets. Regards, Kurt Richeb�cher for The Daily Reckoning Editor's note: Former Fed Chairman Paul Volcker once said: "Sometimes I think that the job of central bankers is to prove Kurt Richeb�cher wrong." A regular contributor to The Wall Street Journal, Strategic Investment and several other respected financial publications, Dr. Richeb�cher's insightful analysis stems from the Austrian School of economics. France's Le Figaro magazine has done a feature story on him as "the man who predicted the Asian crisis." This essay was adapted from an article in the March edition of: The Richeb�cher Letter agora-inc.com