It IS the Economy, Stupid

Bush talked about spending discipline in today's press conference, but simultaneoulsy asked for $147B for first quarter 2005, a new record. Even if held flat, it would equal $588B, another new record. The key point, as made below, is that all of this fiscal decisions leave very little room for error. Any event could quickly spiral the situation into crisis.

Excerpts today's NY Times:

Empowered by his own victory and stronger Republican majorities in Congress, Mr. Bush has pledged to push an economic agenda that could be more ambitious than the $1.9 trillion worth of tax cuts over 10 years that he signed in his first term.

The challenge ahead can be seen in the fiscal decline that took place between Mr. Bush's first inauguration in 2001 and his second one on Jan. 20, 2005. Federal tax revenue was $100 billion lower this year than when Mr. Bush took office, but spending is $400 billion higher.

Foreign investors have thus far been willing to finance the United States' borrowing, but most of that has come from central banks of Asian nations rather than private investors. If foreign appetite for Treasury securities wanes, interest rates would have to rise to make such investments attractive enough to keep money flowing into this country.

Making the job more difficult, politically as well as economically, is that higher oil prices have slowed American growth even as job creation continues to languish. Consumer and business confidence have slipped markedly in the last few months. And while oil prices declined modestly over several days until a $1.26-a-barrel rise on Wednesday, most forecasters are expecting economic growth to slow to 3 percent in 2005 from about 4 percent this year.

Mr. Bush has also promised to make his tax cuts permanent, which would add nearly $1 trillion to federal debt by 2014. And to avoid a huge tax increase for the upper middle class, he hopes to re-engineer the alternative minimum tax, a parallel tax that was created to prevent wealthy people from overusing tax deductions but that is expected to engulf as many as 30 million families by the end of this decade. That could cost more than $500 billion.

The biggest problem of all is the one that begins at the end of this decade: the looming retirement of 76 million baby boomers, which is expected to add trillions of dollars in new costs for Social Security and Medicare benefits.

Budget analysts say Mr. Bush can no longer blame slower economic growth or a weak stock market for the budget deficit, as he has in much of his first term, and he cannot count on faster economic growth to close the gap over the next four years.

"Policy choices will determine where we go,'' said Douglas Holtz-Eakin, director of the nonpartisan Congressional Budget Office. "We will not grow our way out of this. It is no longer the case that we can blame everything on the economy.''

And that does not count the $500 billion for repairing the alternative minimum tax. Mr. Bush ordered the Treasury to come up with a comprehensive solution by early next year, and that proposal could form the basis of a broader plan to overhaul the income-tax system. Even if the costs of repairing the tax are submerged in a larger plan, they will be difficult to avoid.

More ominiously, said Mr. Holtz-Eakin, who worked in the Bush White House before becoming head of the Congressional Budget Office, there is little room for error. Almost any unexpected shock - a new recession, or a new military crisis - could push budget shortages higher than the gloomiest forecasters are predicting now.