Pot of gold nearly empty

While the Bush administration tries determinedly to keep the public’s attention on war and rumors of war, there is another threat greater than Iraq ever could be. Namely, economic collapse.

On the home front, the economy is in a giant mess, as most of us are aware. Unemployment is running higher than it did in the last three quarters. Durable goods orders are down more than 2 percent, and non-defense and capital goods orders slipped 3 percent with shipments and unfilled orders both down.

Asset values of all types of property—office, apartments, retail and industrial—sank 10 percent from mid-2002 through the first quarter of this year, hitting levels of three years ago. Home prices haven’t plunged yet, but are likely to do so later this year.

This is hardly the kind of news the White House wants you to hear—it upsets the voters and could dampen re-election chances in 2004.

That’s why a report commissioned by the U.S. Treasury Department has been suppressed and put on the shelf by Dubya and company. The report shows the country faces chronic federal budget deficits far into the foreseeable future. The analysis predicts a total deficit of at least $44,200 billion in current dollars.

The report was commissioned by former Treasury Secretary Paul O’Neill, who was a little too truthful for the Bush clique’s taste. This study demonstrated that the federal government could be overwhelmed by future health care and retirement costs for the “boomer” generation. Read the deficit’s lips.

So Bush and his allies kept the report’s findings out of the annual budget report for 2004, published last February, while the president pushed for a tax-cut package that critics say will increase future deficits. He got about half what he asked for.

The Treasury study asserts that strong tax hikes, massive spending cuts or a mix of both are unavoidable if the U.S. is to meet its promise of benefits for future generations. Closing the financial gap, the study said, would take the equivalent of an immediate and permanent 66 percent across-the-board increase in the income tax.

President Bush recently signed a 10-year, $350 billion tax-cut program, which he touts as a victory for hard-working Americans and the economy.

The report’s analysis of future deficits dwarfs all previous estimates of the shortfall. That, it states, is 10 times the national debt, or four years of U.S. economic output or more than 94 percent of all U.S. household assets.

These estimates reveal the extent to which the national debt, the annual deficit and other financial health measurements are outdated and misleading. Kent Smetters, a University of Pennsylvania finance professor, who formerly was a deputy assistant secretary in the Treasury Department, said the tax cuts are only a fraction of the imbalance, and the bigger problem is the budget language used.

Writing in the Boston Globe, Laurence Kotlikoff, a long-term budget accounting expert, charged the Bush administration suppressed the research to make it easier to pass the tax cut package.

The federal government is not the only organization facing a crisis and feeling the pinch. A study provided to the National Bureau of Economic Research last year is equally depressing.

More than 30 states, it said, face long-term budget shortfalls that will last way beyond the current budget crunch. The study said this situation will force permanent tax increases, spending cuts or both. The study was reported in Financial Times.

Daniel Bensendorf, a Ph.D. candidate at the University of Freiburg in Germany, said: “Only 13 out of the 50 U.S. states are in a fiscally sustainable situation.”

Bensendorf was a co-author of the study along with Kotlikoff and Dean Baker, an official of the U.S. Commerce Department.

The 15 states identified as having the largest long-term imbalances are: New York, California, Arizona, Pennsylvania, Washington, Wyoming and Alaska. All will be forced to raise taxes, cut spending by 10 percent or a combination of both.

The analysis shows only a quarter of state governments will be in a position to cut taxes, raise total spending or build budget reserves in the long run. Altogether they are about one-fifth of the national population.

Results of the study are conservative because they do not allow for the present cash crunch, new fiscal obligations for education and homeland security and the skyrocketing surge in health care costs.

Concern over tight cash flow and unease over the long-term outlook has driven the spread in yields on state and local municipal bonds and U.S. Treasury bonds to seven-year highs, depressing most state credit ratings.

“I don’t see a systematic assessment of fiscal solvency of these states,” Kotlikoff said. “States can’t go broke overnight, so the real issue is how well they are going to be able to pay their liabilities and obligations over time.

“That requires looking into the future, and there is no evidence that these bond-rating companies are doing that,” Kotlikoff said. “I don’t see anyone—including state authorities—looking beyond their noses.”

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