Beltway Hurricane
Ten days after Katrina, the private economy is holding up nicely. Oil platforms and pipelines are being repaired, traffic is returning on the Mississippi, gasoline prices are stabilizing, and the stock market has rallied two days in a row. The biggest threat now to a rapid and complete recovery is the storm-after-the-storm in Washington, where the politicians are making Governor Blanco look composed.</br></br>Our panicky, or shall we say opportunistic, solons are already using Katrina to bust through whatever spending limits they had previously set for themselves. Following last week's $10.5 billion, Congress is set to appropriate $52 billion more this week, and not just for the Gulf Coast. Senate Minority Leader Harry Reid has already tossed out $150 billion as a spending goal, and Republicans are saying they won't be outbid. No one wants to be stingy, but it's time to worry when the same people who passed a $286 billion highway bill without enough money for Louisiana levees now want to throw money at everything in sight.</br></br>If you think we're being cynical, consider that it took all of two days back from recess for Democratic leaders yesterday to propose killing this year's budget resolution. That document is hardly a fiscal straitjacket. But it is the only mechanism Congress has for putting any restraint on Medicaid and other entitlements growing by 7% to 8% a year, or triple the inflation rate. It's a terrible sign for fiscal sanity that GOP leaders gave in yesterday and agreed to suspend "budget reconciliation" for at least two weeks.</br></br>The real agenda here is to use Katrina to kill the Bush tax cuts and restore Congressional spending-at-will. The rules of "reconciliation" allow tax cuts to pass the Senate with 50 votes, rather than with the 60 needed to break a filibuster. So Republicans had hoped to use those rules to extend the Bush tax cuts on dividends and capital gains for another two years, through 2010. Without reconciliation, tax cuts are dead.</br></br>The irony is that Congress is doing all of this just as the U.S. economy spurred by tax cuts is throwing off record increases in revenues. Federal coffers are rising this year to the tune of $262 billion more than in fiscal 2004, and most state budgets are also brimming. If America is going to have any hope of financing both a war on terror and hurricane relief, it needs to keep this expansion growing. Telling investors that their tax rates on dividends will soon rise back to 35% from 15%, and on capital gains to 20% from 15%, would both shock the stock market and hurt growth.