CITS DEBT WATCH, "Stock Market falls as 'investors' turn back to the U.S

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                    W. Curtiss Priest, Ph.D.
          Center for Information, Technology & Society
              466 Pleasant Street Melrose, MA  02176
  E-mail: BMSLIB@MIT.EDU, Voice: 781-662-4044, FAX: 781-662-6882


                          April 10, 2003

                         Public Issue #97:

                          CITS DEBT WATCH


 "Stock Market falls as 'investors' turn back to the U.S. Economy:
     What do Adam Smith and Paul Volcker have in Common?"

           Commentary by Dr. W. Curtiss Priest, Director:

To a House floor of empty seats, Adam Smith (D-Washington), Ron
Kind (D-Wisconsin), and Jay Inslee (D-Washington) spoke of,
perhaps, this nation's greatest threat -- the "addition of six
trillion dollars of federal debt over the next 10 years, to the
existing six trillion dollars of current federal debt."

Rep. Kind noted that this will be the third time in the last
two decades that administrations including the early 80's and early
90's have let the deficit run wild.  He commented that earlier
administrations, such as Eisenhower's, kept careful discipline
about assuring that public spending did not exceed revenues.
Kind referred to this as "deja voo doo economics."

Kind was careful to distinguish between "one time" charges such
as the current war, against the overarching move towards tax
cuts and looming deficits.

All three were astounded and shocked that for the sake of "tax
cuts to the rich" that their children would inherit an ever
increasing debt.  And all three speakers noted that the ever
increasing debt service cost would increasing choke off the
ability for the national government to provide vital services
and would drive up interest rates as money is increasingly
funneled to a non-productive use.

Smith turned to Bush's recent comments that "[we] shall not pass
our problems on to future Congresses."  While Bush said this
in the context of the Iraq war, Smith stated that Bush should
follow his own advice and not pass the problems of increasing
deficits to future Congresses, either.

Kind quoted from an article, "No New Tax Cuts" appearing in
yesterday's New York Times (full text is below):

  The New York Times, April 9, 2003, Wednesday, Late Edition - Final,
  Section A; Page 19; Column 2; Editorial Desk, 843 words, No New Tax
  Cuts, By Bob Kerrey, Sam Nunn, Peter G. Peterson, Robert E. Rubin,
  Warren B. Rudman and Paul A. Volcker; Bob Kerrey, Sam Nunn and Warren
  B. Rudman are former senators. Peter G. Peterson and Robert E. Rubin
  are former cabinet secretaries. Paul A. Volcker is former chairman of
  the Federal Reserve. All are members of the Concord Coalition, a group
  that focuses on federal budget policy.

Kind quoted from the article and cited several of its authors.

While Republican dogma is that "tax cuts stimulate the economy" we
can note this fallacy to such an argument.  If, as mathematicians
do, take such cuts "to the limit," that is, to zero percent
taxation, that zero percent of anything is still zero dollars
of revenues to the federal government.  So, the mantra of "tax
cuts" is doomed at some point.  Many believe we have reached
the point where the claims of positive consequences of such cuts
belie the ever rising negative consequences.

The presentations of Smith, Kind and Inslee were aired at
8:30 PM (EDT) on C-SPAN1 (4/9/2003) as part of the House's
"Special Order Speeches."  Rep. Smith spoke using a large chart
showing the additional $6 trillion increase in the deficit
over ten years.  His web page is: http://www.house.gov/adamsmith

His offices may be contacted at 202-225-8901 in DC and at
253-593-6600 in Tacoma, Washington.

We note, for the record, that as of 9:30AM (EDT), there have
been no newswire coverages of this event.

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Previous issues of (all) the CITS DEBT WATCH:
    http://groups.google.com/groups?q=cits+debt+watch&hl=en&scoring=d

The entries appear in reverse chronological order, with the
most recent, first.

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NOTICE: Contains copyrighted material, do not redistribute unless you
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The New York Times, April 9, 2003, Wednesday, Late Edition - Final,
Section A; Page 19; Column 2; Editorial Desk, 843 words, No New Tax
Cuts, By Bob Kerrey, Sam Nunn, Peter G. Peterson, Robert E. Rubin,
Warren B. Rudman and Paul A. Volcker; Bob Kerrey, Sam Nunn and Warren
B. Rudman are former senators. Peter G. Peterson and Robert E. Rubin
are former cabinet secretaries. Paul A. Volcker is former chairman of
the Federal Reserve. All are members of the Concord Coalition, a group
that focuses on federal budget policy.

With a war in Iraq and looming postwar costs, growing pressures for a
prescription drug benefit, increased expenses for domestic security
and a ballooning budget deficit, Congress must exercise restraint on
both revenues and spending to prevent fiscal policy from spiraling out
of control. The consensus in favor of long-term budget balance must be
re-established. This issue is now directly before Congress as it
debates the federal budget.

The fiscal outlook is much worse than official projections indicate.
These projections assume that the tax cuts enacted in 2001 will expire
at the end of 2010. They also assume that discretionary spending, the
part of the budget that pays for national defense, domestic security,
education and transportation, will shrink continuously as a share of
the economy. Neither of these assumptions is realistic.

Moreover, the official projections do not include the costs of war and
reconstruction in Iraq. And they ignore the inevitable need to reform
the alternative minimum tax, which is not indexed for inflation and
will apply to some 40 million households within 10 years -- up from
two million today.

Under more realistic assumptions, the deficit projections are cause
for alarm. A recent study by Goldman Sachs includes this forecast: if
the president's proposed new tax cuts are enacted, a Medicare
prescription drug benefit is approved, the A.M.T. is adjusted and
appropriations grow modestly, the deficits over the next 10 years will
total $4.2 trillion -- even if the Social Security surplus is
included. If it is not included, the deficit would be $6.7 trillion.
Under these circumstances, the ratio of publicly held debt to gross
domestic product climbs within 10 years to nearly 50 percent, from 33
percent just two years ago.

And all of this happens before the fiscal going gets tough. Looming at
the end of the decade is a demographic transformation that threatens
to swamp the budget and the economy with unfunded benefit promises,
like Social Security and Medicare, of roughly $25 trillion in present
value. Our children and grandchildren already face unthinkable payroll
tax burdens that could go as high as 33 percent to pay for these
promised benefits. It is neither fiscally nor morally responsible to
give ourselves tax cuts and leave future generations with an even
higher tax burden.

And yet tax cuts are the primary focus of this year's budget debate.
To speed enactment of tax cuts, Congress is planning to use a special
fast-track procedure called "reconciliation" in the budget resolution.
While determining the size of the tax cut to be given fast-track
protection in the budget is sometimes dismissed as a procedural
matter, it is not: whatever its size, a tax cut that receives this
protection is almost certain to be enacted in the later tax
legislation. Members of Congress should not therefore approach the
budget decision with the idea that a tax cut given such status now can
be easily scaled back later.

The president has proposed a cut of $726 billion, which the House has
already approved. The Senate has reduced the cut to $350 billion.

Given the rapidly deteriorating long-term fiscal outlook, neither
proposal is fiscally responsible. It is illogical to begin the journey
back toward balanced budgets by enacting a tax cut that will only make
the long-term outlook worse. Furthermore, the proposed tax cuts are
not useful for short-term fiscal stimulus, since only a small portion
would take effect this year. Nor would they spur long-term economic
growth. In fact, tax cuts financed by perpetual deficits will
eventually slow the economy.

The tax cuts now before Congress do not pay for themselves. No
plausible array of matching spending cuts or offsetting revenue
increases has been, or will be, proposed to close the gap resulting
from a large new tax cut.

We believe that there should be no new tax cuts beyond those that are
likely to provide immediate fiscal stimulus, and that avoid growing
revenue loss over time. If, however, Congress decides it must approve
a tax cut, it should pass the Senate's. While a $350 billion tax cut
does not fit our definition of fiscal responsibility, it comes closer
than a tax cut of $726 billion. Moreover, Congress should re-establish
the pay-as-you-go rule in which tax cuts and entitlement expansions
must be offset. The discipline of this rule greatly contributed to the
elimination of budget deficits in the 1990's and is clearly needed
again.

Congress cannot simply conclude that deficits don't matter. Over the
long term, deficits matter a great deal. They lower future economic
growth by reducing the level of national savings that can be devoted
to productive investments. They raise interest rates higher than they
would be otherwise. They raise interest payments on the national debt.
They reduce the fiscal flexibility to deal with unexpected
developments. If we forget these economic consequences, we risk
creating an insupportable tax burden for the next generation.

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abide to the copyright notice appearing at the end of this article.

As provided for under Section 107 of the 1976 Copyright Law, the
following piece is being distributed for non-profit purposes and for
comment, criticism, and teaching.  In cases where the purpose of
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or article is reproduced.  However, these extracts are typically a
very small percentage of the overall original work or publication.

Should you wish to convey this material, in the same spirit, you are
free to do so.

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