Storm Surge

What will the twin hurricanes do to the U.S. economy? The Federal Reserve seems to think not terribly much. This past week, the Fed continued hiking interest rates, the eleventh such increase since June 2004.

This tighter-money policy is intended to cool an overheated economy -- but the economy suddenly doesn't seem all that strong.

Katrina is forcing the Bush administration to borrow even more money, to pay for the program of reconstruction that the administration hastily threw together last week. Federal outlays will eventually total over $200 billion.

Deficit spending, of course, stimulates the economy. And though Alan Greenspan has been something of an enabler of George W. Bush's big deficits by blessing the president's tax cuts, Greenspan now thinks that these big deficits need to be offset by higher interest rates.

But the hurricane damage and the resulting jolt to oil prices could change this calculus. Gulf coast refineries provide more than one-fourth of America's domestic energy supplies. Oil companies, which like tight markets, have been reluctant to build additional refining capacity, something that could take years. Gas prices could stay above three dollars a gallon for months, cutting into consumer purchasing power, offsetting the spur of new government spending.

Even before Katrina, the Conference Board reported a decline in the index of leading indicators for two straight months. Declining consumer confidence reflects a weak job market. Real wages, adjusted for inflation, are lower than they were four years ago.

Until this year, the economy could at least tread water, thanks to the twin stimuli of low interest rates and large deficits. But the Fed has decided, hurricane or no, that this course cannot continue indefinitely without producing inflation. Ironically, the higher gasoline and heating prices will now show up in the inflation indexes, even though these higher prices reflect a weakened economy, not a stronger one.

It's perverse that it took a disaster like Katrina for the Bush administration to discover the virtues of public spending. Most immediately, if we'd spent even $5 billion shoring up the gulf's flood defenses, we wouldn't have to be spending an extra $200 billion now.

And there are so many better ways to help an economy with $200 billion of public outlay.

If the administration had different fiscal priorities and were not so devoted to government-bashing as a credo, the economy would be in stronger shape overall. In order to pay for tax cuts, half of which will benefit the wealthiest 2 percent, the administration has both increased deficits and slashed social spending.

The administration is cutting not just welfare but outlays on science needed to keep America competitive. It has slashed outlays for real energy independence based on renewable technologies in favor of tax breaks for deeper drilling. Even so, pork-barrel spending has risen, and Katrina will provide a new fountain of no-bid contracts and boodle for cronies.

Faced with the need to find $200 billion for disaster relief, Republicans in Congress are now demanding even deeper program cuts elsewhere, in order to continue the reckless program of tax cuts.

The thrown-together relief program is not efficient public outlay. It will supposedly help the poor and middle class with “homesteading” grants, disaster loans, “faith-based” charity, and -- what else? -- tax breaks. Most of the money will go to business.

But even if some of the Katrina money does trickle down to ordinary people, the citizens displaced by Katrina are less than 1 percent of Americans. As a war against poverty, it is tokenism for one city, designed more for public relations than as a serious effort. When Karl Rove hastily summoned all the administration's serious poverty-fighters, they could have met in a phone booth.

Louisiana is a poorer state than most. But if a similar disaster hit almost any American metropolitan area, it would flush out similar human realities of poverty.

If we were spending additional public funds of that scale -- $200 billion a year – on things the economy really needs, like better schools and preschools, first-time homeownership, investment in science, and public health, we'd have a stronger economy and a more decent society. Instead, the administration has raided the Treasury for tax breaks, the proverbial rainy day has come, and the White House is inept at using government competently, having devoted such passion to hating government and denuding it of resources.

Katrina hosed away a lot of myths, and revealed both the face of poverty and the vulnerability of this administration's economic strategy for America. It was George W. Bush's Perfect Storm.

Robert Kuttner is co-editor of The American Prospect. A version of this column appeared in The Boston Globe.

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