A little more than a week after the terrorist attacks, government bills are rapidly piling up. Not only did the destruction take a toll of lives, but it also created substantial costs for rebuilding and defense measures.
After passing a $40 billion emergency package last week for disaster relief and infrastructure repair, Congress now considers the airline industry's request for $24 billion to help it through the coming lean months. The cleanup in Lower Manhattan and at the Pentagon will cost tens of millions of dollars, at least. And the bill will climb even higher as the government pumps money into overhauling its defense system and its plans for retaliation.
So far, not much has been said about how the increase in spending will affect the budget. Yet it's sure to force budgetary changes inconceivable earlier this month. "The great economist John Maynard Keynes is alleged to have said that when the facts change, I change my opinion," says Alan Meltzer, a professor of economics at Carnegie Mellon. "It's not surprising that the budget is going to change."
Social Security: No Longer Off-Limits
Only two weeks ago, politicians bickered fiercely about whether the government would dip into Social Security funds to pay for regular government programs. An August report from the nonpartisan Congressional Budget Office suggested the government would need to draw approximately $9 billion from the Social Security trust funds to finance spending for the current fiscal year ending this month.
Though any news in August seems like ancient history now, many taxpayers didn't want to see their retirement money used to fund general government programs. A
/ABC News poll released the morning of the attack found that an overwhelming 92% of Americans surveyed were opposed to using Social Security funds for other spending.
But in the wake of the attacks, it seems that the government will be forced to do more than just that. The pressing need to raise money for national security spending trumps any reluctance to tap Social Security funds. "We have gotten over the nonsensical discussion of the 'lockbox,' " says Meltzer. "It never had any practical significance; it was all a political game. The public is not interested in that game, so politicians have stopped playing it."
A Return to Deficit Spending?
Meanwhile, worries about a surge in government spending have affected the bond market, with Treasury yields rising on the long end. Yields on the 30-year bond had increased one-eighth of a percentage point between the Monday before the attacks and Wednesday afternoon.
Indeed, long-term bond investors fear that a jump in spending might eventually fuel inflation. "People who buy 30-year bonds are worried that both the fiscal and the monetary stimulus could be inflationary somewhere down the road," says David Lindsay, who manages the
Galaxy U.S. Treasuries Index Fund.
The government also may have to issue more debt to pay for spending, sweeping balanced budgets into a dustbin. Before the terrorist attacks, says Lindsay, "the expectation had been that surpluses would be used to buy back long-term bonds. Now there's likely to be very little surplus. And if spending is substantial enough, we could go back to out-and-out deficits. There could even be net new issuance of long-term bonds."
Even though a return to deficit spending would be a disappointing reversal, it wouldn't be uncharted territory for the U.S. government. Since 1951, the U.S. has run a budget deficit for all but four years, points out Meltzer.
Granted, international investors could be less willing to help finance that deficit as they have in the past. "There's a slight increase in the risk, of course, attached to the U.S.," says Meltzer. "But the same risk premium is attached to all the other countries, too." If the U.S. isn't safe, he points out, what is?
The world's appetite for U.S. securities will be tested soon. On Wednesday, the Treasury Department announced that it would sell $17 billion worth of two-year notes at its upcoming auction, up from only $14 billion the previous month. "Even in the shorter round, it looks like the Treasury is starting to raise more money," says Lindsay.
So far, positive sentiment related to the
rate cuts has offset any expected surge in short-term issues. But an increased supply of debt eventually will depress prices on the short end. "Once investors decide the Fed has finished easing rates, pressure from the new-issue supply will impact the shorter-end and intermediate-term maturities, as well as the long ones," says Lindsay.
Coming Your Way: War Bonds
Certainly, Capitol Hill sentiment has shifted from despair about vanishing budget surpluses to concerns with military readiness. Last week, two senators said they would introduce legislation authorizing the Treasury to issue war bonds, explaining that such bonds had generated more than $200 billion in revenue in World War II.
At the same time, the government appears to be backing off its 3-year-old debt buyback program. Monday, the Treasury Department said it had canceled debt buybacks scheduled for September.
Through the buyback program, the government had managed to pay down $363 billion of publicly held debt through last November. As part of that program, the government had stopped issuing seven-year notes and reduced the frequency of its five-year notes and 30-year bonds. By the end of 2000, total outstanding debt had decreased to a level close to that of 1993: $2.97 trillion. But in the wake of last week's events, the government's urgency to buy back debt has waned.
Though it's far too early to tally up financial costs from the terrorist attacks, forecasts of budget surpluses made earlier this year sound antiquated. At this point, even balanced budgets might be too much to hope for.