Government Executive - Authors - John Maggs

Analysts debate consequences of a $1 trillion deficit

John Maggs — Mon, 03 Nov 2008 00:00:00 -0500

Back when a trillion was an unimaginably large number, President Reagan confided that he was having trouble comprehending how much a trillion dollars was: "And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you'd be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high."

Reagan imagined this tower of greenbacks in February 1981, at the beginning of a deep recession that many people believe will be equaled in the months ahead. Back then, a trillion dollars represented an extraordinary threshold -- the cumulative debt for the federal government since it first borrowed money to finance the Revolutionary War. In scarcely a generation, the United States government has gone from owing a trillion dollars to borrowing that much just to make the rent.

In 2009, it is possible that the U.S. budget deficit for a single fiscal year will reach $1 trillion. At a time when U.S. businesses and households are being forced to reduce their debts -- "deleverage," in the recent parlance -- the federal government is leveraging more than ever. Only nine months ago, the Congressional Budget Office predicted that the budget deficit for 2009 would be $198 billion. The actual number may be five times as large.

Officially, Congressional Budget Office Director Peter Orszag has said that the slowing economy and the costs of emergency action connected to the financial crisis could push the deficit to $750 billion next year. But that figure doesn't include other anticipated costs, such as an economic stimulus plan of $300 billion or more, other steps to shore up the banking system, and lost tax revenue as the recession deepens.

The first budget expert to use the $1 trillion number was Maya MacGuineas, president of the Committee for a Responsible Federal Budget, based on a guess about declining revenues and some simple addition involving the proliferating obligations of the Treasury Department and the Federal Reserve in trying to unfreeze the financial system. Some of these costs are known -- at least $120 billion has already been drawn by insurance giant American International Group, for example -- but other expenses, such as the cost of recapitalizing Fannie Mae and Freddie Mac -- are not yet clear, MacGuineas noted.

William Gale, director of economic studies at the Brookings Institution, agrees that the deficit could reach $1 trillion. "I think hardly anyone is worrying about that right now," he said. The reasons for this lack of concern go beyond the distractions of a historic election and the depth of the economic emergency, he said. After a generation in which the budget deficit has steadily diminished as a worry for the public and its elected representatives in Washington, Gale said, "there are some lessons that have been forgotten." One of those forgotten lessons is that it is easier to build the tower of debt than it is to dismantle it. Another is that even "temporary" deficits become permanent unless they become the focus of the political system -- a focus that is entirely lacking these days.

Why Deficits Matter

Budget deficits are bad, economists say, when they grow large enough to push up interest rates and retard growth. In 1981, when Reagan took office, the deficit was 2.6 percent of gross domestic product, barely above the long-term average of about 2.5 percent of GDP. A recession, tax cuts, and defense spending combined to drive the deficit up to 6 percent of GDP in 1983, and it remained consistently above average for the next decade.

Deficits cause higher interest rates because the government competes with businesses and consumers to borrow money, according to conventional economic theory. The science of quantifying this effect is a little slippery, but Gale's research estimated that for each percentage point of GDP that the deficit rises, long-term interest rates increase by 0.4 to 0.7 percentage points. According to this yardstick, for the decade of higher deficits that lasted until 1993, government borrowing raised interest rates as much as 1 percentage point each year. Compounded over 10 years, this borrowing crowded out a lot of growth. In 1990, high interest rates were crucial in throwing the nation into a recession, and rates remained troublesomely high during a slow recovery in 1992.

A $1 trillion deficit next year would put the nation's overspending in record territory -- somewhere above 6 percent of GDP, and perhaps close to 7 percent (depending on how much the economy shrinks in the coming months -- a bigger downturn means a bigger percentage). Using Gale's rule of thumb, this deficit level could raise long-term interest rates by perhaps 2 percentage points -- assuming a few things that are hard to pin down.

One of those assumptions is that the increase in the deficit represents a fairly long-term upward adjustment in the government's imbalance between spending and revenue. On the surface, much of the spending that will drive next year's deficit seems like onetime expenses -- the hundreds of billions of dollars to nationalize Fannie Mae, Freddie Mac, and big companies such as AIG; the hundreds of billions more to nationalize banks; and the hundreds of billions that may go to another massive economic stimulus plan, either in a lame-duck session of Congress this fall or early next year. Much of the money flowing out of the Treasury in 2009 to underwrite these ventures will be flowing back over the coming years, Gale said, as the government sells off its stakes in companies and gets payment on its loans.

On the other hand, Gale admitted, a great deal of uncertainty remains over when Treasury can recover its costs, how much it will get, and whether it will have to shell out more money. Meanwhile, he said, deficits were already expected to rise sharply because of the mounting costs of entitlement programs such as Social Security and Medicare. A $1 trillion deficit may make it appear futile for the next president to propose politically palatable steps to address the entitlement problem, Gale said.

And then there's the challenge posed by the scheduled expiration of President Bush's tax cuts in 2011. Current CBO projections assume a big burst of revenue after tax rates rise for many consumers and most businesses -- just when the economy is likely to be emerging from a recession. John McCain has promised to continue all the Bush tax cuts if he is elected president, and Barack Obama vows to continue them for all except those making more than $250,000. So the big burst may never materialize.

So Far, Lower Rates

Simon Johnson, former research director at the International Monetary Fund, said that few economists are worried about a record budget deficit for the United States next year because long-term interest rates are already low and expected to go at least 1 percentage point lower, according to most predictions for 2009. That is what happens during recessions, when the demand for capital dries up, said Johnson, now a senior fellow at the Peterson Institute for International Economics.

But the situation is complicated by another factor -- the unusual uncertainty over the availability of credit. Even after the Federal Reserve Board's decision on Wednesday to lower short-term interest rates to 1 percent, the difference between the Fed's rate to banks and what banks are charging to customers for loans is historically very high, and qualifying for loans has become much more difficult for would-be borrowers. If the financial rescue plan works, this "risk premium" will ease over time, but Johnson concedes that it will remain elevated, perhaps even during a recovery.

The larger question about a $1 trillion deficit, according to Johnson, is whether it represents a historic step toward out-of-control fiscal policy. Unusual among economies around the world, the United States has been relatively virtuous when it comes to debt and deficit spending, he said, and our fiscal conservatism has been a major reason why foreign investors have viewed the United States as the safest place to keep their money. "I don't think that a deficit of 6 percent of GDP" will convince investors that the United States will be unable to fund its obligations, Johnson said. Even with the higher deficit next year, a total national debt of $11 trillion would amount to about 70 percent of GDP, while many developed nations have staved off crisis with ratios well over 100 percent.

Nevertheless, we are less virtuous than we used to be. In 1981, the $1 trillion national debt was about 20 percent of yearly GDP. Since then, the economy has roughly tripled in size while the debt has grown by a factor of 10 -- it is now about $10.5 trillion. Back then, Reagan could provoke outrage by noting that the government would pay $90 billion in annual interest on the national debt. In the fiscal year that ended on September 30, the government paid $450 billion in interest.

The increase in borrowing and interest expenses is a cultural trend. In 1981, the debt held by American households was just under 70 percent of median after-tax income; by 2007, that proportion had doubled to 140 percent of take-home pay. A large share of this increase has come in home mortgage debt -- its share of the total has risen much faster than has borrowing for other purposes.

For the deficit and the debt to really matter, Johnson said, investors would have to conclude that the United States was no longer the safest bet in the world, and the spread of the financial crisis beyond the United States has helped us in that regard. As European nations and other countries have seen the credit crunch strain finance and economic growth, investors' confidence in the United States has actually increased in the last few weeks, Johnson said. This trust is reflected in higher prices and lower yields for Treasury bills and an increase in the value of the dollar, as foreigners put their money in American assets.

The Big Debate

The issue of international confidence is the basis of a significant debate playing out behind the scenes in the Democratic Party, Gale said. On one side are fiscally conservative Democrats who are worried about the threat of the budget deficit and who seek action to deal with growing entitlement obligations. Not surprisingly, this group includes veterans of the Clinton administration, which made taming the deficit its top economic priority: former Treasury Secretaries Robert Rubin and Lawrence Summers, and former White House Chief of Staff Leon Panetta, who co-chairs the Committee for a Responsible Federal Budget.

On the other side are many Democrats who don't want the threat of impending deficits to get in the way of political priorities, particularly health care reform. The most outspoken and influential supporter of this view is economist and New York Times columnist Paul Krugman, who recently added a Nobel Prize to his resume. Krugman has tirelessly warned that fiscal conservatives exaggerate the threat of budget deficits to hold back progressive reforms.

A clue to where this debate stands can be found in recent comments by Rubin, who has ruled out serving in an Obama administration but is playing a big role in the campaign's agenda. In a CNN interview last weekend, Rubin was asked whether the new administration should choose deficit-cutting -- as he did in 1993 -- or fiscal stimulus as its priority. Rubin's answer reflected what Obama has been saying: both. After recommending "a very large fiscal stimulus now," Rubin called for "a real commitment to re-establishing sound fiscal conditions in this country over time, because failure to do that can create ... great concerns in the international markets. That undermines our bond market, undermines our currency. And that would be hugely counterproductive."

Neither Obama nor McCain has said what, if any, spending he would sacrifice to reduce the deficit. The eventual answer, Gale said, is crucial in judging whether the deficit might become the problem for the economy that it was 25 years ago. In 1983, he said, divided government restrained fiscal policy, even without a threat like the one posed by the growth in entitlements. If the $1 trillion deficit is to be temporary, Washington will have to focus on deficit-cutting, as it did in 1990 and 1993, but Gale sees no sign of that happening. Sooner or later, he said, the next president will have to make reducing the deficit a major priority -- either before or after events in the financial markets force him to.

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Questions surround stadium security for Obama speech

John Maggs — Thu, 28 Aug 2008 00:00:00 -0400

Shhhhh! Want to know a secret about the Big Speech at Invesco Field? Barack Obama's acceptance of the nomination in front of more than 75,000 people, billed as "one of the most secure events in American history" won't be much more secure than a big sporting event or rock concert.

Yes, many of the 3,000 police and other security officers protecting the convention this week will be on hand. But it is not unusual for 1,000 or more police officers to be deployed for routine sporting events, and the actual number inside the stadium and protecting the perimeter is limited by space, a practical saturation point that is often reached for big events.

Delegates and other attendees will have to pass through metal detectors and open their bags for inspection, but such measures are now commonplace for professional and even some college sporting events, and for auto races. Although access to the field at Invesco will be reserved for delegates, tickets for the rest of the facility have been distributed in a variety of ways, including freebies given to a large number of people in the Denver area. It was probably easier to get an Obama ticket than one for U2's last concert tour.

And probably cheaper. The Craigslist asking price for a ticket a day before the Invesco event was $500, although the actual sales prices might be a lot lower. It is not unusual to pay that for a good Lakers or Yankees ticket. During the regular season.

The rules for the tickets are meaningless. A spokeswoman for Denver's Joint Information Center for the convention said, "Ticket holders are not supposed to sell them but there is nothing to preclude them from doing so."

The DNC's list of things you can't bring to Invesco for the speech is a long one, but it is based on the list for most events at the stadium -- no weapons, no food or drink, no baby strollers or folding chairs. Attendees are also prohibited from bringing signs or other things that might obstruct someone's view. (This will put a crimp in some of the most creative headwear this week.) Interestingly, guests are also enjoined from bringing "unauthorized merchandise," perhaps an effort to boost sales of official Obama buttons and T-shirts, of which there will be lots. And in a blow against litter, and free speech, all are advised that unapproved "pamphlets" and "handouts" will be seized. Take that, Tom Paine.

Delegates will arrive by bus in the same fashion that worked well at the Pepsi Center, but many spectators will arrive by foot. Parking is prohibited, and the only mass transit will be the light rail to the Invesco station, and two shuttle buses that will ferry people from Coors Field. Security officials did not say how many metal detectors will be used, but the 30 or so to be transferred from the Pepsi Center could easily be overloaded by the three- to fourfold increase in seating capacity at Invesco.

For full coverage of the Democratic National Convention, go to NationalJournal.com.

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Authorities play down plot against Obama

Dan Friedman and John Maggs — Wed, 27 Aug 2008 00:00:00 -0400

The threats, according to authorities, were made by Nathan Johnson and Shawn Robert Adolf, two of three men arrested Sunday evening in connection with a routine traffic stop in nearby Aurora that turned up two rifles with scopes (one of them described by Eid as "a sniper rifle"), body armor; camouflage clothing; and equipment for making methamphetamine.

Those items were in a truck driven by Tharin Gartrell that was stopped by police. Gartrell apparently led police to Adolf and Johnson, staying in separate hotels, who were later arrested. Adolf, who has several outstanding felony warrants, broke his ankle attempting to elude arrest by jumping out of his hotel room's sixth-story window. A quantity of meth was recovered from his room, police said.

Eid said that the evidence of a plot "did not meet the legal standard" to be "a true threat" but that the investigation was continuing.

According to the criminal complaint filed in the case, during an interrogation by Colorado state police and Secret Service agents, a girlfriend of one of the three men said that Gartrell, Johnson, and Adolf, while high on meth, stated an intention to kill Obama during the convention. Adolf rented a room in the Hyatt Regency Tech Center in Denver, believing Obama would be staying there later in the week, and he acquired a rifle fitted for a silencer, along with body armor and other equipment. The girlfriend also said that Adolf had ties to white supremacists. According to an affidavit, the woman quoted Adolf as saying: "No nigger should ever live in the White House."

Nevertheless, Eid said that the threats were not credible, partly because the three men, who he repeatedly referred as "meth heads," were "high on meth" when making the threats.

The arrests were a common topic of conversation among convention-goers and others in town for the convention. Brandon Brea of Orinda, Calif., who was wearing a large "Obama" pin on his sweatshirt, wanted to know whether President Bush had appointed the prosecutor in the case. "That will tell you whether this thing gets buried," said Brea, who was strolling on the 16th Street pedestrian mall.

Eid was indeed appointed by Bush, in 2006. Before that he was a close aide to Bill Owens, then the Republican governor of Colorado; previously he was a longtime lawyer and business executive born and raised in the state. The son of an Egyptian immigrant, Eid is the first Arab-American U.S. attorney, his official biography says.

Obama and top officials for his campaign have had little to say about the arrests, as Obama has usually declined to discuss death threats against him since he emerged as a serious presidential candidate. He was placed under Secret Service protection in May 2007 after a death threat, the first time that a presidential candidate had received such protection before being nominated. A 22-year-old Miami man was arrested three weeks ago after he was accused of publicly threatening Obama's life and the life of Bush. He told authorities he was joking.

For full coverage of the Democratic National Convention, go to NationalJournal.com.

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Security glitch slows early arrivals at Democratic convention

Marilyn Werber Serafini and John Maggs — Mon, 25 Aug 2008 00:00:00 -0400

The problems were solved after a few hours at the 9th Street entrance and the lines shortened to about five minutes by 3:30 pm. But as the police and the media traded blame for the snafu, it wasn't clear whether the incident presaged future problems.

Malcolm Wiley, spokesman for the Secret Service, said that security officials unwisely chose to channel news media, many carrying large amounts of electronic equipment, through the same three metal detectors that were being used to clear official DNC staff. "Once we determined that this was happening, we were able to separate out the DNC staff and things moved much more smoothly," Wiley said.

Not quickly enough for some DNC workers. Even those with important jobs awaiting them inside the center couldn't seem to figure out a way in. "We're the people who built the whole [voting] system, so if they were trying to vote right now, it wouldn't work," said one staff member waiting in the security line on Auraria Parkway who asked to remain anonymous.

Three other DNC staffers who had waited a few minutes at the back of the intimidating line at the 9th Street gate--which looked like it would take hours to work through--heard a rumor that the gate by the Pepsi Center light rail stop had opened, so they walked about 30 minutes to get there. But there they were turned away because they had electronics that the sole police officer manning that checkpoint said she didn't have time to check. They, and many others, were ejected to nearby Elitch Gardens and told to walk around the entire convention complex.

What did the DNC staffers plan to do from there? They just weren't sure whether it was worth the trek back to the 9th Street gate. "They should have planned better," said one. "The whole convention has been like this."

Part of the problem was that media people had been advised that the convention area would be closed until noon for a security sweep, when the sweep actually ended by 10 a.m. "We were here for an hour or two and no one showed up," said one police sergeant at the gate. "Then they all came at the same time."

Wiley said that security officials had ample numbers of personnel and metal detectors to deal with the large increase of convention-goers expected on Monday. "We had a minor problem, and we dealt with it," he said.

Ashley Johnson contributed to this report.

For full coverage of the Democratic National Convention, go to NationalJournal.com.

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Bipartisan Prospects

John Maggs — Tue, 28 Nov 2006 00:00:00 -0500

The secret plan to finance the Nicaraguan rebels with the proceeds of arms sales to the Islamic regime in Iran is a handy proxy for the Iraq war, which Gates had nothing to do with. Both situations involve allegations of lying to the public and to Congress, bungled intelligence, and unresolved questions of responsibility.

But if the debate on Iraq echoes the passion of those times, the peaceful end to one aspect of that earlier scandal probably won't get mentioned.

In the spring of 1988, Congress faced a choice about continuing to fund the Contras, who were seeking a cease-fire with Nicaragua's Marxist regime and were trying to evolve from a military force into a political one. The House had repeatedly turned down Reagan administration requests for military aid to the Contras, and the political incentives for the Democrats were clear -- the GOP presidential candidate, Vice President Bush, was mixed up in the scandal.

But two weeks after prosecutors indicted two Reagan aides, Col. Oliver North and Adm. John Poindexter, for lying to Congress, the House Democratic leadership teamed up with Republicans to approve $48 million in nonmilitary aid to the Contras, money that was used to finance the rebels' demobilization. The Contras joined a political effort to remake the country, and less than two years later they were a crucial part of a right-wing coalition that swept the Marxist government from power in an election.

The House Democratic whip at the time, Tony Coelho of California, says that although it's hard to imagine reaching a similar compromise on Iraq, the Contra deal was in keeping with the baseline of bipartisanship that reigned in Congress back then. Coelho persuaded liberal Democrats to reverse themselves and approve funding for the Contras.

His partner in the effort was Minority Whip Dick Cheney, R-Wyo., a hard-line supporter of arming the rebels. Cheney was the personal guarantor that the administration would keep its promise, after years of deceit about Nicaragua, and his word was good enough for the Democratic leadership.

Coelho said that his trust of Cheney was grounded in a hard-edged reality -- Republicans, with only 177 House members and 45 senators, had to keep their promises if they expected to have any role in the Democratic Congress. "It wasn't about being nice and collegial," said Coelho, who was never considered a naif in the exercise of power. "Bipartisanship was what made sense."

To Coelho and many other congressional veterans of that earlier time, it was the absence of bipartisanship during the current period of one-party rule that prevented Bush from achieving many of his stated goals on Social Security, tax reform, and immigration.

That is also the view of former Sen. Tom Daschle of South Dakota, who was the Democratic leader during the brief time from 2001 to 2002 that his party held a Senate majority. Although Iraq dominated the recent election, "voters want a Congress that can get things done, and increasingly, they saw a Congress that couldn't get things done," he said.

With the Gates nomination and the primacy of the Iraq commission co-chaired by former Secretary of State James Baker, political commentators are taking bets on whether personnel from the administration of Bush I will somehow turn Bush II into a moderate. The more likely prospect, according to Daschle, is that the reality of doing business with a Democratic Congress will force him toward compromise.

By most accounts, the recent high-water mark for bipartisanship in Congress was during the four-year presidency of the senior Bush, when Democrats had 55 seats in the Senate and a 43-seat majority in the House.

Bush 41 and Richard Nixon were the only elected presidents to spend their entire terms with Congress held by the opposition, and what history regards as the signature achievements of Bush's presidency were bipartisan in nature. The four most important pieces of legislation were:

Settling the savings and loan crisis, which threatened to cripple the banking system.
Implementing the 1990 budget deal, which did more to reduce the surging deficit than any action before or since.
Overhauling the Clean Air Act, which made conservation compatible with market principles.
Enacting the Americans with Disabilities Act, which extended civil rights and equal access to 40 million Americans.

Of course, the hallmarks of that bipartisan record -- particularly the 1990 budget deal -- contained the seeds of Bush's re-election defeat in 1992. Conservatives deserted Bush partly because of his cooperation with Democrats, who traded budget limits for tax increases, and then united in 1994 to vote out a Democratic majority that was seen as too free with taxpayer money.

Just as the current President Bush's foreign policy in many ways represents a repudiation of his father's multilateralism, Bush 43's governing style is a rejection of a bipartisan approach that yielded centrist achievements.

One choice facing Bush now is whether bipartisan achievements are worth pursuing.

"There is no question in my mind" that Bush can reach bipartisan compromises with a Democratic Congress, Daschle said. "The question is whether he wants to."

Clayton Yeutter was Agriculture secretary under Bush 41 and was an unabashed advocate of bipartisanship, whether in a united or divided government. He demurs on the question of whether Republicans' partisan approach to governing after 1995 was a miscalculation. "I have always operated on the basis that nothing of significance will be accomplished without bipartisan support," Yeutter said.

His favorite example was the 1990 farm bill, about which a team of administration officials was in almost daily contact with Democratic lawmakers and staffers. "The assumption, which I think was never spoken, was that one side would not try to show up the other in public," Yeutter said.

In the days before the recent election, it was common to hear people speculating that divided government could be a blessing for Bush, because it would force him to abandon his partisan tendencies and give him more room to compromise. That view is "hogwash," according to Nick Calio, who handled congressional affairs under both Bush presidents.

Calio predicts that this White House will adjust to the new Democratic reality and find ways to advance its agenda, but he declares, "The idea that it is somehow easier to get things done, in any way, isn't true."

Many commentators have mentioned that Bush, when faced with divided government as governor of Texas, cut many deals with the Democratic Legislature. But the powers of Texas's governor are among the weakest in the country, and Bush was dealing with a fairly conservative Democrat presiding over the Senate, Bob Bullock.

In his first press conference after the recent election, Bush shrugged off a question posed by a Texas reporter, who asked, "Does Nancy Pelosi look much like Bob Bullock to you?" The reference was to how much more liberal than Bullock is the woman likely to become House speaker.

Dan Rostenkowski was chairman of the House Ways and Means Committee for 14 years, and he considers the 12 of them under Republican presidents to be the most successful. In an interview, Rostenkowski recalled that committee life included retreats for members from both sides of the aisle and anniversary parties for Republican members and staffers.

"I wouldn't vote out a bill unless it had at least six Republican members," he said. Rostenkowski said his last two years, under a Democratic president, weren't as productive because "things were already heading in a partisan direction."

George Mitchell, who was Senate majority leader throughout Bush 41's presidency, told National Journal that the 2008 presidential race would be the greatest challenge to restoring some bipartisanship in the next two years. Mitchell said that although there was more cooperation during the senior Bush's presidency than during the administrations of others he had worked with, "in the last year to year and a half, that really started to break down."

Even when there is no practical alternative to bipartisanship, Mitchell said, politics is always an alternative to legislating.

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University denied federal funds to replace hospitals damaged by Katrina

John Maggs — Mon, 03 Apr 2006 00:00:00 -0400

Instead of trying to reopen two hospitals closed by hurricane damage, Louisiana State University sought nearly $375 million from the Federal Emergency Management Agency to replace the two neglected facilities, which also served as teaching hospitals for LSU medical students, according to the Government Accountability Office. FEMA has been criticized for squandering some of the hurricane-recovery money, but the agency this time said no.

Charity and University hospitals remain closed, as LSU decides whether to replace them or to restore them to pre-Katrina condition, which was bad enough to put them in danger of losing accreditation, the GAO said. Federal guidelines justify FEMA funds only to repair hurricane damage, estimated by FEMA at $36 million, but LSU asked for 10 times as much -- more than half of the cost of building two new hospitals.

LSU hospitals spokesman Marvin McGraw pointed to the GAO conclusion that basic repairs "might be wasting tens of millions of dollars."

Now the university is trying to get funding from the Veterans Affairs Department to rebuild the hospitals, and poor people without access to health care have one less reason to return to the Crescent City.

In February, New Orleans had only about 20 percent of the staffed hospital beds that were available before the hurricane, the GAO said.

The GAO did the review on its own initiative and sent the report to leaders of relevant congressional committees.

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Government operating under a revenue cloud

John Maggs — Fri, 04 Oct 2002 00:00:00 -0400

It was already clear that the costs of the war on terrorism and sharp increases in other spending were going to drive up the budget deficit this year, but this has been accompanied by an unexpectedly sharp drop in tax receipts. Although revenue almost always drops during a recession-as it did during the recession of 2001-Office of Management and Budget Director Mitch Daniels said that 2002 is apparently the first time that revenue has dropped for an extended period while the economy was growing.

Daniels, who has made this observation to reporters, said it showed how uncertain the government's finances were in the near future and thus why it was imperative to control spending. In lining up votes for his $1.3 trillion tax cut last year, President Bush promised to support some expensive increases in domestic spending, such as the $80 billion rise in farm spending he signed in May. More recently, with defense costs mounting, the administration is threatening to veto spending bills unless they are trimmed down.

A good deal of the budget problem, though, comes from the plunge in revenue, which the government can do little to affect. The fact that tax receipts have continued to fall during the current recovery suggests that the months ahead may hold more unpleasant surprises.

In a sense, the picture is much worse than Daniels admits, because he doesn't mention that this year's revenue drop is larger, in percentage terms, than any on record-including those that occurred during recessions and growth periods.

According to the latest Congressional Budget Office figures, revenue fell from $1.83 trillion last October to $1.66 trillion in August 2002, or about 9.3 percent during that 11-month period. Compare that to the 1981-1982 recession-probably the worst since the Great Depression-when revenue fell only 1.4 percent.

Until now, the biggest revenue losses were associated with the recessions of 1953 and 1974, but in both downturns, revenues declined by less than 9 percent. Once tax receipts are tallied for September, the final month of the 2002 fiscal year, the loss will be far and away the biggest ever.

The popular explanation for this drop-and for the fact that it is still occurring despite the economic expansion-is that it comes from the popping of the stock market bubble, and in particular from the loss of capital gains tax revenue. As distinct from income, profits from stocks sold after more than a year carry a federal tax of 20 percent, and revenue from this source exploded during the bull market of the 1990s. It is only natural, according to this argument, that revenue artificially inflated by capital gains would revert to normal after the mayhem on Wall Street.

But capital gains turn out to be a small part of the story. Before the 1990s, capital gains accounted for about 2 percent to 3 percent of tax collections; they peaked at 6 percent in the late 1990s. Even though these receipts have probably fallen by 40 percent to 50 percent, capital gains end up being only a small part of the 10 percent drop in revenue expected this year.

In an analysis of why its own forecasts were off, CBO estimates that about half the decline in revenue in fiscal 2002 came from slower growth: The economy, following the recession that ended this time last year, grew at an annual rate of only 2.9 percent for the nine months that ended in June.

Incidentally, little of the revenue loss in 2002 can be blamed on Bush's tax cut. Only $31 billion of the $172 billion drop comes from the first installment of the cut. The administration heavily loaded the costs and benefits of the tax cut into the latter part of the decade, in part to improve the short-term budget outlook. The White House even monkeyed with other tax rules to help reduce the immediate impact of the cut-$23 billion of corporate tax revenue from the previous fiscal year was shifted over to 2002, and without it the true cost of the tax cut ($54 billion) would have registered.

A clue to what is happening with revenue shows up in the latest revision by CBO. Since March, almost all of the unexpected loss in revenue has come from "technical changes," which don't include capital gains tax revisions or simple losses from a slower economy. The $104 billion in technical revisions since March has to do with changes in who is paying taxes on what. For example, because higher-income households pay taxes at higher rates, income losses for the rich hit revenues much harder than do losses for the poor, who pay far less to Uncle Sam.

This has important implications for the months ahead, because many economists feel that economic growth will be more evenly distributed than it was in the 1990s, when higher-income earners reaped a large proportion of the gains. With the stock market in the doldrums, more gains will go to lower- and middle-income earners, who pay taxes at lower rates. A narrowing of income inequality, which widened so dramatically in the 1990s, spells more bad news for federal revenues, which might not bounce back as quickly as they have before.

Even if Mitch Daniels succeeds in restraining spending, the revenue cloud over federal finances will probably remain.

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How government plays the budget game

John Maggs — Mon, 30 Sep 2002 00:00:00 -0400

But the annual meetings are nothing compared with the new star-chamber venue for corporate leaders-the congressional hearing room. After a decade in which CEOs were welcomed on the Hill as engineers of the economic boom, Congress has recently been skipping the hospitality. Invitations now come in the form of subpoenas, and instead of being greeted with back-slapping admiration, corporate leaders are being subjected to hours and sometimes days of uncomfortable questioning.

While the witnesses have represented only a few well-known companies, the indictment issued by Congress and the White House is much broader. Sen. Paul S. Sarbanes, D-Md., author of the recently enacted corporate accountability law, recites a litany of past accounting-related business scandals, including the savings and loan crisis of the 1980s-and says that the latest wave of corruption is worse than any of them.

"Today's difficulties, unfortunately, appear to be more widespread," Sarbanes said at one of several hearings on accounting practices. "And the fears they have generated are more widely shared, since more and more people are investing in our stock market than ever before."

Sarbanes isn't the only outraged politician. House Energy and Commerce Committee Chairman W.J. "Billy" Tauzin, R-La., had this to say about the Enron mess: "We have witnessed an incredible collection of not only miscreants and potential criminal behavior, but a series of accounting abuses [of] standards and practices, a series of abuses of the American public." Just after July 4, Rep. Michael G. Oxley, R-Ohio, chairman of the House Financial Services Committee, invoked both the American Revolution and the war on terrorism at his hearing looking into WorldCom's accounting practices. "We honored the ultimate sacrifice of our heroes who, long ago, and just last year, placed those virtues above self-interest and beyond the temptations of affluence and protecting others instead of themselves."

Democratic leaders were the first to insist that the accounting profession couldn't be trusted to regulate itself: "I really don't know that people are confident that with the industry watching the industry, you're going to get any real oversight," said Senate Majority Leader Thomas A. Daschle in June. "Who's watching out for the stockholders, and who's watching out for the taxpayers?" House Democratic Leader Richard A. Gephardt scoffed at President Bush's suggestion that accounting procedures were "not exactly black and white." Gephardt said, "Mr. President, with all due respect, accounting should be black and white: clear, precise, and easy for employees and investors to understand."

Let's see: arrogant misuse of the public's hard-earned money; self-preservation over the public good; clear and precise accounting rules blurred to hide the truth. And Daschle's bottom-line question: "Who's watching out for the taxpayers?"

By the way, isn't it budget time in Washington?

Sarbanes is right about one thing: Unlike the S&L crisis and other business scandals, this latest string of abuses involves a practice that Congress and the executive branch understand very well-cooking the books.

Sen. Phil Gramm, R-Texas, who has been at the center of every budget fight on Capitol Hill for 20 years, says if Congress was bound by the same accounting rules as business, "we'd all be in jail right now." He noted that the new Sarbanes law requires CEOs to certify, under threat of prison, that their financial books are honest. "Yeah, if we had to do that, we'd go to jail." In fact, Ernest F. Hollings, D-S.C., chairman of the Senate Commerce, Science, and Transportation Committee, puckishly asked the White House to certify to securities regulators that its budget reports are accurate. So far, Budget Director Mitchell E. Daniels Jr., hasn't responded.

Depending on how it is measured, the fraud committed by Enron and WorldCom executives amounted to between $10 billion and $20 billion. "That's nothing compared to what happens in the budget process," said Robert Bixby, executive director of the Concord Coalition, a budget watchdog group. As one senior congressional aide put it, "Traditionally, we've been able to shift much larger amounts." He paused. "By `shift,' I mean hide." Former House Speaker Newt Gingrich said it is "incredibly hypocritical" for Congress to impose accounting standards on business that it couldn't begin to meet in handling the government's year-to-year finances.

One reason it happens, of course, is that neither Congress nor the administration is directly beholden to anyone in putting together the federal budget. They are not even beholden to each other. Both sides "pretend like they are making a budget, and then they just blow through it," said Leon Panetta, who has seen the game from both ends of Pennsylvania Avenue-first as chairman of the House Budget Committee and later as President Clinton's budget director and chief of staff.

Bixby said, "The president and the [congressional] leaders can give speeches about controlling spending, but when the rules get in the way, they just change the rules."

With the help of Congress, the public has learned a lot this year about the many ways that some corporations hide their losses, boost their profits, and try to keep their chicanery from coming to light. As the budget season heats up in Washington, it's an appropriate time to look at how the government does the same. Outside critics, and even members of Congress themselves, commonly blame Capitol Hill for the budget shenanigans. But the executive branch has been just as active a player in this shell game. Some of these budget gimmicks are already notorious-classifying regular spending as an "emergency," for example. But some of the biggest and most abusive tricks are known only by the budget experts themselves. Here's a look at 10 ways the government plays the game.

1. Loading the Dice

Even before the government begins to make a budget, the process is skewed by official manipulation of forecasts for economic growth, revenue, and spending rates. This practice is akin to what badly run corporations do all the time-exaggerate their long-term growth projections and underestimate their long-term expenses. For the government, the most famous and still archetypal example was the Reagan administration's concoction of a "Rosy Scenario" to put forward a 1982 budget of tax cuts and spending increases that would be sustained by an unrealistic growth rate of 5 percent a year in the economy.

Most of the time, the techniques the White House and Congress use to spin their forecasts are fairly opaque. The bad faith behind the Reagan example is well-known only because then-Budget Director David Stockman decided to come clean in an interview with William Greider in The Atlantic Monthly.

The popular version of history has it that the Rosy Scenario was the product of "supply-side" economics-the discredited idea that tax cuts would produce enough economic growth, even in the short-term, to offset the loss of revenue. In fact, there were no supply-side assumptions in the Reagan budget, just an unrealistically high forecast for growth.

2. Assuming Virtue

One of the common ways the government distorts its budget forecasts is to assume it will behave in cautious, responsible and thoroughly unprecedented ways. For example, the Office of Management and Budget currently assumes that discretionary spending (the spending that has to be approved by Congress every year) will grow at about 2.5 percent a year-roughly the rate of inflation-when it has always grown at a much faster rate. And the pressures for higher spending are particularly strong now that the government is ramping up the war on terrorism.

Similarly, the economic forecast most often cited by budget makers assumes that many billions of dollars in popular tax breaks will expire when the law authorizing them runs out-even though Congress almost always extends such breaks. Barry Anderson, deputy director of the Congressional Budget Office, says that is why CBO and OMB use multiple forecasts in their budgets. But rather than clearing things up, this often only serves to confuse those who are not steeped in budget arcana. During the high-tech bubble, dot-com companies similarly avoided mentioning that they were losing money by dreaming up new, rosier measurements such as the rate at which their revenue was growing relative to losses.

Anderson says that government agencies regularly understate their costs by making unrealistic assumptions about multiyear projects that experience proves will cost much more than projected. He calls the Defense Department the biggest offender. With weapons systems that can take 10 years to develop and 20 years to deliver fully, low-ball cost estimates can be carried over from year to year, until they eventually show up on the budget ledger as government debt.

A related example, almost unknown except to budget insiders, is "spendout rates." Anderson says that government agencies often deliberately underestimate how quickly they will spend their budget authority (the amount Congress has authorized for a program), thus understating their expenses in the short term. In a sense, WorldCom was playing the same game when it claimed that billions of dollars in day-to-day expenses were actually capital expenditures, to be used (and depreciated under the tax laws) over a number of years.

The laws are fairly clear about what qualifies as a capital expenditure, and WorldCom has admitted that it was wrong. But the rules are not as clear for government agencies and their spendout rates, and disputes are common. In one recent example, CBO looked at $100 billion in defense spending authorized for fiscal 2003 and effectively found that the Pentagon was reaping a windfall of $3 billion by slowing down its spendout rate.

3. Breaking the Rules

Every five years or so, the government has a budget crisis and ends up adopting new rules that are supposed to avert a recurrence. The most fundamental reason that the new rules eventually fail is that the government always ends up breaking them. The budget reform cycle usually lasts about five years because it usually takes that long for the rule-breaking to become so widespread that the budget becomes a sham. Now, says Panetta, the government is past even that point.

"The budget process has collapsed. The budget doesn't mean anything because of the lack of enforcement. Everybody involved knows it, but they are pretending to not notice because they are unprepared to stop" spending.

The best-known example of rule-breaking is the yearly debate over "emergency spending," a loophole created in the 1990 budget reforms that allows the government to add spending for emergencies, such as natural disasters, to the budget without breaking previously set budget limits. By the late 1990s, Congress and the Clinton administration had given up much pretense that "emergency spending" was really limited to emergencies. Perhaps the most notorious example was when extra spending needed to conduct the 2000 census was declared an emergency.

"How can something that is required under the Constitution be an emergency?" Bixby asked. Richard Kogan of the Center on Budget and Policy Priorities said the abuse of the emergency-spending loophole in supplemental appropriations bills reached its height in 1999 and 2000, when the caps on discretionary spending adopted in the 1997 budget accord were still in force but the government had an unexpected budget surplus.

Kogan cites Congress's deal in 2000 to reconcile differences in the House and Senate defense appropriations bills by throwing an additional $7.2 billion into the Labor-Health and Human Services appropriations bill. This classic logrolling was accomplished by classifying more of the Defense Department's funding as emergency spending, thus freeing up extra dollars for Labor-HHS.

Kogan says this sort of practice tapered off in 2001, but only because Congress and the administration agreed to the ultimate rule-breaking-raising the spending caps. Another feature of the 1990 budget deal-a requirement that new entitlement spending or tax cuts be offset by spending cuts or revenue increases-has also been flouted. This "pay-as-you-go" requirement is supposed to prevent runaway deficits, but the requirement has been waived so frequently, according to Panetta, that it is effectively useless.

4. Changing the Rules

When the loopholes in the rules aren't big enough, Congress and the administration sometimes change the rules. One way that the government has done this is by reclassifying certain expenditures as "entitlement" spending. (Entitlements are programs, such as Social Security, whose budgets aren't set every year by Congress. The programs spend as much as is required to pay benefits to those who are entitled to them.)

During the Clinton administration, OMB decided that it wanted to tap some of the funds held by the Federal Reserve System, which is supposedly self-financing and independent of the executive branch. The Fed, the central bank for the United States, buys and sells dollars and other currency, earning returns on its lending. Each year, it racks up a small (by its terms) profit of several billion dollars, which sits in a Fed account. Then the Clinton administration decided to count that profit as an asset of the executive branch. The independent Fed still controls the money, but by claiming it as an asset, the White House helps make the budget picture look a little brighter.

One change of the rules last summer was an example of a phenomenon that almost every member of Congress condemns but that large majorities nonetheless wholeheartedly support-"directed scoring." The Congressional Budget Office was created in 1974 to be an independent voice in the budget process, and in most cases, it has the last word on how to count things in the budget. On occasion, however, CBO's judgments get in the way of a popular bill in Congress, and the leaders take matters into their own hands.

In this case, it was a bill bailing out the retirement fund for railroad employees. The fund was facing serious problems because the retirees were living longer but the number of railroad workers supporting them was dropping. One idea was to boost the return of the plan by allowing its funds to be invested in the stock market. CBO's view was that since that money would be put at risk, the investment had to be scored in the budget as an expenditure, and a hefty one-$15.5 billion. Over the objections of some conservative Republicans, big majorities in the House and Senate voted to "direct" the CBO to declare that the shift in railroad money would cost nothing.

The retirement fund case is the biggest example of directed scoring that CBO's Anderson can remember, but not the only one. Almost every year, Congress votes to reverse some CBO decisions on individual budget items. "I hate directed scoring. I think it corrupts the budget process," said Gramm, who was one of a handful of senators who fought against the shift of railroad funds. Anderson, who is an employee of Congress, demurs when asked how he feels about directed scoring. "Congress writes the rules," he said.

And rewrites them.

5. Ignoring the Rules

Sometimes, when you can't break the rules or change the rules, the easiest thing to do is to ignore the rules. Early in the Clinton administration, when negotiators were putting the finishing touches on the 1993 budget deal, Anderson (then at OMB) remembers, White House officials were stuck: They were $5 billion short in finding all the "pay-as-you-go" offsets to meet their often-stated goal of $500 billion in deficit reduction, but they were unwilling to cut spending or raise taxes to meet the shortfall. Instead, Anderson said, the administration, and the Democrats who controlled Congress, just pretended as though all the accounts were properly balanced. The $5 billion deficit should have triggered a special session of Congress to find the money. It was never clear, Anderson said, whether the Republicans didn't notice the discrepancy or didn't care.

6. Stopping the Clock

The imperative that drove the suspected fraud at WorldCom was meeting short-term profit goals. One method employed by officials there-and at other companies that have recently "restated" their earnings-was to book income from long-term contracts in the near-term, even though the income wouldn't really come in for years. Another technique was to slow down the recording of expenses that should have (and often were) paid promptly. In both cases, the trick was only temporary-in the end, profits would fall and expenses would add up, but CEOs were more interested in making it through the next quarterly earnings report than in fixing the long-term problem.

There is a kindred tradition in the federal budget process, primarily demonstrated by the many ways budget makers delay payments to help make the current picture look a little brighter. Former CBO Director Rudolph Penner said such timing gimmicks are now used routinely in almost every budget. "Pretty much any time that a pay period [for federal employees] falls close to the end of the fiscal year, you can bet that the costs will be kicked over to the new year," he said.

One of the largest timing shifts happened last year, when the Bush administration was scrambling to accommodate the first slice of its $1.3 trillion tax cut and simultaneously boost spending. With the support of Congress, the White House agreed to postpone the normal due date for about $23 billion in corporate taxes by two weeks. By thus shifting the due date into the next fiscal year, the government was able to make the revenue losses from the tax cut look smaller than they really were-at least temporarily.

Robert Reischauer, who headed the CBO from 1989 to 1995, said he viewed timing shifts as pretty harmless gimmicks, since they had to balance out in the end. "There's no economic impact, it is just cosmetics," he said. The example Reischauer said he found most amusing was when Congress came up with a way to slow down Medicare payments, thus postponing some expenses each year. In an illustration of the government's impulse for double-talk, lawmakers dubbed the slowdown "Prompt Pay."

But Kogan of the Center on Budget and Policy Priorities said that timing shifts are more than just temporary emollients. The Bush administration's decision last year to delay the corporate tax payments came before Sept. 11, at a time when the administration was having trouble lining up support for a large increase in defense spending. The shift also came before drastic budget revisions had foreclosed any prospect of a balanced budget. Government officials "temporarily" delayed the tax payments with the goal of facilitating a permanent increase in spending, Kogan said.

7. Making It Disappear

The accounting abuses at the heart of the Enron scandal involved energetic and creative bookkeeping that allowed top management to hide losses that the company incurred from reckless business moves and to conceal staggeringly large sums that executives diverted from shareholders. Most of the losses and the apparently stolen profits were hidden through the creation of shell companies that kept the illegal maneuvers off Enron's balance sheet.

In terms of sheer scale, the most effective way the government cooks the books is by using the similar ploy of declaring entire agencies and problems to be "off-budget." This slippery term generally means that the costs of certain ongoing government functions are excluded, as a bookkeeping matter, from the year-to-year budget tussle. In some cases, this is probably a good thing. The Postal Service, for example, operates largely independent of government control and is fiscally sound, and thus it is appropriate that it is not part of the federal budget-if only to stop the government from grabbing its profits.

But government budget experts still grumble about the sleight of hand when the Postal Service was taken off-budget a decade ago. OMB, scrambling to decrease the deficit, had the Postal Service write a check to the U.S. Treasury for $50 million, which showed up as new revenue, even though it was just an accounting trick. "There's a lot of room for this stuff when you start taking things off-budget," Gramm said.

In the current fiscal year, CBO considers $358 billion off-budget, about 18 percent of the federal government's $2 trillion total spending.

One of the most notorious off-budget gambits came at the end of the Reagan administration, when Budget Director Richard Darman and others needed a cost-free way to begin paying for the savings and loan bailout. Instead of recording the $30 billion bailout as spending, and thus adding to it the growing budget deficit, the government created the Resolution Funding Corp., which issued bonds that Uncle Sam will have to pay off in 2009. To make matters worse, since those S&L bonds carried a higher interest rate than regular Treasury bonds, taxpayers will end up paying more in the long run.

8. Ransoming the Future

The federal government's biggest budget dodge, by far, is classifying Social Security and parts of Medicare as off-budget programs. The Concord Coalition's Bixby dismisses timing shifts and directed scoring as "low-grade gimmicks," but he calls the off-budget treatment of Social Security and Medicare "the kind of [accounting] abuse that will consume the federal budget if something drastic isn't done." According to the President's Commission to Strengthen Social Security, in 2016 the Social Security program will pay out more in benefits than it collects in payroll taxes, requiring the government to start borrowing money.

Richard Kogan argues that the accounting treatment of Social Security captures the conflict inherent when budget makers have to decide between budgeting for the short term or the long term. Counting Social Security tax receipts outside of the normal budget process makes it a little harder for the government to use the Social Security surplus to paper over a short-term budget deficit, he said. On the other hand, walling off Social Security has allowed the government to project healthy budget surpluses in the years ahead-when, everyone knows, the Social Security shortfall will be eating up revenues. According to the Commission to Strengthen Social Security, without tax hikes, benefit cuts, or borrowing, the Social Security deficit will be nearly as big a burden as the defense budget by 2035.

Although politicians often talk of a Social Security "trust fund," as if its balances were safeguarded, Bixby points out that there is no real prohibition on dipping into Social Security to help reduce a deficit. Furthermore, because the "trust fund" incurs obligations to workers who will retire later, while simultaneously collecting payroll taxes, nothing prevents Social Security from issuing more IOUs than it will be able to cover. "There is no trust fund, just a promise the government won't be able to keep," he said.

9. Passing the Buck

The Constitution provides for a government of limited, enumerated powers, with the rest left to the states, but it is safe to say that the Framers never anticipated the concept of "burden-sharing" for Medicaid and other programs. Thanks to a campaign by Republicans in the mid-1990s, Congress has rules against enacting "unfunded mandates," which are laws that impose costs on local government but provide no federal money to pay for them. But that prohibition does not apply to many existing mandates that, through regulatory changes, can end up shifting significant costs to local governments.

The most expensive are environmental programs, such as local air pollution standards. Then there are the occasional changes in the burden-sharing formulas for federal-state programs such as Medicaid, or for transportation spending, which can shift more costs to the states. While participation in the state-funded aspects of Medicaid is optional, other responsibilities are not. States must pay 50 percent of the cost of distributing food stamps to the poor, for example, and state and local governments must fund 85 percent of the cost of a federal law benefiting disabled children, according to Kogan.

But the government has even more ways to pass the buck. Barry Anderson said the method that bothers him the most is what could be called "proxy taxation." An example is the Universal Service Fund, money that the phone companies collect on every phone bill and use to fulfill various federal mandates, such as the fund's original purpose: extending basic phone service to rural areas. That goal was achieved long ago, but the tax lives on. Anderson said he was at OMB when Vice President Al Gore hit on the idea of diverting that money to help extend Internet access to public school classrooms. "Treasury never touches the money, but this is a huge program, billions and billions," he said.

Another proposal that would have imposed huge costs on consumers in this indirect fashion was the never-enacted Clinton health care plan, which would have effectively forced millions of people to buy insurance from a government-sponsored health cooperative. Other such "proxy taxes" abound, most of them imposed on business. These fees and surcharges help finance a larger government without showing up in the federal ledger.

10. Postponing the Pain

This is the phrase that Barry Anderson uses to define budget gimmicks large and small. "Anything that postpones the pain qualifies," he said. Under that definition, the Pentagon's effort to lease 100 Boeing 767 fuel tankers is a gimmick, no matter what the Air Force claims. "It is just like leasing a car," Anderson said. "Deep down, you know it is going to cost you more." In the case of the planes, the incentive for budget planners is that the leasing cost in the early years of the contract will be only about 1 percent of the cost of buying the planes. It is surely no coincidence that the Air Force is considering a 10-year lease for the tankers, putting the decision on whether to buy the planes just beyond the reach of the House's 10-year budget rules.

Another innovative and increasingly popular technique for postponing the pain is "advance appropriations," where Congress commits to spending money in future years. Before 1995, the only consistent advance appropriation was the $200 million to $300 put aside for the Corporation for Public Broadcasting, which operates on a biennial budget that is supposed to insulate it from political pressure. By 1996, the total in advances for different programs rose to $1.9 billion; in 1998, it was $3.9 billion; in 2000, it jumped to $11 billion; and in the current fiscal year, the grand total is $23.5 billion.

What triggered this exponential increase in advance appropriations? Much of it has come in five education programs. Senate Budget Committee Chairman Kent Conrad, D-N.D., has explained that the advance appropriations have something to do with the academic year running differently from the fiscal year. But this argument is pretty well eviscerated by the committee's minority staff director, Bill Hoagland: "Congress must have finally realized that after 30 years of funding education the old-fashioned way, it suddenly had to adopt advanced appropriations," he writes in the acerbic Budget Bulletin newsletter. "Instead, the real reason ... was because they could (there was no limit), because they wanted to get around the discretionary spending caps, and because ... beneficiaries did not care."

Now What?

The government's resourcefulness in evading budget discipline might seem funny if so much was not at stake. Based on the latest estimates from Treasury, the United States will go from a $91 billion surplus in 2001 to a deficit of about $165 billion in the fiscal year that ends on September 30, 2002. That $256 billion swing is by far the largest in history,

Some congressional leaders are demanding that the rules on spending caps and pay-as-you-go spending, which expire on Sept. 30, be renewed this fall. But most lawmakers eagerly abandoned that discipline a year and a half ago, when it became standard practice to waive the budget rules and ignore the fact that new spending was not being paid for in tax hikes or offsetting cuts. At last count, the pay-as-you-go deficit stood at $127 billion, and sometime before adjourning, Congress will have to vote to waive the rule again.

President Bush grumbled recently about Congress's plan to add $5 billion to his supplemental spending request, but he has otherwise shown little discomfort with Washington's freewheeling budget environment. Bush's tendency to focus on a single objective like the war might mean that the looming problems with the budget could get far worse before he is forced to confront them.

"You either govern by leadership or crisis," said Panetta, who now heads a public policy school at California State University. "It looks like this is going to be crisis."

Gingrich, who used to blame most budget problems on Democrats, offers a more philosophical explanation nowadays. "I think it gets back to divided government and the narrowness of the majorities in Congress," he said. "When there is this tension between two competing ideologies, there's a natural tendency to try to find common ground-and that's increased spending."

In addition to setting a poor example with its own budget shenanigans, the federal government has always lent a sympathetic ear when business sought to bend accounting principles to serve shortsighted goals. A year ago, just before the deluge of business failures, one of the most popular tax bills in Congress would have allowed business to immediately write off the cost of computers and telecommunications gear. Breaking from the usual practice of depreciating computers over their useful lives, businesses would be able to treat them on their books as if they were paper cups or some other disposable item.

The change wouldn't have hurt tax receipts in the long run, but the real goals were to promote computer sales and to let companies pad their bottom line in the short term by declaring a capital purchase as an operating expense and thus deduct it in full from their taxes. It was exactly the kind of accounting gimmick, in other words, that many corporations used to spit shine their next quarterly report.

If government wants to change the values that led business astray in the past decade, perhaps it should start with its own.

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Treasury Department

Richard E. Cohen, John Maggs, and Julie Kosterlitz — Thu, 28 Jun 2001 00:00:00 -0400

Established: 1789
Address: 1500 Pennsylvania Ave. NW, Washington, DC 20220
Phone: 202-622-2000
2001 Budget:: $389.8 billion
Employment:: 144,019
Web Site: www.ustreas.gov
Functions: The Treasury Department is charged with advising the President on fiscal policy, acting as fiscal agent for the federal government, and performing certain law enforcement tasks through the Secret Service. Treasury also administers tax policy and tax collection; manages the public debt; conducts international monetary affairs; produces all postage stamps, currency, and coinage; and supervises national banks and thrift institutions.

Paul H. O'Neill
Secretary
202-622-1100
O'Neill's reputation as a corporate turnaround specialist might come in handy as he grapples with the uncertainty of a slowing economy. He made his mark as chief executive of Pittsburgh-based Alcoa from 1987-99, (retiring as chairman in 2000), where he vastly cut management, boosted productivity, and repaired frayed relations with workers. From a field of candidates for Treasury Secretary, O'Neill was chosen as the only one not tied closely to Wall Street. A former Ford Administration colleague of Vice President Dick Cheney, O'Neill reportedly impressed President Bush with his direct manner. He has one of the busiest and most varied jobs in the Cabinet-serving as the chief agent and spokesman for economic policy, supervising tax collections, printing money, handling international economic events, and overseeing a large law enforcement bureaucracy. O'Neill got into a few scrapes in his first months on the job, surprising the financial markets with comments on the dollar, and generally earning a reputation as something of a loose cannon, but there is no evidence this has hurt him at the White House. For his tendency to drone on about obscure topics, some career officials call him "Dr. Strangelove," a reference to the early 1960s Peter Sellers movie about a nuclear Armageddon. Before Alcoa, O'Neill held senior posts with International Paper Co. from 1977-87, and before that spent 10 years at the Office of Management and Budget, the last three years as deputy director. He was born in St. Louis in 1935, graduated from Fresno State College with a bachelor's degree in economics, and earned a master's degree in public affairs at Indiana University.

Kenneth W. Dam
Deputy Secretary (designate)
202-622-1080
Dam is part of the Reagan revival within the current Bush Administration. Dam and his mentor, former Reagan Secretary of State George Shultz, made news in 1998 when they mounted an attack on the International Monetary Fund and the idea of financial bailouts. In the Clinton years, the deputy secretary took the lead in averting such foreign crises. It is not clear whether Dam will do the same-in the Reagan and first Bush Administrations, the job was more of an administrative position. Meanwhile, Dam's confirmation to the No. 2 job at Treasury, and those of most of Treasury's top nominees, have been held up for months by Sen. Jesse Helms, R-N.C., under the threat of a filibuster. Helms is demanding changes to Customs Service regulations on textiles, but the Bush Administration says the changes must be accomplished legislatively. Dam, 68, has spent most of his career as a law professor at the University of Chicago, specializing in international economics. He held positions in the Nixon White House and then served as Schultz's deputy at State from 1982-85. After seven years as a vice president at IBM Corp., Dam worked in 1992 for a year as president of the United Way to help it recover from a scandal. He grew up in Kansas and attended the University of Kansas and the University of Chicago Law School.

Charles O. Rossotti
Commissioner of Internal Revenue
202-622-9511
One of the few Cabinet department officials appointed to a fixed term, Rossotti intends to complete his five-year service, which expires in November 2002. His chief mandate is to implement the restructuring of the IRS that Congress approved in 1998-with Rossotti's active involvement. He previously reorganized the agency's regional structure, creating four operating divisions that serve individuals; small businesses and the self-employed; large businesses; tax-exempt groups and government entities. Despite his nonpartisan portfolio, he is under considerable pressure from Secretary O'Neill to ensure that an estimated 95 million income-tax rebate checks are distributed quickly and accurately this summer. Rossotti also has placed a high priority on the IRS's years-long battle to upgrade its often-outdated computer system-a project that has consumed huge amounts of dollars and effort, with disappointing results so far. And he must contend with the reality that the IRS remains an agency that Congress, and the public, love to hate; a recent complaint has been excessive audits. Rossotti, 60, came to the IRS from Fairfax, Va.-based American Management Systems Inc., an international business and information-technology consulting firm that he co-founded in 1970. He held administrative positions at the Pentagon during the Johnson presidency. A New York City native, he graduated from Georgetown University and received an MBA from Harvard.

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The numbers' cruncher

John Maggs — Mon, 05 Mar 2001 00:00:00 -0500

Deputy Assistant Secretary of Treasury for Tax Analysis

There's no argument about who is at the top of the marquee for tax matters in the executive branch. The assistant secretary of the Treasury for tax policy is the public face of the Administration when it comes to taxes. Not only must the assistant secretary testify before Congress and face the press on tax issues, but the appointee is also ultimately responsible for drafting legislation, reviewing tax regulations, and negotiating tax treaties. Perhaps most important, he or she is the person who must explain tax policy to the President.

One of the assistant secretary's deputies, however, plays a less visible role that is nearly as important, and could be crucial for President Bush's top priority this year -- his $1.6 trillion tax cut. By tradition, the deputy assistant secretary for tax analysis is the top-ranking tax economist at Treasury. When it comes to the numbers-crunching -- and Treasury's tax people do a lot of it -- the deputy for tax analysis is in charge.

Few outsiders know it, but it is Treasury, and not the Office of Management and Budget, that is responsible for the entire revenue side of the federal budget. The deputy for tax analysis supervises this huge accounting and analytical effort. Ordinarily, the fact that no one has yet been named to fill this job would be a problem, but President Bush didn't issue a detailed budget on Feb. 28 -- only an outline. Treasury officials say they expect to have a deputy for tax analysis in place to help prepare the full budget before its release sometime in April.

The tax deputy represents credibility. "The person in that job is responsible for all the [economic] assumptions," said a key congressional tax staffer. "He's got to have the confidence of the staff on the Hill, and ultimately the members." Perhaps the deputy assistant's most important constituent is the Congressional Budget Office. "When it comes to gauging the economic impact of a proposal, it is really important to have an economist with credibility," said former CBO Director Robert Reischauer. That person's reputation "determines whether the numbers will be laughed at by the top professionals." Among the alumni of this post is R. Glenn Hubbard, a top Bush campaign adviser who was just appointed to be the chairman of Bush's Council of Economic Advisers.

The Brookings Institution's Bob Litan, who was an OMB official under President Clinton, said that the tax deputy may play a lesser role under Bush because of the abundance of tax experts close to the President, including economic czar Larry Lindsey. But one former deputy says that one part of the job never changes. "There's always a conflict with the White House, where the goal is getting out the message, and [Treasury], where the goal is getting it right," said Len Berman, who held the job from 1998 to 2000. "I always felt awkward as a political appointee because you're not supposed to be immune to the political needs of the President, but you also have this obligation to be totally honest." Return to main story

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Treasury Secretary no foe of government

John Maggs — Wed, 31 Jan 2001 00:00:00 -0500

Voters last year asked: Is Bush at heart too conservative to deliver the unity and moderation in Washington that he has promised? For O'Neill, though, the question is whether he is too moderate and ideologically flexible for a President and Administration that have staked out clear, conservative positions that do not brook easy compromise.

Unlike Vice President Dick Cheney, Bush economic adviser Larry Lindsey, and the President himself, O'Neill has never been a tax cut warrior. Quite the contrary. O'Neill supported the two biggest tax increases in history: George H.W. Bush's 1990 hike, and Bill Clinton's 1993 increase. Both plans showed a clear preference for deficit-controlling fiscal rectitude over supply-side obeisance to lower taxes. "He's never been very big on tax cuts," said William Niskanen, a former Reagan economic adviser and a one-time colleague of O'Neill's in the Ford Administration.

Bush has said he wants to reduce U.S. dependence on foreign oil by reducing taxes and regulation for the oil industry. O'Neill, in contrast, unsuccessfully lobbied the elder Bush for a $10-a-barrel tax on crude oil to spur conservation, a position that has been endorsed by Al Gore.

Unlike the new President, and virtually all leaders of U.S. industry, O'Neill has prominently declared that global warming is an imminent threat, and that business should accept the idea of limiting carbon dioxide emissions. He has even endorsed the idea of a carbon tax, which would make industry pay for the right to pollute. And although unions unanimously opposed Bush, they have been unified in their praise of O'Neill and his conciliatory approach to labor relations as chaiman of the Aluminum Company of America.

O'Neill comes from outside the circle of close Bush advisers. If he is a Bush outsider, though, he's a Cheney insider. He was a trusted ally of Cheney when the latter was President Ford's chief of staff, and O'Neill ultimately served in that Administration as deputy director of the Office of Management and Budget.

O'Neill's philosophical differences with Lindsey, a die-hard defender of supply-side economics, are the closest thing to a controversy over Bush's economic team. But bureaucratic considerations could determine who gets the upper hand early, Niskanen said. Lindsey has been detailed to lead a crash effort to review the final regulatory splurge of the Clinton Administration, something that could sidetrack him for weeks. Niskanen noted that O'Neill has something else in his favor: It is rare for a White House adviser to exert more influence on economic policy than the Secretary of the Treasury, the person most of the country recognizes as the spokesman on such matters. Niskanen recalled that Reagan economic adviser Martin Feldstein decided to go public with his conflict with Treasury Secretary Donald Regan and was quickly sent packing.

O'Neill is unusual for his background in industry. Only three of the 22 Treasury Secretaries since Franklin Roosevelt's Administration have been primarily men of industry. All the others have come from Wall Street, and most saw the Treasury Secretary's job, at least in part, as safeguarding the interests of Wall Street. O'Neill might, for example, be less prone to bail out investors in some failing Third World economy. But any Treasury Secretary will find it hard to ignore a plea from the Street.

If O'Neill's 24 years as a business executive indicate anything, it is that he seems very comfortable with government assuming a large role in assisting the private sector.

This can be seen, for example, in his approach to global warming. Although O'Neill opposed the Clinton Administration's plan for mandated limits on carbon dioxide emissions, he broadly hinted that a crash program of government-assisted research could produce new technologies to achieve the same results. In a speech, O'Neill said that it would cost $500 million to make aluminum smelting superefficient, but that "nobody in the industry is in a position to do it on their own." O'Neill made his pitch for a government-industry partnership, including perhaps a waiver of antitrust law, to President Clinton at the White House.

Another, more far-reaching initiative shows the same predilection for a big-government solution. As chief executive of Alcoa, O'Neill spearheaded what was possibly the Clinton Administration's broadest effort at intervention in the free market.

In the early 1990s, after the collapse of the Soviet Union and its military, Russia flooded the market with three things vital to maintaining superpower status: steel for ships and tanks; uranium for nuclear weapons; and aluminum for aircraft. When prices for steel and uranium fell in the United States, producers in this country won anti-dumping penalties against Russia, actions that raised prices and in some cases limited imports. By contrast, O'Neill mounted a huge lobbying effort to enlist the Clinton Administration in a much more sweeping approach to the aluminum glut-a global agreement in which all producers, including competitors in Europe and the United States, would agree to specific limits on production, solely to boost prices.

Wait a minute. Wouldn't that be a cartel, a violation of the most basic principles of antitrust law? Absolutely, but it's not illegal, as O'Neill must have known, because of a principle called "State Action Immunity." Roughly translated, it means that if the government is involved and assents to an action that would otherwise break the law, then it is legal. This is the defense that the Clinton Administration offered in its settlement of the tobacco litigation, which fixed prices to keep the tobacco companies afloat, but did so in the context of a government-approved agreement.

But the aluminum agreement went much further. In past cases, the federal government has presided over trade agreements that assigned production quotas to entire countries but didn't attempt to coordinate or influence the output of U.S. companies. The aluminum agreement, however, ended up assigning production quotas not only to Russia, but also to the individual European and American companies that turn out most of the world's production. "It was an unusual agreement in that respect," said C. Fred Bergsten, director of the Institute for International Economics. "I didn't think it was a good idea at the time, and I said so" in an opinion article published in The Wall Street Journal.

The aluminum pact had a pernicious effect outside the United States, Bergsten said. It placed severe limitations on one of Russia's primary sources of hard currency. At the time of the 1993 pact, aluminum accounted for 30 percent of all Russian exports to the United States. Bergsten noted the irony of the United States' demanding, on the one hand, that Russia embrace free enterprise but on the other insisting on the kind of industrial production quotas that were a hallmark of Soviet central planning.

The Justice Department tried to derail the negotiations, and so did Laura Tyson, Clinton's chief economic adviser. Aluminum is a pretty small industry, but the agreement went through, in large part because of O'Neill's clout. To overcome Justice's final objections, aluminum company executives fashioned a fig leaf: Instead of directly negotiating production quotas, each wrote a proposed quota on a piece of paper, without identifying the company. After several rounds, the U.S. and European sides reached the desired cut in production. And the Administration threw in $250 million in loan guarantees for Russian aluminum producers.

The agreement worked-for a while. A 2.5 million-ton surplus of aluminum dropped to 500,000 tons, and aluminum prices more than doubled. Alcoa, which made virtually no profit in 1993, earned $375 million in 1994 and $791 million in 1995. The cost of the aluminum deal, however, was much larger for users of aluminum, such as Boeing Co. According to a rough estimate by the Institute for International Economics, higher aluminum prices cost the U.S. economy $2.5 billion a year, or about $500,000 per aluminum worker (there are about 5,000 production jobs in the industry). Given the average metal worker's salary, aluminum companies pocketed most of that amount.

By the middle of 1995, however, two things had happened-first, the surging U.S. economy had increased demand for aluminum so much that U.S. and European producers were under pressure to add capacity. At the same time, Russian producers started exceeding their quotas, but the strong demand kept prices comfortably high for U.S. producers. The aluminum deal effectively collapsed, but with few complaints from the now healthy U.S. aluminum industry. Higher prices, and Alcoa's strong record of cost-cutting and innovation under O'Neill's guidance, helped the company rack up earnings of slightly more than $1 billion in 1999. Like most CEOs, O'Neill is a free-marketeer who was willing to make exceptions that helped his company.

His experience at Alcoa has left O'Neill very suspicious of Russia's reform promises, a suspicion that will endear him to conservatives. Many Democrats, on the other hand, will welcome his ideological flexibility. O'Neill could be the embodiment of Bush's successful centrist Administration, or the man to blame if the tax cut plan is done in by partisan strife.

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For the 43rd President, it's ready, set, govern

James A. Barnes and John Maggs — Mon, 22 Jan 2001 00:00:00 -0500

The Real Lesson

Ironically, the Napoleonic 100 days might be a better guide to what most historians and political experts believe is the real lesson of past 100-day periods: Don't believe in the myth so much that you ignore the reality of what you face as President. Hubris, in other words, is a greater danger to new leaders than caution. The 100-day window "is an overrated, artificial concept," said Paul Light, a scholar at the Brookings Institution. "[Brookings] just completed a list of the greatest 50 achievements of government of the last 50 years, and virtually none of them were achieved in the first 100 days." Light said that two powerful facts influence new Presidents: First, the early months of a presidency are usually a time of higher approval ratings and better treatment by Congress. At the same time, a new President is more likely to blunder, because of his inexperience, than at any other time during his presidency. Light says the risk of inexperience always outweighs the potential benefits of seizing the moment. "There is a use-it-or-lose-it mentality, and it leads to egregious policy mistakes," he said. An eager John F. Kennedy assumed the CIA and the Pentagon were working together to adequately assess the risks of sponsoring an invasion of Cuba, but his knowledge was imperfect, and the Bay of Pigs debacle dominated Kennedy's first 100 days. Likewise, Bill Clinton was surprised by the explosive reaction to his plan to end the ban on gays in the military, and that miscue came to represent the chaos of his first 100 days. Jimmy Carter sowed resentment by assuming he had the support of a Congress controlled by his party, and he disastrously overloaded the legislative circuits in early 1977. It is no coincidence that those Presidents whom most think of as having had successful 100-day starts came into office in times of crisis. Lyndon B. Johnson was suddenly thrust into the Oval Office after an act he called "the foulest deed of our time." He used a speech five days after the assassination to demand action on two stalled Kennedy initiatives--a tax cut bill and civil rights legislation--and he won on those issues by linking them, at that emotional moment, to the martyred leader. Ronald Reagan was greeted by the worst economy since the Great Depression. Neither Reagan nor Johnson faced the array of problems that Roosevelt did, but the sense of crisis encouraged them to act boldly, and they persuaded Congress to cooperate. If Johnson and Reagan had the best 100-day beginnings of Presidents since Roosevelt, the special circumstances that each faced deserve some credit. Johnson was a canny pol who knew that the grieving nation would rally behind his call for action. Reagan always understood the boost he got from his brush with death after he was shot by John Hinckley on March 30, day 70 of his presidency. Years later, when things were not going well, Reagan suggested to an aide that he should get shot again. Often, the mistakes of the first 100 days--and their true costs--are not evident immediately. Historians generally credit Reagan with a successful first 100 days. On Feb. 18, Reagan had delivered a speech on his economic agenda and, after a delay for his recuperation, it was passed in a series of votes that lasted until June. At the time, his tax cut and defense spending increase were considered a 100-days success, but hindsight shows they were flawed. Reagan ignored the warnings of his budget director and ushered in more than a decade of deficits that harmed the U.S. economy and crippled the presidency of his successor. The central achievement of Reagan's first 100 days--convincing most Americans that he was a brave, unflappable leader--had more to do with his being shot than with any bill or decree. And the legislative effort that received the most focus in his first 100 days turned out to be--with the possible exception of the Iran-Contra scandal--the blackest mark on his presidency. Perhaps the greatest victim of the unforeseen consequences of 100-day efforts was a man who never even became President. Newt Gingrich is among those who think the 100-days concept often entices leaders into overreaching. "I believe Clinton set the stage for [his party's election defeat in] 1994 by rushing in and trying to do too much too fast," said the former House Speaker. When Republicans took over Congress following the 1994 elections, Gingrich spoke of decreasing the size and reach of the federal government, making the President less relevant, and asserting a larger role for Congress. He ignored the prerogatives of the Senate; vastly underestimated the President's power to battle back; and misread the GOP's large majority as a mandate for radical reform, rather than a protest against Democratic rule. In framing his first 100 days as Speaker, he sowed the seeds of the Republican revolution's failure, and of his own demise. Gingrich, naturally, sees his first 100 days in wholly positive terms and argues that he had a great advantage that Clinton in 1993 lacked--a mandate. "We campaigned on the Contract With America, and we got a 53-seat majority," he said. "We had legitimacy." Clinton in 1993, by contrast, had gotten 43 percent of the popular vote and failed to gain any Democratic seats in the House or Senate. Presidents who misread the size of their mandates, as Clinton did in 1993, risk overreaching during the first 100 days, Gingrich said. This was a precept that George H.W. Bush knew well, according to Gingrich. "I was with the President when he was told that he had a 92 percent approval rating," he said. "His reaction was, `Oh, well, it's only down from here.' He understood that a good 100 days only means that now you need another good 100 days." Considering the circumstances of the 2000 election, this is a lesson that George W. Bush is not likely to ignore. The Bush Plan

"I'm sure there's going to be a lot of activity, but he's not going to have the normal honeymoon," said a Bush political adviser. "A lot of Democrats in Congress who are going to be passing judgment view this election as essentially a tie. It's not like he got a mandate, so it will be tougher." Republican pollster Robert M. Teeter, a longtime Bush family political adviser and a close friend of Vice President Dick Cheney, said that the new President would be wise to start off with issues on which there is a better chance for bipartisan agreement. "You don't take on stuff that you don't think the Democrats are going to go for and lead with it," Teeter said. And with Democrats and some of their interest-group allies taking a harder line on the confirmation of some of Bush's Cabinet nominees, some Republicans think that Bush might not be as quick or sweeping in signing executive orders to roll back some Clinton-era regulations. "Bush picks his fights carefully, and he won't go out of his way to antagonize Democrats," said a Bush ally. Although the details of his legislative plan are closely held, Bush's advisers say that his early objectives are likely to be the same ones he enunciated during the campaign. And the way he is using the transition period also offers a few clues. For instance, the first major session that Bush had with conservative and centrist Democratic members of Congress was held at his ranch in Crawford, Texas, in December to discuss education policy. Bush said that there was "a lot of agreement" at the gathering, and that "there is no better place to start to show that our Congress and the President can cooperate for the best of the country than education." The President campaigned on giving more flexibility to states in using federal education aid-including, under some circumstances, vouchers-while raising accountability standards. He has also advocated spending more money to improve literacy among preschool children in Head Start programs. Although vouchers remain controversial for many Democrats and some Republicans, his other proposals have bipartisan support. And because the 106th Congress failed to reauthorize the Elementary and Secondary Education Act last year, education could be an attractive issue on which Congress and the new Administration could set a cooperative tone. Bush said education reform would be the first initiative he sent to Congress, and in recruiting Houston schools chief Roderick R. Paige to be his Education Secretary, he nominated someone who backed vouchers but would not be opposed by the National Education Association teachers union. Still, some in the Bush camp are cautious about predicting popularity for his education plan. "Education reform gets you into bitter opposition from some elements of the Democratic coalition," said one Bush strategist. "To really do reform, you have to do some things the teachers union is adamantly opposed to." Bush also held an early meeting with corporate CEOs that allowed him to again pitch his campaign proposal for across-the-board tax reductions. Some Republican congressional leaders have called for voting on Bush's tax package in pieces, starting with popular proposals such as reducing the "marriage penalty" and estate taxes. Bush hasn't rejected their advice, but he hasn't embraced it, either. "He is wedded to that tax cut," one adviser said. Unreasonable Expectations

Neustadt, a professor at Harvard's John F. Kennedy School of Government, writes that no President can reasonably hope to meet the popular expectations for 100-day success, and he cites three reasons:

The 20th Amendment. It's hard to believe, but until Franklin Roosevelt's time, a new President had nine months in which to establish his rule before Congress met in regular session. The President could call special sessions before then for limited purposes, but he controlled the agenda. The 20th Amendment established that Congress would convene three weeks before Inauguration Day. Although this is supposed to prepare Congress for quick action on the President's agenda, Neustadt argues that if one or two chambers are controlled by the opposition, it usually gives that party time to gird for battle.
Competition from Congress. Whatever party is in control, Congress is "institutionally suspicious of `downtown' [the executive branch]; competitive with White House control of federal agencies, their programs, and their budgets; and licensed by the Constitution to compete," says Neustadt. Honeymoons are forced on Congress by public opinion, and they disappear as soon as opinion shifts, he argues. "So honeymoons are marginal, at best, in deciding a new President's success with legislation."
Ignorance. Neustadt says that lack of experience is a formidable obstacle. "If he has not already held high executive office ... the President will be ignorant of many things he needs to know, yet can learn only by experience all through the 100 days, and for months after. So those early months are exceptionally hazardous, as well as marginally advantageous." Neustadt recalls that without the experience to know how it might be amplified (and distorted) by the press, the Carter White House sought to conceal some questionable financial dealings by Budget Director Bert Lance, and thus brought on a scandal.

In the face of such overwhelming evidence, why is the 100-days myth so durable? Most people blame the press. "It is one of those hoary old journalistic devices that has very little meaning," said Ed Fouhy, who has served as Washington bureau chief for most of the television networks. But the press reflects an attraction to this idea that runs deeper in the population. "We have a perennial need to compartmentalize," Gingrich said. "It is easier to think that way. We know that preseason football tells us nothing about the regular season, but we watch it anyway." Stephen Hess and most other political experts say the press forces Presidents to hew to the 100-days myth; Fouhy says it is the other way around. Doyle McManus, Los Angeles Times Washington bureau chief, says the 100-days concept keeps the press from delivering a premature judgment on a new Administration, which the 24/7 news culture demands. "I mean, the guy hasn't been sworn in yet, and people are already asking how he's doing. I think most of us use it to hold off the demand to deliver the report card too early." Hess said that the public, the press, or the politicians will always insist on some arbitrary standard by which to measure a new President, and he seconded Bush's suggestion of a 180-day period. Light said that any such deadline makes no sense, because the basic goals of government have changed so much since the 1930s. "The country had big problems then that needed solving, and 100 days was a useful concept to get things moving," Light said. Since the 1960s, though, "government has been about fine-tuning," he said. "We've exhausted the need for that dramatic stuff." Thus, Bill Clinton's grandiose health care plan never had a chance, yet his bite-size steps, such as extending insurance coverage to poor children, have produced steady progress. "We're much more likely to get to national health care through this incremental approach," Light said. And we're more likely to judge our Presidents fairly when we abandon the myth of the first 100 days.

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Another management headache for the INS

John Maggs — Mon, 15 Nov 1999 00:00:00 -0500

At a time when its past management problems have put the Immigration and Naturalization Service in Congress's crosshairs, a new and embarrassing blunder is bringing the INS even more flak. In particular, critics are knocking the agency's handling of a controversial program that allows high-technology companies to bypass immigration limits so they can import engineers and other skilled professionals deemed to be in short supply.

The INS foul-up came to light last month, as the agency was trying to close the books on the fiscal year that ended on Sept. 30. After years of fending off charges from different sides that it undercounts or overcounts the number of visas it grants to workers in short supply, INS officials admitted that they had inadvertently approved as many as 20,000 more of these special visas in 1999 than the 115,000 permitted by law.

It seems that local INS offices were approving visas as fast as they could, but the tally wasn't making its way to agency headquarters in Washington.

As a result of the mistake, and because of torrid demand for workers with high-tech skills, Hewlett-Packard Co., Microsoft Corp., and other high-tech companies could be barred from hiring foreigners in 2000 as early as February, something that industry says would be a significant drag on growth.

The snafu is all the more embarrassing for the INS because it involves one of the most controversial programs the agency administers. The visa program known as H-1B is under constant and withering scrutiny by Congress, but, despite that, agency officials apparently didn't monitor it closely. Such problems are nothing new at the INS: Last spring, Government Executive magazine ranked the management of 15 high-profile federal agencies, and the immigration service came in last.

The slipup couldn't have come at a worse time for the INS, and for the visa program. The House held hearings last week on splitting the INS into separate agencies that would carry out its two distinct functions-keeping most foreigners out, and helping some of them to come in. "Little wonder there is such momentum behind the House's bipartisan legislation," said the bill's sponsor, Rep. Lamar S. Smith, R-Texas, after hearing the details of the H-1B screwup.

It was also bad news for personnel recruiters, such as Steve Leven of Texas Instruments, who says he is already hard-pressed to find qualified electrical engineers. Because of the INS miscount, and because of a huge surplus of applications received in 1999, the INS could be shutting down the program for 2000 in late January. Leven said that means Texas Instruments, based in Dallas, won't be able to recruit foreigners until October-months after some of the potential workers receive their diplomas in U.S. universities. Foreign nationals accounted for 7 percent to 8 percent of Texas Instruments' new hires in 1999, said Leven.

He laments the bidding war for entry-level engineers: "The competition is incredible. Most of these guys are walking around with four or five offers, with bonuses and stock options on the table." A hiring delay "is going to hurt us and the whole industry, there's no doubt."

For politicians, the problems are no smaller. Pro- and anti-immigration forces in Washington battled to a draw on H-1B visas this year. The ranks of opponents of liberalizing the program include some conservatives, many liberals, and the AFL-CIO. They stopped business and pro-immigration lawmakers in Congress from raising the 115,000-visa quota, which was filled in July, three months before the end of the fiscal year. The INS and the White House, mindful of labor's opposition to liberalizing the program, opposed each of the four plans under debate in Congress to relax the quota and allow more hiring.

The issue divides both parties, and ordinarily this would be the kind of bipartisan muddle that Congress seeks to aviod during a presidential campaign, but there probably won't be any way to duck it, according to Renee Winsky, a vice president of the Information Technology Association of America. "If you're talking about the quota being filled in January, our members can't wait all year to hire people. We're going to be making our case very loudly."

And while Congress faces the practical task of keeping the program alive next year, the debate there could easily spill over into the presidential campaign. One GOP candidate, Sen. John McCain of Arizona, has his own bill to temporarily suspend restrictions on highly skilled high-tech immigrants. Texas Gov. George W. Bush also favors liberalizing the program. Vice President Al Gore, under intense pressure to break with the Administration and do something for the high-tech industry, has been held back by his allegiance to the AFL-CIO, which endorsed him for President last month.

INS officials have been silent about the H-1B program since their mistake was discovered last month-they won't say whether the miscount will be charged to last year's quota or this year's, and they won't even give a tally of how many visas have been approved since the new fiscal year began on Oct. 1. Not surprisingly, the two sides of the debate urge different responses to the miscount. AFL-CIO officials say the extra visas should be counted against this year's quota, but Sen. Spencer Abraham, R-Mich., chairman of a Senate subcommittee that overseas the INS, says that the visas should be counted against prior years in which the cap was never reached.

INS officials haven't ruled out revoking visas that were granted toward the end of fiscal 1999, a solution that high-tech executives describe as the worst of all possibilities. To revoke the residency of an engineer or a scientist who is six months into a design project-"well, I couldn't imagine anything worse," said Leven.

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U.S. shapes global approach to governing

John Maggs and Neil Munro — Tue, 20 Apr 1999 00:00:00 -0400

The United States may be an uncomfortable and even an accidental empire, but an empire of sorts it is, and like any empire, it shapes the world in ways great and small. Beyond its role as the guarantor of economic and military stability for much of the globe, America extends its influence through the export of ideas about government and commerce. Increasingly as the century nears its end, these ideas have worked to remake other countries in the American image.

If this sounds like the ethos of the Cold War-exporting democracy and American values-it may be no coincidence that one familiar agent of Cold War missionary zeal is enjoying its best days since the 1960s. In response to a surge of volunteers, and higher demand for those volunteers from host countries, Congress will soon expand the ranks of the Peace Corps by 50 percent, sending 10,000 Americans-the highest number since the agency's early days-to 80 countries. And the Peace Corps' mission has expanded as well-volunteers today are as likely to help villagers write a business plan as dig a well.

But the U.S. effort to create American-like instututions abroad is far more ambitious and elaborate than it ever was during the Cold War. Virtually every arm of the federal government is now engaged in a dialogue with officials in dozens of other countries-an exchange that, with few exceptions, amounts to teaching other governments how to adopt the U.S. approach to almost any issue.

This effort extends from the largest and most significant-such as sophisticated military exercises conducted with nations as diverse as Kazakhstan and South Africa-to the tiniest and most mundane corners of the U.S. government. The U.S. Merit Systems Protection Board, for example, enforces domestic civil service rules and has only about 150 employees, but it still manages to host 20 to 30 foreign visitors a year, from every part of the globe. Through this program, countries such as Uganda learn, in theory at least, how to set up a fair process to judge workplace disputes.

This is just one part of an uncoordinated but vast effort to export the U.S. legal system to other lands. Various federal agencies and federally funded nonprofit groups have helped scores of countries write modern constitutions over the past few decades; South Africa and the Czech Republic are two examples. This enterprise has greatly expanded since the fall of the Soviet Empire. This same combination of federal agencies (such as the Agency for International Development) and U.S.-funded groups (such as the National Endowment for Democracy) has helped countries write criminal and civil laws, train police detectives and public defenders, and even set up a network of notaries public.

Reinforcing these fledgling legal frameworks are dozens of programs to help create an American-style political culture-in Russia, AID runs what amounts to an Academy of Democratic Values for politicians and top bureaucrats, drilling them on U.S. notions of church-state separation, the role of the armed forces in a civil society, and freedom of the press. More than 1,900 of Russia's elite have attended. Industry and professional organizations such as the American Bar Association also participate. And American labor unions often get money from U.S. international agencies to help promote collective bargaining abroad.

The effects of this great exportation of American methods and systems are manifest everywhere. After the financial crisis hit South Korea and other East Asian nations in 1997, federal officials identified one barrier to recovery-the lack of modern and efficient bankruptcy codes in many of these countries. A speed-up in funding from the U.S.-dominated World Bank helped Thailand and Korea rewrite their bankruptcy laws. As is generally the case in America's overseas proselytizing, these were not entirely selfless actions: A U.S.-style bankruptcy law helps to protect American companies doing business in these places.

In addition to an increase in scope, American missionary programs have also become far more specific and concrete in their aims. The effort is not merely to export American values; it is to export the American way of doing things, the entire American system of government really-piece by detailed piece. Here's one small example: For the Russian city of Novgorod, an AID-funded program wrote a new city charter-complete with rules for public participation in local budget-making-that was based on the charter of Hartford, Conn.

This remaking of the world in America's image is nothing new of course. European colonialists left governmental and administrative legacies all over Africa, Asia, and Latin America. But now some of those legacies are giving way to American methods-investigative judges being replaced by professional police and prosecutors for example. Today, even the one-time colonialists are adopting some of the American law and practice, despite the power of the 15-nation European Union to impose its own single standard. In the area of antitrust law, for example, EU regulators are moving slowly but perceptibly toward the American approach in which rigid guidelines are used to describe how much of a market one company can control.

Economics, in one form or another, is usually behind the success of American ideas of government and business. The dominance of American enterprise makes it more likely that U.S. approaches to business regulation will be accepted around the world. It helps, too, that the United States is usually the only nation willing to pay to export its ideas. This happens formally, through exchange programs such as the one at the Merit Systems Board, but also informally, through American dominance of international organizations.

Its dues may be in arrears at the United Nations, but the United States pays the largest share of the costs for maintaining virtually all important multilateral organizations, and that fact alone has helped it dominate these groups. Sometimes that domination is explicit-the United States holds the largest number of votes at the International Monetary Fund-but sometimes it is less obvious. At the 29-nation Organization for Economic Cooperation and Development in Paris, where all governments are ostensibly equal, the United States pays 25 percent of the budget, partly to keep the OECD from becoming the captive of European bureaucrats. In the past two years, the United States overcame European objections at the OECD to push through a new pact curbing business bribery, and stopped the organization from adopting for foreign investment rules that were opposed by U.S. bankers.

To see the myriad ways in which the United States replicates its laws and customs abroad, consider telephones. Fifteen years ago, the United States was alone in abandoning the idea of a single national telephone monopoly. The immediate effect was to stimulate investment and innovation in the United States, and sharply lower costs. This wouldn't have mattered much but for the size and strength of the U.S. economy, which gained an immeasurable comparative advantage over Europe and Japan. Technological advances in telecommunications here also helped enhance U.S. influence in the international standard-setting organizations that make sure people can talk to one another in different countries. Pressure then inexorably started to build in Europe to privatize and breakup its government phone monopolies, and the United States used international groups such as the International Telecommunications Union to effect those reforms. Through the ITU, U.S. officials successfully pressured foreign phone monopolies to slash the rates they charge foreigners to connect calls, a subsidy that had been shielding the monopolies from foreign competition.

A 1997 agreement in the World Trade Organization pushed telecommunications reform even further, giving European governments cover for a politically risky phone deregulation. The WTO also adopted a blueprint for regulating phone competition that is prompting other nations to create their own versions of the Federal Communications Commission, more deeply embedding American laws and procedures.

But it's in shaping the laws and standards that affect the spread of high technology and services that American business and government have had their greatest success abroad. The Internet is perhaps the best example-a potentially world-transforming development, and one that the rest of the world is being led to accept on U.S. terms. Indeed, America's promotion of the Internet is the most ambitious element of its trade policy because U.S. government and industry officials are effectively asking foreign governments to create a free-trade zone in cyberspace for words, images, intellectual property, physical products-anything that can be bought, licensed, or rented via the Internet.

In effect, this policy is exporting the United States' free-market, anti-tax regime and the free-speech rules that the U.S. Supreme Court has developed over the past few decades. To accomplish this ambitious goal, U.S. officials want other countries to clear away trade barriers-meaning Europe's value-added taxes and rules that restrict advertising, consumer protections, and data privacy.

Washington's confidence in U.S. dominance of the Internet is exemplified by its hands-off policy toward the groups that manage the Internet. The U.S. government recently backed a plan to transfer a critical Internet management function to Switzerland-the group that registers all those "dot coms" and other Internet domain names. U.S. officials believe this will help grow the Internet marketplace faster abroad, something that will only benefit American companies. It's not just Euro Disneyland anymore; America, for better and for worse, is the world's Tommorrowland.

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