Hurricane Katrina. Iraq and Afghanistan. Medicare prescription drugs. The highway bill. Tax cuts and more tax cuts.

Accumulated during the first five years of the Bush administration, this list of initiatives and responses to crises isn’t long. But the combined cost is enormous.

The Katrina Cleanup

In round numbers, these items will add well more than $1 trillion to the federal budget over the next five years alone. That will impose a mind-boggling additional burden on the American people, who already pony up more than $2 trillion a year — an average of roughly $7,000 from each of us — in federal income, Social Security, estate and excise taxes, and higher costs for almost everything we buy to cover corporate taxes and tariffs on imports.

Even if the government borrows much of the money to cover these added expenses, it will eventually have to be repaid. Oh, and if we do borrow it, the yearly interest payments on the added federal debt will just make the inevitable bill that much larger.

Of course, no one knows how big the costs will be for Katrina and Iraq. Plus, projections for the Medicare program grow larger every day. And then there are the tax cuts — estimates of the forgone revenue from five years of various kinds of tax reductions are distorted by illogical expectations that they will phase in and out of existence. Only the highway bill, derided as a pork-barreler’s dream, had a cap on it — of sorts.

The open-ended nature of these recent spending decisions has fed into concern that the budget is spinning out of control. Just as the wind, rain and waves that swamped New Orleans and the Gulf Coast renewed concerns that humans can’t manage nature, the maelstrom that the federal budget has now become is starting to scare lawmakers — and others, including ordinary taxpayers — into thinking we can’t avoid being sucked under water.

In the latest Gallup poll, 45 percent of those surveyed expect Americans to make “major sacrifices” so that the federal government can afford the cleanup after Katrina. Only 15 percent said they supported borrowing the money. More than half said spending on the war in Iraq should be curtailed to pay for Katrina, while the number favoring tax increases was almost three times as large as that favoring reduced domestic spending.

Those sorts of views pose powerful risks for lawmakers who choose to ignore them. And the message seems to be sinking in. Republicans in Congress are talking about finding ways to offset the costs of Katrina (and of Hurricane Rita, which also wreaked havoc along the coast), in effect challenging the Bush White House to stop behaving as if the government has a bottomless piggy bank.

The GOP, which holds the reins of power in Congress and in the White House and bears the greatest share of the responsibility for the performance of government in the public’s eye, has been riven by this brewing debate over paying for Katrina (even though there is no such angst over the price tag of the Iraq war).

The Republican Study Committee, a group of conservative House members, last week circulated its proposed “Operation Offset,” a host of mostly recycled spending reductions that promises to save $370 billion over five years.

Two controversial elements of the proposal would postpone the Medicare drug program and pare about 6,000 lawmaker-initiated projects from the just-enacted highway bill. But the Medicare proposal sparked sharp rebukes from the top two House Republicans, Speaker J. Dennis Hastert of Illinois and Majority Leader Tom DeLay of Texas. Hastert also tried to put a stake through the idea of cutting highway projects, though DeLay — whose congressional district lies near the path of Rita — held open that possibility. DeLay further cautioned against talk of deferring additional tax cuts to keep the budget deficit from widening. The issue has clearly fractured the party in power, and left Democrats with an opening. (Story, p. 2558)

This decade of irrational budgetary exuberance started during the latter years of Bill Clinton’s presidency, when the economy soared and yielded budget surpluses that wiped away any pressure to control spending. The situation was amplified by President Bush’s succession of tax cuts — some of which were enacted long after the surpluses were just a memory — and the 2003 Medicare law, which was payment for an election-year promise made to the nation’s elderly.

The result is that government officials at both ends of Pennsylvania Avenue are forecasting wider deficits and finding little agreement on when, where and how to generate savings to guard against that result.

The likelihood is that the people who ultimately decide the shape of the federal budget will need to undergo an attitude change that allows them to confront these realities, lest they find themselves in a perpetual cycle of political recriminations over the deficit and the government’s inability to find the resources to meet the public’s needs.

As lawmakers, administration officials, lobbyists, academics and voters focus anew on the federal budget, they will inevitably run up against several unavoidable fiscal realities. Some of these truths have been evident for years; others have cropped up relatively recently. But these realities cannot be ignored in what appears to be a new and more urgent phase in the ongoing debate over the nation’s spending priorities and the ability of Congress and the White House to return to and maintain an era of budgetary discipline.

No one knows how much spending will be needed.

In Case (After Case) of Emergency

No one has any precise idea about what Katrina (and Rita), Iraq and Afghanistan will wind up costing. All involve extraordinarily large-scale operations that really can’t easily be subject to long-range planning.

But precision isn’t the only goal of budgeting. The federal budget is the only place where the president and Congress can see the big picture of their spending decisions. Yet the truth is that no one can really know the final price tag. Almost three years after the Iraq invasion, they do have a clearer sense of how much needs to be spent to maintain the military presence in the Persian Gulf. The big uncertainty, though, is how long that expense will continue. That difficulty in forecasting makes today’s decisions suspect a year or two down the road. History also suggests that cost estimates are more likely to rise than to decline.

More significant, perhaps, is the fact that no one can predict what sort of calamities might befall the country and require a government response. Four years and three weeks ago, most Americans would have dismissed as improbable, if not impossible, predictions that two of the country’s tallest buildings would be destroyed by terrorist-piloted aircraft and that one of its major cities would be devastated by a 100-year storm.

But both happened, and to the extent that the invasion of Iraq was precipitated by the administration’s reaction to the Sept. 11 attacks, we are still paying for both, and will do so for years to come.

To date, Congress has appropriated almost $351 billion to pay for what the administration calls the “global war on terror.” That includes military operations in Iraq and Afghanistan, enhanced security for defense installations and foreign aid to assist in postwar reconstruction of Iraq and Afghanistan.

An additional $45 billion is contained in the fiscal 2006 defense appropriations bill that has yet to be enacted, but it is envisioned as merely a “bridge” payment until the administration can send Congress a more complete request for the coming year. Spending on the war and its aftermath in fiscal 2007 and beyond is anyone’s guess.

On the high side, Katrina-related costs are estimated to reach $200 billion, about half the amount already committed for Iraq and Afghanistan. Congress has already appropriated $62.3 billion for emergency aid and cleanup costs, and has voted to reduce taxes for those who live in the Gulf Coast region, a cost of about $6.1 billion more. Other smaller measures already enacted include grant relief to college students, welfare recipients and other special needs groups.

Still more will be spent, however. Another tax bill is expected this fall, and soon enough another supplemental spending bill of as much as $50 billion will probably be on lawmakers’ desks.

Essentially none of this money has been committed through the ordinary budget process. Congress did fulfill its constitutional requirement to appropriate it. But if the goal of budgeting is to engage in long-term planning for known obligations and to prepare for unforeseen emergencies, in the last several years Congress and the White House have abandoned all semblance of hard forecasting.

But it’s not as if people in the position of managing the government cannot foresee the extent and magnitude of these costs, at least on some level. Iraq is a perfect example.

Six months before the war began, the administration’s top economic adviser offered a projection of the cost that has proved much closer to the mark than most other official estimates. In September 2002, Lawrence Lindsey, then director of the president’s National Economic Council, famously said that at the upper limit the Iraq military and rebuilding costs might be 1 percent to 2 percent of U.S. gross domestic product (GDP), or about $100 billion to $200 billion.

Other administration officials quickly said Lindsey’s estimate was way too high. And just over two months later, Lindsey was gone, pushed out in a reshuffling of the White House economic team.

But Lindsey wasn’t alone in forecasting that the expense might be so great. The same month Lindsey made his forecast, the nonpartisan Congressional Budget Office (CBO) gave Democrats on the House and Senate Budget committees a detailed breakdown of the potential costs of war in Iraq and subsequent occupation by military forces that comes close to the monthly expenses incurred.

The government is full of people who are paid to reliably estimate the costs of wars, disasters and government health care programs. But nowadays, when those costs are likely to be huge and impinge on other government priorities, the decision often seems to be to set the matter aside and handle it separately.

That way, the budget process, with its controversy and difficult choices, is avoided.

Congress’ reliance on ‘emergency’ spending bills has changed the paradigm.

The Spending Trend Lines

This reliance on ad hoc decision-making — “emergency” spending — has completely changed the rules of the budget debate on Capitol Hill and suggests lawmakers no longer want to approach the process as it was envisioned.

Anything so special that it’s an obvious priority is taken off the table, an action that solves two political problems: Crisis expenditures don’t pinch day-to-day government programs, and the cost of the crisis itself need not be closely reviewed because, well, Congress will find the money somewhere.

The effect is that lawmakers have freed themselves from the original intent that the budget be used to set priorities.

The most obvious recent examples of this are the Iraq war and the post-Katrina cleanup. Presumably, rebuilding Iraq and rebuilding New Orleans are one-time events that can be handled as “emergencies” and financed with “supplemental” appropriations outside the regular spending process. The rationale is that they need not be made part of the general budget because they won’t recur.

But, in the case of Iraq, the costs are about to extend into a fourth fiscal year. And even Bush has said the country will be paying for Katrina for many years.

The growing tension among Republicans over offsetting the costs associated with Katrina by making cuts elsewhere demonstrates just how fraught this new paradigm is with political and economic peril. On the one hand, the high price tag and its effect on the deficit could make lawmakers seem profligate and fiscally irresponsible. On the other, forcing long-term cutbacks on social programs to “offset” the cost of an emergency could make them appear cold and heartless.

Congress makes spending, taxation and borrowing decisions under the terms of the 1974 Congressional Budget and Impoundment Control Act, which was designed to bring big-picture thinking and planning to the myriad ways the government spends taxpayer dollars. Though it has been the dominant reality on Capitol Hill for 30 years now, much of the intent of that law has been lost in recent years.

The Budget Act wasn’t designed strictly as a tool to curtail deficit spending, though in its first years it was often seen that way. Instead, it was passed with the lofty goal of forcing Congress to make sometimes difficult choices and as much as possible to be transparent in making its decisions.

The idea behind the act was that Congress would be able to look at the entirety of the government and adopt a quasi-binding budget plan each year. These budget resolutions establish annual totals for spending, taxes and deficits. In that way, the budget limits the ability of appropriators to spend willy-nilly — except for presidentially certified “emergencies,” which fall outside the enforcement mechanisms designed to put a check on Congress’ tendency to excess.

The yearly budget also often directs the committees that oversee “entitlement” spending — programs that have no set spending restrictions other than the set criteria for their recipients — to propose changes to their programs as needed to rein in costs to meet spending and deficit targets. And it sometimes requires the tax-writing committees to propose adjustments to tax laws to increase, or even cut, revenues to meet the budget’s targets.

The goal was always to keep Congress’ eye on the bottom line, and the law today remains mostly as it was. What has changed is the reliance on supplemental spending to pay for anything that can be considered an emergency.

Supplemental appropriations have long been used to disguise the total cost of the government and to avoid tough choices. Two decades ago, lawmakers consistently under-appropriated for farm price-support programs and food stamps. That, in turn, created a need at the time for supplemental spending bills to cover shortages in those programs and also opened the door for Congress to include other pet spending projects on what became a “must- pass” bill.

But the dollar amounts of those supplementals, even though they reached into the billions, didn’t have a patch on the supplemental spending of the past three years. From 1975 though 2002, supplementals averaged $14 billion a year; since then the annual average has exceeded $120 billion.

Congress could try to cover Katrina-related expenses through the regular appropriations process, even though the new fiscal year starts in less than a week, on Oct. 1. But the appropriations process for fiscal 2006 actually hasn’t progressed very far, and the Homeland Security spending bill, which would carry most of the Katrina money, isn’t close to becoming law. It could easily be amended to recognize the expected cost of the disaster.

Moreover, the Budget Act makes allowances for the likelihood that circumstances will change: Congress just doesn’t want to go there.

If lawmakers wanted, they could debate and adopt a second budget resolution for the coming year that would take into account the expected costs of Katrina (and Iraq, if they wanted to be so bold). It would make new assumptions about tax receipts and the size of the deficit that would have to be covered with borrowed money. And it would, in effect, re-allocate money to appropriations accounts so that lawmakers could refine the decisions they have been making over the summer.

Congress routinely did write second budget resolutions back in the early years of the act, but that practice fell into disuse. Doing so today would require members of Congress to confront reality much more directly than they do now. The escape hatch of the emergency supplemental would be gone.

Yet ironically, the call for offsetting spending cuts to finance the rebuilding of New Orleans and the Gulf Coast may pit the two big off-the-table priorities against each other.

Opponents of the Iraq war have suggested paring spending on that endeavor to limit the amount that will need to be borrowed for Katrina. Given the desire of lawmakers from both parties not to undermine soldiers serving in Iraq, however, that idea is unlikely to go far.

But the public pressure to shift money from Iraq to domestic needs was clear enough to Arizona Republican Sen. John McCain that he felt compelled to nip it in the bud last week. “I have yet to see a poll that shows that a majority of Americans favor a cut and run; in fact, just the opposite,” McCain said. “So you can make a strong case in my view that we have to continue the funding.”

If so, the last thing Congress will do is follow an optional procedure that would force lawmakers to vote for a painful trade-off.

The fights are on the margins.

A Taxing Deficit Projection

It is news to no one in Washington that the two biggest drivers of the federal budget are the aging of the population — the first of the baby boom generation became eligible to retire and start drawing on their individual retirement accounts and 401(k) savings plans in July — and the rapid increase in health care costs for all Americans.

The consequence is that, for lawmakers who want to establish priorities and re-assert control over the budget, most of it is out of their immediate reach. So-called mandatory or entitlement spending on Social Security, Medicare (the health care program for the elderly) and Medicaid (the health care program for the poor and disabled) now swamps all other government programs.

And the growth in entitlement spending has compressed the pieces of the budget pie that are designated as discretionary into a smaller and smaller slice. Unless there’s a whole new approach to budgeting, and to gauging the federal government’s role and responsibilities, budget writers have little room in which to maneuver.

In 1965, Social Security was three decades old and firmly established as a premier function of the government. But its costs were relatively small as a share of total federal spending, amounting to less than 15 percent. Today, Social Security soaks up 21 percent of all federal outlays and is the largest single expense of the government.

Medicare imposed zero costs on the budget 40 years ago because it had just been created. Now, it is the third-largest government expense, behind defense and Social Security, and amounts to almost 12 percent of outlays. Moreover, Medicare’s share of the budget is poised to increase significantly next year and thereafter, as its new prescription drug benefit takes effect.

Together, all mandatory spending, including interest payments on the federal debt, has grown from about a third of the budget four decades ago to more than 60 percent today.

Meanwhile, “discretionary” appropriations — those spending decisions that Congress makes each year — have moved in the opposite direction, from two-thirds of the budget pie to less than 40 percent. And although discretionary spending on defense has been sliced in half as a share of the overall budget, the defense portion still exceeds the amount committed to domestic affairs and international assistance.

Without comment, CBO put a stark graphic on the cover of its routine budget outlook report this past August that illustrated how spending on Social Security, Medicare and Medicaid will soar as a share of the nation’s economic output. The picture on the CBO report cover showed that spending on these three entitlements was fairly stable over the past decade, equaling a bit more than 8 percent of GDP each year, but that it will soon start rising and approach 10 percent by 2015.

Inside the report, CBO explains that its estimates put the cost of these three programs at between 12 percent and 17 percent of GDP in 2030 and between 13 percent and 28 percent in 2050. “Over the long term, then, growing resource demands for those programs will exert pressure on the budget that economic growth alone will not eliminate,” CBO said.

Yet, when lawmakers lament that there isn’t enough money in the pot to pay for all the domestic programs that they think have merit, they frequently fail to press home the point that the growth in mandatory spending — and the squeeze from tax cuts — is what’s causing much of the pain.

That’s partly a function of politics. Those who want to spend more on education and environmental protection are unlikely to favor trading off cuts in entitlements such as Medicare and Medicaid.

And hundreds of billions of dollars worth of special provisions in the tax code grant deductions from income or credits against tax owed for everything from home mortgage interest payments and employer-provided health insurance to maintenance of railroad tracks. In the minds of many economists, these tax “expenditures” (forgone revenue) are little more than entitlements by another name. And as is the case with most entitlement spending, these tax provisions are essentially off-limits to budget writers trying to match income with expenses. At least that’s the case absent a change in the way business is done on Capitol Hill.

DeLay underscored this reality two weeks ago when conservative GOP lawmakers first started demanding spending cuts to reduce the borrowing required to finance the Katrina cleanup. “My answer to those that want to offset the spending is sure, bring me the offsets, I’ll be glad to do it. But nobody has been able to come up with any yet,” DeLay said.

His remarks so upset members of his own party that DeLay later said he hadn’t meant to say there were no cuts to be made.

But the fact is, unless Congress wants to tackle the big bear in the room — entitlement spending (and Hastert and DeLay have already ruled out touching the hard-fought Medicare prescription drug benefit) — it will have to turn its knives on discretionary programs, more than half of which reside in the politically impregnable defense category.

In other words, budget cutting today is an exercise practiced mainly on the margins of federal spending, and even then on the portions of the budget that have the least bang for the deficit buck. If nothing else, that explains why majority Republicans remain divided on how to go about solving the deficit riddle.

You can’t trust the numbers.

They don’t call it smoke and mirrors for nothing.

In Congress, where you can pretty much do anything you want if you have enough support, the political difficulty that comes with trying to make big changes in the deficit often throws decisions into the straightjacket that is the budget process.

And as much as the Budget Act seeks to push lawmakers to make tough decisions, the process has its own internal contradictions. It stipulates, for example, that the costs associated with changes in the tax code or entitlement spending be projected out as far as the terms of that year’s budget resolution — typically five or 10 years.

For tax cuts, the rules require that changes in the law literally end with whatever budget “window” Congress adopts. That’s to prevent lawmakers from adding perpetually to the budget deficit by making permanent changes in tax law.

But this same rule can have the reverse effect, too, by creating the appearance of fiscal discipline when, in fact, there is none. For instance, Congress can game the system by “sunsetting” a new tax cut — allowing it to expire after a few years — to mitigate its projected revenue loss. It’s a blatantly cynical maneuver, since the operative political assumption is that no tax cut will ever be allowed to expire. A future Congress will instead have to find a way to cover the cost of renewing it.

This bait-and-switch was clearly visible in the series of tax-cut bills enacted in the past five years. In each instance, lawmakers had to hide their intentions and rationalize decisions that appeared inappropriate and in some cases downright fraudulent.

Many of the tax cuts incorporated both a sunset and a graduated phase-in of certain benefits. One of the more dramatic of those provisions was a change in the federal estate tax enacted in 2001. Congress voted for a staged reduction in the tax over the decade until 2009, when it is to be fully repealed — for one year only. The full tax on inherited wealth that existed in 2000 will be restored in 2010 unless Congress votes to extend the tax cut before then.

The effect of this legerdemain on the budget forecast tells the larger story. When Congress “repealed” the estate tax in 2001 under the phase-in/sunset approach, CBO estimated that its cost to the Treasury would be $138 billion over 10 years, through 2010. But if Congress votes today to extend the repeal, the cost through 2015 will be $290 billion more.

In one way or another, every tax cut that Bush and Congress have pushed through in the past five years contains some variation on this shell game.

Even now, as CBO projects the federal deficit into the future, it cannot legally assume that Congress will extend the tax cuts beyond their current expiration date, even though every member of Congress and their siblings are working on the premise that they are permanent. (American voters, too, it should be said.)

A “baseline” deficit forecast that assumes no extension of expiring tax cuts (and no extra spending on the war in Iraq) shows the deficit declining to about $113 billion in fiscal 2011, down from $331 billion in fiscal 2005. But if an estimated phase-down in additional Iraq spending is added in, along with extensions of all expiring tax cuts, the deficit will instead grow to $379 billion, CBO projects.

To meet similar demands of budgetary calculations, lawmakers carefully tweaked the Medicare drug bill enacted in 2003 to hold its 10-year cost estimate to $400 billion. But as soon as another year ticked over after the bill became law, the projected cost surged to more than $500 billion, reflecting increasingly higher expenses as the program matures.

For outside observers, this sort of math appears to be the apotheosis of deception, designed to make it appear as if Congress is hiding the true costs of its actions.

And for those who labor under these rules, the frustrations are equally troubling.

Economists and taxpayers alike rebel at changes in tax laws that come and go. Predictability and transparency of tax policy are important to companies and individuals who are trying to make the best possible economic decisions. So, taxpayers tend to assume that a tax cut enacted four years ago will continue forever, and not disappear in four more years just because Congress wrote the law that way.

And for lawmakers, the presumption that an expiring tax cut has to be renewed forces a new round of legislative debate and negotiations — and another round of funny budget math to meet the rules of the budget game.

Gimmickry has always been part of congressional budget debates — it long predates the Budget Act, in fact. That Congress even plays along with these accounting rules is at least one indication of the sway the deficit still holds in American politics.

Still, it would take wholesale behavior modification on Capitol Hill to end the game playing, which is no longer even regarded as cynical but as simply the way the legislative system works.

So it’s hard to imagine that the rules might be changed soon, however useful it might be to permit Congress to enact a permanent change in tax law or create a health care program whose true long-term costs can be detailed and forthrightly debated.

In the meantime, keep your eye on the pea.

The risk is not that foreign investors want our debt. It’s that they could stop wanting it.

Majority of Debt Held by Overseas Investors

For the White House, Congress and most of official Washington, the deficit is in the details. Every spending decision, every vote for a tax cut, every time a tough choice is cleverly avoided, the gap between revenue and expenses goes upward, $1 at a time.

For the U.S. economy and the American public, however, the deficit is someone else’s claim on our future — and, more often than not, that someone else is a foreign government that has decided to buy our debt and then hold it for a payback down the road.

Indeed, the default position of most critical budgetary choices nowadays is to allow the difference between what the government spends and what it brings in to grow ever wider — and then to borrow the difference. The problem for future generations is not only that they will bear the burden of repaying that debt, but that increasingly they will owe it to the Japanese, the Chinese, the British, the Europeans and other international investors.

America’s leaders constantly harp upon the notion of energy independence. The United States imports about 58 percent of the crude oil, gasoline and other refined petroleum that it consumes. But the federal government now imports almost every dollar that it borrows on Wall Street to pay its daily bills. That makes the country even more reliant on foreign capital than it is on foreign oil — and, in theory at least, that money could dry up quickly if foreign investors suddenly decided to invest elsewhere.

Since George W. Bush became president, the budget surplus has disappeared, and four years of deficits — including a record $412.1 billion in fiscal 2004 — have required the government to borrow $1.1 trillion in financial markets. In that same period, overseas investors have lent the federal government a bit more than $1 trillion.

And this is not just a one-time thing. Every week a portion of the government’s debt matures and must be repaid by the sale of even more Treasury bills, notes and bonds. The United States is counting on international investors to stay in the market continuously and indefinitely.

Japan is by far the largest investor in Treasury securities, and China is a fast-rising No. 2. If those two countries, plus investors in Britain and elsewhere, decide to stop lending to the Treasury, Americans will have to pick up the slack. That would drive up Treasury’s interest rates — less demand requires a bigger incentive to buy — but also interest rates in general, since U.S.-backed Treasury notes provide the safest investment and thus form a benchmark for all private borrowing. The upshot would limit the amount that Americans could invest in their own businesses and families.

Concern about the degree to which foreigners finance American spending habits is nothing new: The United States has lived with this reality ever since Japan became a world economic power in the 1980s. Yet the degree to which international investors put their money in the United States is greater even than their share of marketable Treasury debt suggests. At the end of 2004, international investors held almost $4 trillion in U.S. stocks, corporate bonds and other non-governmental securities.

As much as anything, security is the principal reason the United States is such a magnet for foreign capital. That’s a tribute to the strength of the U.S. economy and the stability of the government. And the persistent increases in foreign investment suggests there is little risk that will change any time soon.

But if there is any reason lawmakers might want to think twice about defaulting to deficit spending, it’s the possibility that one day they will wake up to headlines that U.S. interest rates soared when demand for Treasury securities fell short of supply. That will happen if China or Japan decides to invest in euros or its own economy, and perhaps if some element of the American economy — an ever-growing deficit, perhaps — makes U.S. debt unattractive.

That will be the real day of reckoning.