How Katrina could save us from a fiscal fiasco
By Geoffrey Colvin

(FORTUNE Magazine) – LADIES AND GENTLEMEN, BEHOLD THE GREATEST excuse in recent history. Hurricane Katrina seriously and even tragically harmed millions of people, thousands of businesses, and hundreds of local governments, but countless more will claim damage. Aid requests are already coming in from people whose only qualification is a Southern accent, and as corporate earnings season gets going, it'll be interesting to track uses of "Katrina" in the press releases. But in milking a catastrophe, no institution is more shameless than government: Dozens of states, including North Dakota, are using Katrina to ask for federal money, and Washington has found an opportunity to ladle out billions to friends and family. What's especially sad is that real leaders in government could use Katrina as an excuse to do desperately needed good--yet they probably won't.

The big problem, easy to overlook for now, is that our federal fiscal situation is dire in a bizarre and deceptive way. At the moment it doesn't look bad. Tax receipts are way up. The budget deficit is down to 2.7% of GDP, only slightly above the average of the past 40 years. The economy is growing smartly, productivity is rising impressively, and unemployment is low. What's not to like?

The answer is what happens in just a few years unless big changes get made. When the Social Security and Medicare hammer drops in 2012--much sooner than most people expect--it will start taking vast sums from other government programs or from all our pockets. A less noticed fiscal trauma looming just down the road affects the other side of the picture, taxes. The alternative minimum tax is about to contort our tax system into a shape it was never intended to have by sharply raising taxes on people it was never intended to touch.

Those drastic effects are baked in the cake--without major changes in the tax and spending systems, they'll happen. Everyone in Washington knows it, but making those major changes has been politically impossible. Now Katrina offers a convenient justification.

It's a great opportunity to argue that we've finally been painted into a financial corner. Start by getting America focused on a few critical numbers. How big is Katrina's projected $200 billion cost? It's really big. It's more than the combined 2006 budgets of the departments of Education, Energy, Health and Human Services, Homeland Security, and Labor, plus the Environmental Protection Agency. If it were all spent in this fiscal year, it would jack up the federal deficit by 60% and suddenly make our fiscal picture much uglier.

But couldn't we spread out the cost? Yes, but it's not that easy--Katrina forces us to confront additional costs. Scores of cities now realize they're poorly prepared for catastrophes, and they're already seeking funds to upgrade their readiness. At this moment, taxpayers are likely to support such moves, but they're going to cost a lot.

Which brings us to taxes. The administration argues, with justice, that its tax cuts have helped spur the economy and drive the recent jump in tax receipts. But a lot of Democrats and some Republicans want to raise taxes because we need more revenue right now. Problem is, as rising energy prices make the economy more fragile, do we really want to slow it down further with a tax hike--especially with the tax code's stealth bomber, the AMT, about to start pounding millions of unsuspecting middle-class Americans?

This is the moment for President Bush, Senate Finance Committee chairman Chuck Grassley, House Ways and Means Committee chairman Bill Thomas, and others who want to be on the right side of history to step up and say, "This does it--the bill for Katrina forces us to make fundamental changes. It will be hard, but we must act: Reform Social Security and Medicare. And while we're at it, fix the AMT."

Would Katrina, used in this way, be an excuse? I'm afraid it would. Truth is, we could defer some of the spending, work a few budget fiddles, take a somewhat larger deficit, and get by. And that is probably what will happen. Feckless officials will squirm around the problem, let the opportunity pass, and leave the consequences to our kids. But if Washington's leaders use the catastrophe to whip up popular support for heading off the financial disaster on the way, let's all agree to let them get away with it. Never will an excuse have been more nobly used.